Most major stock market indexes remained range-bound throughout April as the bulls and the bears dueled it out daily. Investors were unsure of what to do in April because the Federal Reserve (Fed) had just raised short-term interest rates on March 28th, ( at its regular scheduled meeting), the fifteenth time in a row since June of 2004.

The Fed by its actions and public announcements remained concerned about the resurrection of inflationary pressures building in the U.S. economy due to its accommodating posture of historically low interest rates until 2004.

In addition, stock and bond market investors were checking out the new Fed chairman (the fourteenth), Mr. Bernard Bernanke, who took over from Mr. Alan Greenspan early in 2006.

Stock and bond market investors continued to hope in April that the U.S. economy would become a “Goldilocks Econ-

omy”, that is, a stable slowing economy, with little if any inflation building.

It is my belief however, from my studies in economics, that inflation is a monetary phenomenon not an economic one. What this means, is that it is the Fed that creates the money supply that is the culprit, if inflation takes hold.

When the Fed as it has done post 9/11, lowers short-term borrowing costs to near zero and encourages its member banks to lend to unworthy borrowers, then this easy money will raise the specter of inflation, not a robustly growing economy.

Unfortunately, it is likely that no matter what the Fed does now, unless it radically raises interest rates (that takes courage) and requires its member banks to reign in credit, the U.S. economy is doomed to rising inflation ahead.

Stock and bond market investors abhor inflation as it can erode

corporate profits which is bad for stocks, and in addition, erodes the value of the interest payments that bond market investors receive.

Most major stock market indexes began to rise in early May, but soon faded right after the Fed again raised short-term interest rates on May 10. The stock market continued to decline until mid June when the bulls again took the upper-hand, bringing most major stock market indexes to about where they started in early June.

I remain cautious about what is ahead for the overall stock market. As such, I remain committed to the stocks of energy and precious metals companies for the portfolios that I manage on behalf of my clients.

These specific stock market sectors should perform well as long as the U.S. economy remains dependent on imports of crude oil from many unstable countries.