The stock market likes a little inflation -- for a period of time, anyway -- because it's impossible to for a country to realize economic growth without allowing its money supply to grow along with the demand for its currency. The more currency in the system, the more it tends to move toward the stock market (to a point). Thus, inflation should more or less grow at the rate that a country is prospering and its population is growing. Too much currency floating accompanied by not enough goods, resources and services offered (because demand for them is rising) will cause inflation. (Sort of makes you not want Uncle Ben's job, doesn't it?)

Milton Friedman made the analogy of inflation to alcoholism, writing that when beginning to drink, say, a good wine (my analogy), things will go fine. But keep drinking more good wine, and you'll be in for a serious hangover! We the people were served a rather large amount of "good wine" last month, when the November PPI and CPI came in at 0.8% and 0.1%, respectively. When I first saw those numbers, I made a mental note to be on guard for a possible trend beginning. Thus, when the December PPI and CPI numbers are announced on Thursday and Friday respectively, I think that the "wine party" that began a few months ago might enter the "hangover" phase -- and a new trend phase. The PPI for December is projected to be 0.8% and the CPI is projected to 0.4%! Ladies and gentlemen, strap yourselves in because the "Big I" is possibly here again, and the party has only just begun!

When I first began to actually make money in this business, I was taught to never annualize any positive return on any trade, or combination of trades, or even successful months after months! Thus, no matter how well I was doing, I never multiplied anything by 12 (thereby annualizing it). I still don't! However, when examining economic numbers reported by the U.S. government, keeping to that rule should be given a pardon as our government tries its best to paint a pretty picture in regards to our cost of living. For example, many years ago the PPI and CPI were not "watered down" by the current process of the government extracting "food and energy" costs from these inflation figures. When forced to report what they must, you should note the report with an inquiring mind. Reporting an "annualized" 9.6% PPI and an "annualized" 4.8% CPI should catch your attention and alert you to the possibility of making a buck -- or a lot of them -- by trading ahead of these numbers in a way that uses the projected PPI and CPI reports to your potential trading advantage.

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