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Investors Shocked

Inflation concerns have analysts worried the Fed is behind the curve and the economy is overheated. Bloomberg asks How Worried Should You Be?

For almost a decade, investors have waited patiently for any hint of inflation in the U.S. economy, a sign the recovery can sustain itself without emergency stimulus from the Federal Reserve. Now they’re getting it, and many are shocked at the reaction.

“It’s kind of a strange time and we seem to be driven by a fear of what everyone wants, and that’s higher rates,” said Joe “JJ” Kinahan, the chief market strategist at TD Ameritrade. “Higher rates confirm a stronger economy, and the market was very afraid of that all week long. And that’s been a big reason for selling.”

Strategies that worked for years buckled in the rout. So-called short-volatility, in which traders bet that share turbulence will remain restrained, reversed, as Friday’s 29 percent spike in the Cboe Volatility Index triggered a 13 percent plunge in the ProShares Short VIX Short-Term Futures exchange-traded fund. About 27 million shares changed hands, the most since the Brexit vote.

Wrong Fear

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Inflation is the wrong fear. Sure we might be in a temporary bout right now. But collapsing asset prices will quickly turn fears of inflation to fears of deflation, and the next round of QE likely will not help.

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Mike "Mish" Shedlock