Today's "jobs Friday," when the federal government announces its mystifying and statistically incomprehensible report on jobs, thus assuring the job security of media pundits everywhere. And hey, I'm one of them! What's interesting about this month's jobs report, with a report of 36,000 lob losses (less than expected) is not so much its contents, but the market's reaction. All markets are up. That reaction says to me: Inflation ahead. Keep in mind, when everybody is getting fired, it's very hard to create inflation, because nobody has any money to buy anything. However, once the printing presses start running, and job losses start to diminish, all it takes is the slightest bit of hiring to create inflation. Why is that? Because the feds have pumped trillions of dollars of money into the system, and all the banks and consumers need is a whiff of things improving to get the ball rolling again.  Right now that money is trapped on banks, who are clutching it with their fists, saving it for more potential losses or to lend out, if things get better. With that trillions of dollars of liquidity out there, that means that inflation will accelerate meaningfully if there is only a slight uptick in demand. But don't take my word for it -- look at the markets. Crude oil is back to $82 a barrel, gold is flirting with $1,200 again, but most importantly, all manner of commodities and materials stocks have been rising strongly, some breaking out to 52-week highs. Take a look at the action in iron-ore producer Cliffs Natural (CLF) below, which recently broke out to a new 52-week high. [caption id="attachment_1374" align="aligncenter" width="498" caption="Cliffs Natural (CLF)"][/caption]

Now, let's take a look at the price of gold and silver, as measured by the ETFs GLD and SLV:

[caption id="attachment_1375" align="alignnone" width="498" caption="Gold Trust (GLD)"][/caption] [caption id="attachment_1376" align="alignnone" width="498" caption="Silver Trust (SLV)"][/caption]

These charts to me are indicative to rising prices, not falling prices. The deflationists can argue all they want about the falling prices of homes, and cars, but the fact is that these are big-ticket items that represent huge, leveraged discretionary purchases by consumers. Yes, we are in the midst of credit deflation, which means that anything that requires credit or leverage (a house and often a car), is difficult to buy or sell. But the prices of everyday things, including iron ore and fuel are going up again. This will feed inflation into the system.

So is the Fed ready to slam on the breaks? Doesn't look that way, judging by the recent M2 money supply chart from the St. Louis fed.

Holy cow. Does that look deflationary to anybody? The deflationists argue that the money is being printed and piled into banks, but it can't feed into the system because the banks need to reserve for losses. True, reserves for losses are up. The banks aren't lending (because of the lack of demand that I described). But in fact, you don't need a huge economic boom for this money to feed into the system and inflation again. All you need is a slight stabilization. And eventually (probably in the next 12 months), people will need cars or houses again because the excess inventory will start to get worked off. Banks will start to lend again, because they have to make money. And inflation will take off.

Now, you could make an argument that the turning point isn't hear yet, but I would argue that it is. If businesses are going to grow again, they will need to hire. In 2010. Now, this many not be enough to resolve long-term structural problems to jobs in Western nations, given the trend toward the emerging markets. But just a slight increase in hiring in the West can spark the inflation bug.

Check out the chart below, which shows the gap between labor costs and productivity. Businesses are making more money than ever off this gap, because they have slashed workers down to the bone and profits are up. If this isn't evidence that companies will be forced to hire at the slightest sign of economic improvement, I don't know what is. The fat cats fired too many people. Some of them will come back in 2010. As you can see, a similar trend occured in 1970s but that gap evenutally closed and what was the result? Inflation.