Kass: Fed Cuts Leave Ugly Scar -- Blahflation

This blog post originally appeared on RealMoney Silver on Feb. 20 at 7:27 a.m. EST.

"You're walking around blind without a cane, pal. A fool and his money are lucky enough to get together in the first place."

-- Gordon Gekko, Wall Street

Bullish equity investors are thinking too linearly in attempting to rationalize value by observing rearview mirror indicators of economic activity and corporate profits while ignoring the emergence of blahflation (i.e., blah economic growth and stubbornly high inflation).

Not surprisingly, the media, preoccupied by the past tense of Wal-Mart's (WMT Quote - Cramer on WMT - Stock Picks) and Hewlett Packard's (HPQ Quote - Cramer on HPQ - Stock Picks) earnings reports (and others), are missing the bigger picture as well.

On the other hand, bond investors see the future more clearly, as they have recently observed inflation's disruptive effect on the back end of the curve, which has gained nearly 50 basis points in yield over the last few weeks.

For over a year, The Edge has anticipated the re-emergence of blahflation. Blahflation has now arrived, and it will be the cruelest tax of all.

We see its symptoms almost daily now:

• Gold rose by another $25+ yesterday, and other precious metals followed with higher prices.
• Oil traded above $100 per barrel.
• Gains in the prices of Industrial materials buoyed the CRB Index to near-record highs yesterday.
• Higher prices of grains, soybeans and other soft commodities also contributed to a rising CRB Index.
• China's consumer price index has ramped, and that country is now exporting inflation into the U.S.
• The yield on the 10-year U.S. note gapped to over 3.90%.

Meanwhile, for years the Fed, which abandoned its responsibility of banking industry oversight, now digs its heels in and attempts to remedy a credit system in seizure by using the old technique/method of easy money.

The Fed is pushing on a string. It has failed to recognize the ramifications of the peeling of the credit onion, which has uncovered new problems (almost weekly) that have spread into the credit and financial system. These new problems may very well be beyond the Fed's control as the banking industry shies away from risk-taking activities.

The Fed's efforts are now only exacerbating deep-rooted problems that have been percolating over the last decade. The effect of which will be another form of deflation but, unfortunately, in P/E multiples.

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.