Inflationary forces and monetary manipulation by the Federal Reserve will continue to guide the market in the coming months. The manipulation by the Fed is not going away - not in this election year. This past week was proof of that. After a shocking sell-off on Tuesday across all markets, following lower than expected growth forecasts out of China and worries over a hard landing default in Greece, the Fed made its presence felt.

On Wednesday, March 7th, the Fed, in timely fashion, allowed strategic information to leak to the Wall Street Journal.

Jon Hilsenrath of the WSJ, reported that:

"Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.

Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed's previous efforts to aid the recovery."

What was the result in the markets following this information leak? The US Dollar tanked and everything from precious metals to financials went up.

Let's just analyze the first sentence from the above excerpt for a moment.

Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation...

A new type of bond-buying = printing money

Printing money, by definition, leads to increased inflation, due to an increase in money supply.

Hilsenrath stated the bond-buying program is "designed to subdue worries about future inflation."

The Federal Reserve has repeatedly preached that inflation was in check, that it was under control and that if anything it was too low!

The truth comes out.

The Fed knows it's playing with fire and getting closer and closer to burning everyone's savings as it attempts to hold back the flood gates of runaway inflation and a collapsing US dollar. Only those holding commodity based assets and other hard assets have a hope in preserving their wealth. Our team believes the biggest gains will be had in supply tight commodities - specifically copper, gold and silver.

The Fed is going to beat the US dollar into submission because it's the only way (in the short-term, without real growth) that GDP can increase, employment will go up, tax revenues will go up and the US will be able to continue servicing its debt.

Remember that if the Fed admits inflation is on the rise (and exceeding its target), according to its playbook, Bernanke must raise interest rates. Raising interest rates is a multi-year recession sentence and a potential fast track to a Greece like default scenario for the US.

The volatility we saw on Tuesday has been typical of the super cycle in commodities and current bull-market we find ourselves in. Sharp, sudden pull-backs, combined with slow steady rises, articulate the saying 'the markets are climbing a wall of worry' perfectly. Prior to Tuesday's selloff, the Dow had gone 45 trading days without a 100-point decline - an amazing feat considering the volatility of the past 4 years.

This lack of volatility is what the Fed wants.

The Fed knows that if volatility remains low, investors have the ability to forget about the underlying threats of a Euro Zone default or even America's own recessionary threats. It is only human nature.

Our team at Pinnacle remains very cautious about the long-term prosperity and success of the United States. Despite its continued positive job numbers, the vast majority of these newly created jobs have been in the service sector. For the most part, service sector jobs do not create lasting GDP, real growth or durable expansion. This gets back to the heart of America's problem and the consumer mentality which has led it to the brink of bankruptcy. Many of the 227,000 jobs added in the month of February do little to help increase America's exports. As we've stated for years, it will be growth in manufacturing and a shrinking trade deficit that will carry America out of the hole it finds itself in.

The US trade deficit has surged to its highest level in more than three years. On Friday, March 9th, it was reported that January's trade deficit was $52.6 billion. The markets reacted positively by ignoring the story. There are some disturbing facts behind this number. Although it reflects increased consumption, this is not necessarily a good thing. Remember that it was over consumption which led us to the brink of a complete global meltdown in 2008. And with oil prices hanging around $110 a barrel, that trade deficit is unlikely to shrink anytime soon.

The US just posted its widest trade deficit since October of 2008. Does that mean the American consumer is wealthier now or is it spending money it doesn't have?

Every quarter the Federal Reserve releases its Flow of Funds report. In the middle of last week the Fed released the data from Q4 of 2011. The Fed uses this to track quarterly changes in consumer net worth.

In Q4 of 2011, for the first time since Q1 of 2008, debt across all holder classes increased. This includes the debt held by households, nonfinancial corporate business, nonfinancial non-corporate business, state and local governments and of course the Federal government. This breaks a 3 and a half year trend of consumer deleveraging since the US entered the heart of the recession. What this data suggests is that overall borrowing is positive again and that the deleveraging phase is over. Are we headed for sunny skies with more borrowing for investment, backed by solid, rising incomes in export driven industries? The short answer is no. The employment data clearly shows the bulk of the jobs have been in the service sector. In other words, the data is telling us that the US deleveraging phase is now over, old spending habits have returned and debt is being accumulated for the first time since Q2 of 2008!

Review the chart below (click on image to enlarge):
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If you'd like to read the 127 page report the Fed published, known as the Flow of Funds report, please

All the best with your investments,