Martin Hutchinson says the Fed has finally starting doing its job: putting price stability over Wall Street’s demands. Real interest rates are negative. This is feeding inflation. It also means Treasury bond yields – also currently below the rate of inflation – are too low and should begin to rise again.

Martin says investors can profit from this situation with the Rydex Juno Inverse Government Long Bond Strategy (MUTF:RYJUX).

More from Martin in Money Morning:

The statement that was issued after the policymaking meeting was somewhat “hawkish,” suggesting that the U.S. Federal Reserve is awakening to the dangers of persistent and gently rising inflation.

Wall Street was initially spooked: it had hoped for the usual bounce that follows a Fed rate cut. However, investors subsequently decided the Fed’s inaction meant things weren’t so bad after all. Actually, the inaction was the first example in several years of the Fed doing its job – standing up to the easy-money politicians and Wall Street in the pursuit of lower inflation.

The Consumer Price Index (CPI) for August registered a decline in prices of 0.1%, which observers hailed as an indication that inflation worries are at an end. But don’t you believe a word of it; the decline was entirely due to the recent fall in oil prices, which we here at Money Morning expect will one day reverse course and resume their upward march. The only question is when that will happen and what the catalyst will be to make it so.

In terms of the CPI, the “real” consumer price inflation was actually 5.4% over the past 12 months, which makes the 2.0% Federal Funds rate look pretty silly.

The same is true all over the world: Inflation rates are either well above the local bank base rates (2.3% vs. 0.5% in Japan, 12.1% vs. 9.0% in India), or are only just below them (3.8% vs. 4.25% in the Eurozone, 4.8% vs. 5.0% in Britain). Only China has inflation of 4.8% to go against a bank rate of 7.2% – just reduced from 7.47% – but China had been holding prices down with direct controls for the Summer Olympic Games, so its current inflation number is pretty dodgy.

If interest rates are at or below the inflation rate in most of the world, then it follows that global monetary policy is expansionary and inflation can be expected to increase generally.

You can’t entirely blame the world’s central banks; we have been in a credit crunch for more than a year now, and investment banks the size of Lehman Brothers (NYSE:LEH) and Merrill Lynch (NYSE:MER) getting in trouble is a pretty good indication that all is not well. However, there’s also no denying that low or negative real interest rates will tend to produce an acceleration of inflation.

The two objectives – saving the world banking system, and keeping inflation under control – are in conflict.

The market demonstrates the solution to the conflict.

On Monday the Federal Funds rate traded for much of the day at 6.0%, versus the Fed’s target of 2.0%. To get the market Federal Funds rate down towards the target, the Fed needed to inject lots of liquidity, which it did – to the tune of about $70 billion.

That liquidity increased the money supply, but only to make up for the decrease caused by bank failures and market fear, thus restoring the market’s balance and lowering the Federal Funds rate to about 3.0% by the end of the day’s trading. An interest rate cut Tuesday would simply have moved the “target” Federal Funds rate, rather than the actual rate, and would have led to more inflationary pressures without materially helping the banking system.

Indeed, one can wish that the Fed had confined itself to injecting liquidity throughout this prolonged credit crunch, keeping the Federal Funds rate level at its September 2007 level of 5.25%. In that case oil prices would probably never have soared to $147 a barrel, and U.S. inflation might have remained safely around 3.0%.

Going forward, it seems clear that next time the FOMC meets without having had about half of Wall Street disappear in the preceding week (the next scheduled meeting is Oct. 28-29), it will be tempted to announce a modest interest-rate rise, unless the U.S. economy is truly in the tank by then. Of course, the Fed would remain ready to lower rates again if a deep recession appeared, or to inject liquidity if more banks got in trouble.

That would suggest that the current sharp drop in yields on long Treasury bonds has been overdone (from 4.25% in June to 3.25% yesterday (Tuesday) morning, before rebounding to 3.49% at yesterday’s close). Thus, a rebound in Treasury bond yield – taking them significantly above the level of inflation – is called for as money is tightened and the Federal Funds rate rises.

To take advantage of such a yield rebound, you should consider the Rydex Juno Inverse Government Long Bond Strategy (MUTF:RYJUX). This invests in short futures contracts on long-term Treasuries. It can be expected to gain as Treasury yields rise.

Source: Federal Reserve Policymakers Stand Up to Wall Street’s Easy-Money Crowd

Don’t panic – yet – if you live in Britain, because we’re not talking about dear old Blighty. But across the Channel, Jean Claude Trichet is talking tough. He’s the president of the European Central Bank (ECB), in charge of guarding the value of the newest big kid on the global currency block, the nearly 10-year old euro.

And now he’s fast becoming the hero of inflation fighters everywhere. Because yesterday, amid the usual turgid guff that central bankers usually churn out when they’re doing nothing very much, he came up with a bit of a bombshell – an imminent interest rate rise.

Although key rates are being kept unchanged for now, the ECB’s Governing Council has been getting more and more twitchy about climbing consumer prices which have risen “significantly” since last autumn due to soaring energy and food prices. And now Monsieur Trichet and co. expect inflation to stay high for longer than it first thought, because money supply is still growing too fast.

So not only are Euro central bankers staying “in a state of heightened alertness”, they’re prepared to “act in a firm and timely manner to ensure that medium term risks to price stability do not materialize”, and to show “strong determination to anchor medium and long-term inflation expectations in line with price stability.”

In short, expect an ECB rate hike next month.

It’s certainly seems to have come as a bit of a shock to many analysts. Just a week ago, Capital Economics was fairly confidently predicting that with eurozone inflation set to ease later this year, “the next move in interest rates should be down”.

But it’s good to see that some central bankers this side of the Atlantic are still taking their jobs seriously and trying to maintain the value of their currency. Which, it seems, the ECB can do rather more easily than Bank of England governor Mervyn King.

He’d probably like to do the same as the eurozone, with UK inflation seeping above the 3% mark at which he has to pen an open letter to Chancellor Darling explaining what’s gone wrong, but his hands are tied while the UK economy is falling off a cliff. And it looks like the knots are getting tighter by the day, with the unwelcome news that Mr Darling has now decided to give Mr King some extra outside ‘help’ in “advising” the Bank about “financial stability”.

That sounds horribly like Government-speak for finding ways to fiddle around with the Old Lady’s independence, and specifically to find ways of altering the Bank’s 2% inflation mandate. That would be a serious mistake – changing the target again would just chuck any remaining financial credibility the UK has left, right out of the window.

Talking of being a credible inflation-battling central banker, US Federal Reserve boss Ben Bernanke certainly isn’t one, having presided over a cavalier slashing of American interest rates in the face of a worse inflationary storm than the ECB is battling. But to be fair to the Fed, not quite all his colleagues are in quite the same boat.

Richmond Fed president Jeffrey Lacker has just ‘fessed up to his fears that the Fed’s lending to securities firms introduced in March could stoke up problems in the future, because it might “induce greater risk taking, which in turn could give rise to more frequent crises”.

In other words, we could soon be right back in the same boom-to bubble-to-bust mess from which we’re now suffering.

Thank goodness someone in authority in the US has seen the dangers. Though it’s a shame that Mr Lacker isn’t running the whole Stateside central bank show. Then we might see some rate rises over there, too.

Source: Why Europe’s Got It Right on Inflation

The chart below is from the highly recommended John Williams’ Shadow Statistics website (www.shadowstats.com). You can fall for most any government statistic or you can search and think for yourself.

The blue line shows rising prices according to previous historic accounting methods. The yellow-orange lines show recent spin statistics emanating from the NY/DC axis of weasels. Either way, no falling consumer prices are apparent.

Oops, something went wrong here.

The non-Federal non-Reserve is what went wrong. They and their elitist cronies have all but destroyed the American dream. The idea of stable or falling prices will not happen on their watch.The non-Federal non-Reserve is what went wrong. They and their elitist cronies have all but destroyed the American dream. The idea of stable or falling prices will not happen on their watch.

Those of you with memories short of 100 years might want to check out how the Fed has fared since inception. Its stated purpose was to create “price stability” as well as economic growth.

The 1800’s clearly demonstrate it is possible to have stable prices when honest and Constitutional money is in effect. And this was the case for an entire century, no less. How about the 20th century?

The “Creature” known as the Fed came our way in 1913. International bankers have had their hooks into the American populace ever since. Here is the master demonstrating to the pupil the long-term chokehold the Fed has on the American populace.

The Fed’s original charter demanded they provide stable prices. Then they decided to target maximum employment. Now their target seems to be benefiting their closest friends. Whatever they target you can bet they’re aiming at you in the end.

Technological advances and astoundingly cheap foreign labor should have brought forth falling US consumer prices over recent decades, but the Fed inflated it all away. They printed money at will and took advantage of a situation that demanded falling prices. We lost out.

These guys are heavily responsible for our presently escalating food and energy costs.

What’s the solution? Boot out the Fed. Rescind the unconstitutional income tax and the Gestapo like IRS. Scale back an oppressive and imperial government. Empower individual citizens.

Rest assured the government will screw up anything they propose to fix.

See the big picture.

Invest resourcefully,

Rusty

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: Dr. Russell McDougal has dedicated years of study and investing in the natural resources exploration sector. During that time he has closed out DOZENS of gains of 500%... 1,000%... 2,000% and more! Currently he is sitting on multiple thousand percent winners, including one stock that is up a whopping +5,000%. And for a select group of investors, Rusty has agreed to share his secrets of success... and his top stock recommendations. Click here to learn more... ]

Source: Stable Prices? Don’t Make Me Laugh

But this decline is likely just the start for rice prices, which have been artificially inflated by government controls and may continue to plummet by as much as 20%.

Rice – which supplies one-fifth of the world’s calorie intake – really began its journey skyward last October, when India banned exports of non-basmati rice to protect the wildly popular grain from succumbing to inflationary pressures. Later that month, India eased the ban, but reapplied it last March.

Faced with civil unrest brought on by rising food prices, other countries have been following suit. In just a few months…

• India banned exports of non-basmati rice after inflation hit a 14-year high.
• Egypt, which typically brings 1.4 million metric tons of rice to the world market each year, banned exports from April 1 to Sept. 30.
• Vietnam, after curtailing exports in March and April, extended a ban on rice sales through May.
• Brazil suspended rice exports, approximately 313,000 metric tons a year, in an effort to maintain price stability.
• Indonesia suspended exports of medium-grade rice exports to combat inflation.

The price of rice doubled, and in some cases tripled, in the first four months of 2008, according to BusinessWeek. U.S. long grain rice jumped from $400 a ton to $800 a ton. Indian Basmati rice soared 182% from $850 a ton to $2,400 a ton. And Thai jasmine shot up from $559 per ton to $1,125.

But the price surge had little to do with supply and demand. Instead, experts pointed to the protectionist measures by rice producers.

“The primary reasons for the recent price spike in rice are due to export bans and restrictions by several major exporters globally that have tightened supplies in the global market,” Nathan Childs a rice specialist at the U.S. Department of Agriculture told Voice of America. “Overall though, the 2007-2008 rice crop is the largest on record and supplies are up a little bit from a year earlier.”

Only 7% of global rice production is traded internationally, which means any government intervention in the export or import markets could have a dramatic impact on rice supply and prices. Traders, millers, wholesalers and retailers also began hoarding supplies to see how much higher prices would go. A weak U.S. dollar and higher costs for fertilizer and shipping also contributed to the rise.

Speculation among investors and consumers has run rampant in recent months, adding to political and economic pressures. As the run-up in commodities price steepened in the early part of the year, driving the price of corn and wheat to all-time highs, traders on the Chicago Board of Trade dove head first into the volatile rice market. Rice futures have gained slightly less than 80% in the past year as a result.

“We have enough food on this planet today to feed everyone,” Adam Steiner, head of the U.N. Environment Program told the Associated Press, adding that the way that access to that food is being distorted by perceptions of future markets is distorting access to that food.

“Real people and real lives are being affected by a dimension that is essentially speculative,” Steiner said.

However, the market has begun to turnaround this week, with rice prices falling 11.6% from its April 24 peak. 

The drop accompanied news that Vietnam would produce enough rice to meet demand from exporters, as well as local consumers. The country also banned speculators from its domestic market.

Also, Thailand has announced it will release 2.1 million tons of rice from the state’s stockpiles for sale to the public to ensure that consumers pay moderate prices for the grain for the rest of the year.

Thailand is the world’s leading rice supplier and has repeatedly assured the public that it would not curb exports despite speculation to the contrary. The nation produces 18 to 20 million metric tons of milled rice each year, of which 9 million is consumed at home. The rest is exported.

Thailand has committed to the export of 8.75 to 9 million metric tons this year and remains confident it can meet that commitment, Reuters reported. In addition to causing a worldwide panic, going back on its word and imposing export curbs would be political suicide for the nations current governing party, which came into power largely on its populous farmer support. Almost half of Thailand’s 65 million people are involved in agriculture, which accounts for 11% of the nation’s GDP.

“I believe the government will not betray farmers who voted for them by imposing any export restrictions, which would cut export demand and adversely affect domestic prices,” Paka-on Tipayatanadaja, a rice analyst at Kasikorn Research in Bangkok, told Reuters. “Farmers invested a lot to grow more rice after the government said it has to plans to curb export. The government has no chance to reverse the policy now.”

Thai jasmine rice is one of the most popular types of rice in the world. U.S. imports of jasmine rice have jumped by 78% over the past ten years. One shopper outside a San Francisco Costco Wholesale Corp. (COST) stores told BusinessWeek that Thai jasmine rice was “the priced one, because of its smell.”

The price of the fragrant rice has benefited greatly from the bullish rice market as its price has more than doubled. As they did so, American shoppers and restaurant owners began panic buying the popular scented rice prompting wholesale clubs like Costco and the Wal-Mart Stores Inc.-owned (WMT) Sam’s Club to limit customers’ purchases.

Fortunately for jasmine rice fans, it’s likely that the price of all Thai rice will continue to ease next few weeks, possibly by 20% according to the secretary general of the Thai Rice Exporters’ Association.

“The market is likely to correct up to 20% even if the bans by India and Vietnam remain,” Korbsook Iamsuri, who is also managing director of Kamolkij Co. Ltd., told Reuters.

The benchmark Thai 100% B-grade white rice was quoted between $1,030 and $1,050 per metric ton, slightly below last week’s record of $1,080 per metric ton, Korbsook said. If she’s right, the price could adjust to $864 by mid-May. And if the price of Thai rice drops, it’s likely others will follow suit, as Thailand – which accounts for nearly a third of the global rice trade – is typically the standard bearer for global rice prices.

If rice prices persist at record levels, most experts expect that consumers will overcome cultural loyalties and switch to medium grade rice, like that grown in California and Arkansas. California will harvest approximately 4 billion pounds of rice this year, 40% of which will be exported. While it’s not as popular as its Asian counterparts, California rice has experienced a price jump of its own. According to the San Francisco Chronicle, California growers will get $20 per 100 pounds of rice this year, double the 2007 price. As a result the amount of rice being planted in the region is on the rise. Rice has been planted on an estimated 549,000 acres in California this year, up from 534,000 acres in 2007.