Profiting from the Fed’s Biggest Mistake

What’s the one common item consumers see costing them more? I’d have to answer, gas. Courtesy of record high crude oil prices, consumers are paying more at the pump to fill their vehicles than they have in years.

But, what else is going up in price dramatically? Well, I can tell you what’s not going up in price:

House prices are not rising. In many markets, property prices are actually declining. That’s deflationary, not inflationary.

Stocks are not rising in price. Stock prices are still, generally speaking, below the high they reached six years ago.

Most electronics, clothing and goods are cheaper today than they were a couple of years ago thanks to Chinese imports.

The American economy, after growing 5.6% in the first quarter of this year, will likely only grow 3.5% for the remainder of the year.

And while the Fed will say it’s concerned about inflation picking up, we must keep in mind inflation in America is growing at rate of 3% a year–hardly dangerous. Retail sales in the U.S. could also be contracting as opposing to growing.

The big mistake I see (of should I call it “Bernanke’s Big Mistake”) is a total misread of the economic picture. The Federal Reserve continues to be obsessed with inflation, or at least that’s what they tell us. But I see more deflation than inflation.

If the Fed has misread the economy and raised interest rates too high, slowing the economy too much, and spurring deflation, you’ll likely see interest rates drop like a rock as the Fed goes to all lengths to turn deflation back into inflation. This is another reason why I wrote on Monday that bonds are now a buy in my opinion.

Aside from oil prices, a lot of what I see out there is deflationary price changes as opposed to inflationary ones. If the Fed starts seeing the same threat, or if the economic numbers actually start painting a deflationary picture, the Fed will acknowledge its big mistake and drop interest rates like a rock… making today’s bond buyers big winners.