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Inflation Rally Back On Once Again

Just a few days ago every talking head in the media was worried about China Inflation and the tension between North and South Korea. The European Debt crisis was spreading like wildfire with Ireland, and Portugal on the list for bailouts. However, yesterday the European Central Bank(ECB) said that they will start buying bonds from stressed nations such as Portugal, Spain, Italy, and Belgium. This is basically what the Federal Reserve Bank is doing in the United States with it's quantitative easing. As we all know the stock market went bananas yesterday and loves the concept of everything getting inflated as the money reserves increase sharply. However, while the party gets extended and everyone can drink a little more at the bar, does this really solve the problem?

The Currencyshares Euro Trust(NYSE:FXE) caught it's best bid yesterday in three weeks by trading back above the psychological $130.00 level. The U.S. Dollar Index also declined and the inflation rally was once again intact as the markets exploded higher. Things look great again and the markets seem to be right on track. Right?

There are pros and cons to everything as we all know by now. Here are some the negatives that I saw yesterday. The first negative was the huge move higher in crude and gasoline. The popular United States Oil Fund(NYSE:USO) jumped above the $37.00 level. High oil at the start of the winter season is going to hurt consumers in the short term. Gasoline also spiked higher yesterday and this effects everyone. The United States Gasoline Fund(NYSE:UGA) is now trading above $40.00 and this is a new high for the year.

If you want asset prices to trade higher you must be willing to accept higher oil, gasoline, and heating fuel, and most every other commodity. These higher prices in commodities come with the territory as the central banks continue to pursue their inflation experiment. One thing that I have learned is that there is nothing free in this world. If you want your 401k to be up it means that the U.S. Dollar will likely be lower. Unfortunately, this is how it is these days and that is why it is important to just trade the markets. This inflation boom will come to end eventually and the world will have to deal with another bust cycle. This is what makes the world go around at this time.

Nicholas Santiago
Chief Market Strategist