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This Chart Will Show Me When Inflation Really Heats Up

By Jeff Clark
Tuesday, July 9, 2013

 Inflation is heating up...
The Consumer Price Index (the "CPI") – a widely accepted measure of inflation – has been increasing at about 2% annually for the past few years. The Fed has been using that slow rate of inflation to justify keeping short-term interest rates low and pumping billions of dollars into the markets every month.
But as you can see from the following chart, even a small annual increase in the CPI can add up to a big move over time...
We don't really feel the pain as prices increase slowly. We're like the proverbial frog in the simmering pot of water.
But it looks like things are about to heat up...
 Interest rates have spiked higher over the past few weeks. Rising long-term rates is an early warning sign the market is concerned about inflation. Here's an updated chart of the 30-year Treasury Bond Yield I first showed you last month...
The 30-year rate has broken out above the first resistance line and is now headed toward the next resistance line near 4.4%. It's 30% higher than where it was in May. And it's up 50% from its bottom last August. Rates don't rise like this if the market is comfortable with inflation.
 Now take a look at this chart of the Baltic Dry Index (the "BDI")...
The BDI reflects the cost of shipping dry goods overseas. It's a good measure of economic activity. But it's an even better measure of pent-up inflationary pressures. The cost of shipping dry goods gets worked into the final cost of those commodities. After a three-year downtrend, the chart is poised to reverse to the upside.
The BDI has already rallied more than 50% so far in 2013. If it can break above resistance at about 1,200, it will be poised to make a run at the next resistance level near 2,000.
That will be one heck of a move for the BDI. And it will be a sure sign that inflation is heating up.
– Jeff Clark

Further Reading:

Steve Sjuggerud says that "stocks can actually soar during inflation... for a lot longer than people think." So when is it time to start worrying about inflation? Steve says "the 'uh oh' moment happens when inflation touches 5%." Learn more here.
When interest rates rise, there's one industry in particular that benefits – and Frank Curzio thinks its profits are about to soar. Although "rising interest rates are widely viewed as a negative for stocks," Frank writes, "higher interest rates are great for bank stocks." Get his favorite ways to play the banking boom right here.

In The Daily Crux
Market Notes
Small-cap stocks are leading the market… the Russell 2000 Index jumps to a new all-time high.
2013 has been a massacre for silver miners… Coeur d'Alene, Hecla, and Silver Standard are all down 50%-plus since the start of the year.
Big insurance stock fund KIE breaks out to a fresh five-year high.
Pipeline uptrend continues… Spectra Energy and DCP Midstream Partners hit new all-time highs.
Market Watch
Symbol Price
S&P 500 1640.46 +0.5% +21.1%
Oil (USO) 36.41 -0.4% -95.4%
Gold (GLD) 119.51 +1.2% -22.3%
Silver (SLV) 18.42 +1.2% -30.0%
U.S. Dollar 84.21 -0.3% +1.1%
Euro 1.29 +0.6% +5.0%
Volatility (^VIX) 14.78 -0.7% -13.6%
Gold Stocks (^HUI) 211.94 -1.8% -50.0%
10-Year Yield 2.65 -2.2% +72.1%

World ETFs
Symbol Price
Japan (EWJ) 11.52 -0.7% +25.2%
USA (SPY) 163.95 +0.6% +23.7%
Israel (ISL) 14.37 +0.4% +22.2%
Taiwan (EWT) 13.26 -0.7% +10.9%
India (IFN) 19.25 +0.8% +6.2%
Singapore (EWS) 12.60 +0.4% +3.5%
Canada (EWC) 26.26 +0.8% +2.5%
Russia (TRF) 13.62 +0.4% +0.6%
China (FXI) 32.21 +0.4% -0.9%
S. Korea (EWY) 51.84 +0.3% -3.0%
S. Africa (EZA) 56.00 +0.5% -10.3%
Lat.America (ILF) 35.18 +0.2% -12.8%

Sector ETFs
Symbol Price
Media (PBS) 21.85 +1.0% +48.8%
Defense (PPA) 25.40 +1.0% +37.7%
Financials (IYF) 73.36 +0.6% +35.6%
Construction (PKB) 19.01 +0.1% +35.5%
Consumer Svcs (IYC) 105.90 +1.1% +31.8%
Health Care (IYH) 102.28 +0.6% +31.6%
Alt. Energy (PBW) 5.61 +0.5% +31.2%
Biotech (PBE) 30.70 +0.2% +29.7%
Retail (PMR) 31.41 +1.0% +29.1%
Industrials (IYJ) 84.70 +0.3% +27.8%
Water (PHO) 22.51 +0.5% +23.6%
Transportation (IYT) 112.00 +0.1% +21.5%
Telecom (IYZ) 26.20 +0.3% +18.9%
Insurance (PIC) 19.01 +0.1% +18.3%
Software (PSJ) 30.71 +0.4% +17.0%
Big Tech (QQQQ) 72.66 +0.1% +14.9%
Semis (PSI) 15.91 -1.1% +11.6%
Basic Mat (IYM) 68.27 +0.7% +8.0%
Real Estate (IYR) 66.12 +0.4% +6.0%
Utilities (XLU) 37.43 +1.4% +5.8%
Nanotech (PXN) 6.85 +0.2% +2.2%

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