Is Inflation Really to Blame?

SAN DIEGO – "Stocks plunge on inflation fears." That was the typical headline Wednesday. How silly is that?

How silly, that is, if inflation really was the reason for the drop?

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Remarkably silly. Silly, I say, because it doesn't take an economist or a report from the government to know that things cost more. Gas costs more. Clothes cost more. About the only thing that doesn't cost more is housing, and that is already so high that a reversal in pricing is irrelevant.

If inflationary fears didn't cause this market to fall, what did? I think it was a total lack of conviction in anything. (A regular theme of mine.) That became clear a week or two ago when prices first began to sink following the realization that Fed chief Ben Bernanke didn't mean the Fed will pause, but may pause, going forward.

Now we get this oh-my-god-there's-inflation reaction to an unexpected bump in the CPI. When the reason given for the market's slide is as obvious as inflation, the obvious conclusion is that this is about as speculative as it gets.

As for the market as a whole, bulls will come up with reasons the market will rise. Bears will come up with reasons they will fall. Between here and there, it may do both. Without conviction, however, the bulls might as well be running on landfill in an earthquake zone. As we say in California, beware of liquification.

Speaking of liquid: Let's talk dollars (with some sense thrown in.)

Everybody always wants to hang on what the Fed will or won't do. That's what you and I can easily understand. It's something we can see and feel.

But the "debasing" of the dollar by a Fed that is believed to be printing bills and throwing them out of a helicopter as if they're play money? That's anything but mainstream - and going beyond the mainstream is where my pals Todd Harrison, John Succo and Scott Reamer of Minyanville.com often head as they try to get a true grasp on things that are less than obvious.

So, I got the three of them on the phone the other day to hear their explanation of their not-so-popular or most definitely not-well-understood dollar-related concerns.

If I understand them correctly, it boils down to this: They believe all those dollars that are being printed make people feel wealthier than they really are. As the dollar drops, everything really costs more relative to the rest of the world. Rather than mere inflation, Succo argues, in this global economy this is a period of hyper-inflation. And every period of hyperinflation, he says, "ends with a deflationary bust."

"The disconnect between perception and reality in the financial markets is the largest it has ever been," Harrison says. "When does all of this manifest? I have no idea."

Neither do I -- and this just scratches the surface of their concerns -- but it's all definitely something worth pondering.

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