Evolution Or Revolution – Seeking Alpha

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The world is evolving, and there are consequences. Of that you may rest assured. Inflation is a time bomb, and from the U.S. government and the Fed - which is a part of the U.S. government - the fallout is only beginning, in my estimation.

Many people dont understand this, but while the Fed presidents and governors are allowed a good deal of independence, the institution itself is part of our government. The Fed was created by the Federal Reserve Act of 1913, and it reports directly to Congress. Period. The institution is not allowed any singular independence.

What Americas central bank is now causing is having a decided effect on all of our financial markets. I have pointed to the ramifications of our bond and stock markets before in my commentary, but those are not the only markets that are under the gun. Please allow me to demonstrate what is happening to the United States as compared to other nations.

2-Yr Benchmark Govt. Yields - U.S. vs. Other Nations

(Source: Tullett Prebon via FactSet)Not only does this mean that the cost of borrowing money in America is now more expensive than in most of the larger nations on Earth, but it means that more international companies will be borrowing outside of the United States to achieve significantly lesser costs. Higher yields may be a boon for some but it is a bust for others.

It is also having a material effect on the dollar.

*Data according to BloombergIf you consider the euro, we are approaching parity once again. This will have all kinds of implications for our imports and exports. Make no mistake about it. This will also have an impact on earnings for a number of U.S. companies. The dollar rose to 101.86 against a basket of other nations this week - a level not seen since March 2020. The Federal Reserve's recent rate hikes have been followed by higher U.S. debt yields, with more to follow, by all indications, suggesting markets are confident the Fed can tame inflation, and encouraging foreign investors to buy U.S. Treasuries.

Maybe yes, and maybe no, would be my retort. The flip side of raising rates is some sort of recession. While I am not saying that one will happen, after having watched the Fed for some 48 years now, I am mindful of mistakes that might be made. I am also mindful of the consequences.

Interestingly enough, the dollar makes up approximately 59% of central bank holdings. This is the lowest level in a quarter century. This may change again, and change soon, as the BOJ and the ECB seriously lag the actions of the Fed.

What I can virtually assure you of, in the weeks and months ahead, is a serious bout of volatility. Whether you consider bonds or equities or our currency, volatility will be standing there and causing many of us to scramble as a result. I suggest very cautious methods of investing now where you beat the inflation rate in the most conservative manner possible.

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Evolution Or Revolution - Seeking Alpha