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BOSTON ( TheStreet) -- The stock market has fallen for six straight weeks as the economy has cooled, pulling down benchmark interest rates. Yet, prices for food and gas have risen, worrying investors.
All of this has occurred even though
Federal Reserve Chairman Ben Bernanke says inflation isn't a problem. During a speech last week in Atlanta, Bernanke argued there is "not much evidence that inflation is becoming broad-based or ingrained in our economy." While he acknowledged commodity prices have been a key driver of inflation, "the recent increase in inflation will prove transitory," the top monetary policy maker said.
Fed Chairman Ben Bernanke
For individual investors at home shelling out $4 for a gallon of gasoline and nearly as much for a gallon of milk, inflation seems to be anything but temporary.
"Meat, dairy and cheese prices are up over 20% year over year. You see energy prices and gas prices up. There's inflation. It's real inflation," says Cliff Remily, manager of the
Thornburg Investment Income Builder Fund(TIBAX).
"I don't know how you can realistically say that inflation is not a problem at this point," Remily continues. "Corporate margins are under pressure because of inflation. Is it transitory? I guess it's transitory if we go into another recession. This inflation is a
Remily isn't alone in his concern over Bernanke's view of inflation. Other fund managers, such as Cliff Hoover of
Dreman Value Management, worry that the Fed chairman believes he can control inflation.
"When you have to pay $100 to fill your tank of gasoline, you should say 'Thanks, Ben,' " Hoover says. "He's trying to prevent the market from clearing so quickly, but at the same time, you have unintended consequences of that economic policy. The unintended consequences are what we're seeing today with inflation."
JPMorgan Chase(JPM) CEO
Jamie Dimon had choice words for Bernanke during the Q&A portion of his speech in Atlanta. Dimon pointedly asked the Fed chief whether anyone at the central bank studied the cumulative effects of rules and regulations on banks, noting his own fears that they will stifle job creation and a recovery in businesses and credit markets.
But what could the Fed do otherwise? The central bank has pumped liquidity into the system through two rounds of quantitative easing, the second of which is set to expire later this month after the last $60 billion of open market transactions. Some fund managers, like Philip Tasho, co-founder and chief investment officer of TAMRO Capital Partners, applaud Bernanke for his sobering view of the economy and for taking a
third round of quantitative easing off the table for now.
"We've had so many issues out there, ranging from the turmoil in North Africa to the earthquake and tsunami in Japan," Tasho notes. "There were higher food and gas prices. There were weather issues, from tornados to flooding. We hope these are temporary issues that should settle down and we could see a more benign scenario in the back half of the year."
Because of his view that inflation pressures are transitory, Bernanke expects growth to strengthen in the second half of the year. While not everyone may agree with that view, the volatility in the market during the last half of 2011 could become an investor's best friend.
"Bernanke's intention is to monetize our way out of this thing, which is his only choice at this point. We're in a Keynesian mess," says Dreman's Hoover. "But as a stock picker, you use that volatility and play off of it."
TheStreet spoke with Hoover and other fund managers to get their view on inflation, how the markets will perform in the last half of 2011, and what stock picks play into their investment ideas, which are presented on the following pages.