Lower Unemployment Means Higher Interest Rates

On Friday of last week, the U.S. government issued figures showing that unemployment had fallen to 4.4 percent. Saturday's Financial Times (FT)said that this was, "the lowest level for nearly six years."

This gave Good Friday's shortened hour bond market a shock as its bets of lower U.S. rates appeared to evaporate. According to Saturday's FT, "Bond prices plunge[d]."

In the same article, the FT reported that the U.S. Fed "is likely to be concerned by fresh signs of wage and price pressures in the latest figures, with average weekly earnings 4.4 percent higher than a year ago—close to 10-year highs."

Our readers will know that we have long warned that the CPI figures are cooked by our government to the downside, for political reasons, and that what we term, "Stealth Inflation" stalks our economy.

[Editor's Note: Lou Dobbs Agrees with Us: Inflation Numbers Lie!]

As we have also long reminded our readers, we believe the Fed is privately aware of Stealth Inflation.

We believe this has encouraged the Fed's bias against inflation. This, bias is despite the fact that the official CPI is only marginally above Fed chairman Bernanke's "comfort zone."

We have often pointed out that what keeps the Fed from stronger anti-inflationary action is its most difficult dual mandate—to both control inflation and to encourage economic growth.

We feel that this difficult balancing act has inspired a recent period of dangerous indecision on the part of the fed.

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We think this indecision has led to a certain lack of clear and determined leadership. This has greatly increased that risk of infecting the U.S. economy with the worst of economic ills — Stagflation.

The latest news on unemployment and wage inflation will, we believe, enable the currently overly cautious Fed to come off the fence and take firm action to kill a rising Stealth inflation, by raising rates.

This will cause a major drop in prices in the long bond market, which has buried its head in the sand over inflation and bid up the price of long bonds to create our present inverted yield curve.

This is why, despite temptation, we have warned our readers to keep their bond investments short-term, high quality and high coupon.

We now see the way open for the Fed to raise their key rate at the next FOMC meeting on May 9th.

The prospect of a higher U.S. Fed rate has not been lost on the bond markets or on the FOREX markets. The U.S. dollar is already stronger against the Euro, Yen, Sterling and gold.

Our forecast for a Fed rate hike leaves us with the same recommendation for our more conservative investors.

Be patient and cautious of U.S. stock markets. Continue to diversify aboard, possibly through low load mutual funds or ETF's, and particularly towards Finland, South Korea, Norway, India, China and Australia.

Our most conservative readers should remain heavily weighted to cash, high coupon, high quality, short-term bonds and a bit of gold.

Editor's note:
Bernanke Reveals `Fiscal Crisis` Ahead
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.