GDX VanEck Gold Miners ETF

Prepare to run and hide. It's coming, very soon. It will eat your paycheck and your savings in no time at all. Your standard of living and your wealth will evaporate like dollar bills in a fire.

What is it? Inflation, of course. Or so the doomsayers have been warning us since the Federal Reserve's quantitative easing (QE) policies officially began in March of 2009.

Why have they been way too early, if not down-right wrong? First, if you fear a run away secular and structural trend like inflation, you always worry about it. It's in your blood. You constantly wait for it. So, of course, you are early.

Second, they don't understand the nature of a systemic banking/housing meltdown and its major consequences: credit contraction and deflation. Or how stubbornly persistent these can be. They don't appreciate what happened/is happening in Japan and so they can't apply the lessons here.

I've been defending Bernanke on his policies for over two years. In fact, I've been praising him for his resolve -- in the face of massive criticism ("treason," for instance) -- in understanding the depth and persistence of the problems our economy faces.

In the first half of 2010, I wrote many articles pointing out how silly the hawks were to cry of inflation and higher interest rates right around the corner.

I tried to explain the depth of the housing bust and bank contraction, and that these would not only hold inflation back but also demand more QE. But you can only talk about facts so much with an inflation hawk because they just refuse to get some things.

The hawks don't get a few realities...

1) Hawks don't get that deflation is worse than inflation. And that our systemic, generational banking/housing crisis has not been pushing us toward the lesser evil.

2) Hawks don't get that the volatility in crude oil prices is more a function of the secular and geological trends in energy than dollar devaluation. In other words, if energy is one of the biggest and costliest economic inputs, it will surely impact inflation at some point. But that is our future regardless of QE.

3) Hawks don't get that capital will seek returns anywhere and everywhere. There will always be bubbles, in all asset classes. While rates are low and dollars plentiful, they seek yield in equities and gold. And a balance of safety in US treasuries. Who knows what the next bubble will be, but it probably won't be another housing one any time soon so I'm busy looking elsewhere.

4) Hawks don't get that you beat inflation by being an active, intelligent investor. I'm still wondering why we bother to make pennies. And I am prepared to see nickels become obsolete in my lifetime too. Good riddance. I'll enjoy the double-digit returns I made investing and not worry about the 5% that inflation ate.

5) Hawks don't get that inflation equals growth and progress. It's as inevitable as death and taxes. Or at least they will wish it so if they ever wake up in a deflationary spiral some morning.

But don't take my word on any of this. I'm not an economist. I'm just a trader. Take it from our resident quant, Dirk Van Dijk, in his latest rant Inflation Low (and will stay that way).

Kevin Cook is a Senior Stock Strategist with Zacks.com
 
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