Inflation Around Corner?

Inflation looks poised to increasingly dominate investment decisions. This domination should help lift stocks, although segments likely perform poorly, hurt treasuries, and undermine the dollar. The complicating aspect is increasing price instability overseas countering these trends as investors look for "safer" shores.

Multiple countries have started tightening monetary policies to combat accelerating inflation on their shores. This tightening has hurt equities in these countries, as I have learned first hand in China. A derivative of this tightening is a breakdown in commodity prices as rising interest rates are expected to slow economic growth.

In the United States the Fed likely let's inflation accelerate until the second half of 2011, fueling inflation overseas and domestically. However, until domestic inflation slaps investors in the face, the dollar may actually strengthen as money flows away from inflation figures reported overseas.

The United States economy likely continues to recover, although more nominally, and thus is a driver of stock market performance. As I have discussed under my stagflation theme, the inflation likely builds from the bottom of the economy. McDonald's noted rising cost pressure, which it will try to offset with higher prices. This is the rub in our consumer driven economy, costs rising but consumer wealth is not (double dip housing?).

In summary, I likely re-establish positions with pricing power deeper in the supply chain. A pullback in stock did not materialize in January, and thus it is likely time to move forward with investment themes.