Inflation can be defined as a continued increase in the mean price of products and services. Excess total demand, as a result, of too rapid economic growth, and supply side factors (cost push factors) are the key causes of inflation.

Demand-Pull Inflation

The causes of inflation are associated with demand pull. Demand-pull inflation is characterized by rise in demand comparative to supply. An economy that is close to or at full employment would be characterized by a rise in demand which would lead to a rise in the price amount. Inflation emerges as firms reach full capacity. In response to firm full capacity, prices are raised; workers get higher wages thereby increasing their spending power. There would be demand-pull inflation, whenever the economic growth surpasses the long run trend rate of growth. The growth in productivity is used to measure the average sustainable rate of growth which is referred to as the long run trend rate of economic growth.

Cost-Push Inflation

Cost push is one of the main causes of inflation. If the costs of firms are increased, then the firms will apply this to consumers by incorporating the increased cost into their products and services. There are many factors that can cause cost-push inflation, and they include rising wages, import prices, raw material prices, higher taxes, declining productivity, and profit push inflation. A key cause of cost-push inflation is rising wages. It is evident that higher wages is associated with rising demand. Devaluation of currency, which is directly related to an increase in inflation, will result to more expensive import prices. In other words, when there is a depreciation of currency people spend more to purchase the same imported goods. Causes of inflation related to cost-push are also associated with increases in the price of oil. If the oil price increases by 25% then there will be a significant rise in prices of most commodities and services in the economy.

Other Causes of Inflation

Rising in house prices and printing of more money are other causes of inflation. Rising house prices can indirectly trigger demand pull inflation. Moreover, there will be a rise in inflation if the Central Bank prints money more than needed. There will be a rise in prices of commodities if there is more money pursuing the same volume of goods. An extreme increase in the money supply usually causes hyperinflation with exceptional conditions, such as recession and liquidity trap.

The rise in inflation means that investors need to understand gold investing essentials in order to hedge and protect themselves. People need to have ten percent of their money in gold and precious metals in order to have insurance against inflation.

Coffee futures have shown a significant drop in the past three weeks. This was a result of the worst drought incident in several decades in Brazil, the largest producer and exporter of coffee in the world. But things are beginning to pick up, as more than average rainfall is expected in the major regions that produce coffee, including Southern Minas Gerais, Espirito Santo, Rio de Janeiro, and Sao Paulo.

The recent drop in coffee futures has highlighted increased swings in the market. In mid-Match after price reached its highest level since 2012, forecast for rain provoked the largest 2-day selloff since 2010, which was preceded by a rebound to another new high on April 11. Rain has been the major factor that has affected coffee futures over the past few years. Some years have witnessed les frequent rain that has affected overall coffee production.

Presently, the projected weather pattern suggest that there is going to be too much rain far more than the crop is going to need for proper growth. If this happens, it may equally affect the crop’s productivity and availability in the futures market. Even a projected weather forecast alone can have its toll in the coffee futures market.
Coffee futures traders all want to know what is happening with the Brazilian crop because a little impact might cause a good price swing in the market. The options which give futures owners the right to trade June futures for $1.94 increased by 75%. In line with this development, there was an estimated 2,043 coffee futures contracts traded, the most active future option on ICE yesterday.

It is estimated that world production of coffee will trail demand by 7 million bags by October 2014. This will be the result of changing weather conditions that may not be favorable to coffee production. And the U.S futures data show that it will mark the time coffee futures has witnessed a slump in five years.

The estimated coffee output for Brazil this year range from as low as 46 million bags to as high as 56 million bags. A bag weighs 132 pounds or 60 kilograms. This difference is almost the size of Colombia’s estimated production of Arabica beans.

With this development, all focus will be on Brazil and how weather conditions can affect their own quota of coffee beans in the world’s futures market. It will suffice to say that the weather condition for coffee production in Brazil will go a long way in determining price movements of coffee futures in the world market.

The stock market crash of 1987(also known as Black Monday) began on the 19th of October, 1987 when stock markets in many countries in the world crashed. It started in Hong Kong and reached Western Europe, spreading to the United States after several markets in the world had already declined significantly. During this period, the DOW Jones dropped by 22.61 percent.

One major reason given for this financial upheaval was the computerized selling by program trading. But the largest price drops occurred when the trading volume became light. Swift stock executions are performed by computers during program trading based on foreign inputs. A particular strategy was adopted using program trading in a bid to affect portfolio insurance and arbitrage strategies. The utilization of program strategy became very popular among Wall Street firms as computer technology grew in prominence. After the crash, a lot of people blamed it on the strategies of program trading as stocks were sold even when the market crashed, leading to more market decline.

Some economic pundits were of the opinion that the crash itself was a reaction tilted towards return to normalcy caused by program trading activities before the crash. Indeed, most of the blame on the 1987 crash was put on program trading.

Some other economics indicted not only program trading but also other internal and macroeconomic issues such as fears about inflation and international dispute on foreign exchange.

Some of the internal reasons were portfolio insurance and innovations with index futures. The Chicago’s futures market was even below the stock market and investors tried to arbitrate it. As people were trying to sell their stocks at the New York market, portfolio insurers were equally trying to sell theirs as well.

Another economics Richard Roll opined that program trading was not the major cause of the crash but the nature of the international stock market back then. He supported this argument by pointing out that program trading was only carried out in the United States, and as such, the market crash could not have affected countries like Hong Kong and Australia, if program trading was the prime cause of the worldwide market decline. In fact, before the crash reached the United States, the stock market of some other countries have significantly declined. Another reason given for this crash was the disagreement in monetary policies of the G7 industrialized nations.

From the above, it can be seen that the cause of the stock market crash of 1987 was a combination of several factors which were both internal and external in nature.

The only way to prevent yourself from getting caught up in a crash like this is to understand and obsess over stock market trend analysis.

The first quarter of this year saw TLT bond ETF rebound from harsh returns posted last year, as last year’s high interest rates resulted to falling yields this year. At the start of the New Year, market experts expected and change in the equity prices in the New Year. But this was not to be as disappointing economic activities coupled with unsettling headlines from key emerging markets such as Brazil and China accelerated the softening.

Oddly, cold weather was the major cause of the laxity in January and February economic data in 2013. But the TLT bond market had a little setback in March as speculation was fuelled by Federal Reserve Chairman Janet Yellen that there would be an increase in interest rates.

The fear of high interest rates has kept several TLT bond investors at bay and afraid of putting their money in bond ETFs. But despite this, a number of bond ETFs have continued to outperform in the U.S. stock market. The S&P 500 ETF is up by 1.8% in April 2014 and has been in this range for several months now. In addition, the bond ETFs have rallied as a result of the reduction of interest rates on the U.S. treasuries. As a result, the share TLT bond ETF has risen to 8.9% this year, a nine-month high. The present yield on TLT is 3.25% with an expense ratio of 0.15%. These ETFs are composed of treasuries with more than 20 years maturity date
The SPDR high yield ETF bond is also up by 3.5% in 2014 (including the monthly dividend).

The SPDR has a yield of 4.8% with an expense ratio of 0.45. This doubles that of a 10-year treasury bond.

Performance of Municipal Bonds in relation to TLT bonds

The High-Yield municipal Bond has a remarkable gain of 7.5% when the monthly dividend is included. Its portfolio is composed of 75% below investment grade municipal bond. This has actually outperformed the TLT Bond ETF. But the 30-Day yield of 5.4% is as a result of the tax advantage of municipal bonds, which has an astonishing 8.95%. Its expense ratio is 0.34%.

However, investors who want to invest from overseas can shift to the emerging TLT Bond ETF markets such as Brazil and China. The ETF has a steady increase of 3.5% with a yearly yield of 4.7%. Mexico, Brazil, and Russia are the countries with the highest portfolio exposure.

The US stock market no doubt has a high valuation today. Today’s valuation of 23x is much higher than the historical valuation of 14x earnings. This present high valuation is measured by the S&P 500 component stocks. But this market is beginning to experience some downturn, and the reason is not because the market is doing badly. It is because the market has been far too overvalued. Most US stocks are just too expensive and are not a representation of their actual worth compared to their historical precedents. This high valuation is a strong signal to investors that the market will soon move into the bear zone from the current bull zone it has been.

Investing has to do with buying at a lower price and selling at a higher price. So, the most important aspect of a stock’s price appreciation process is the price you pay for the stock. The best way to reap a lot of profits from the stock market is to buy stock of good companies when they are offering a low price. In this way, when the stock starts appreciating to reach its actual value, serious gains will be made. This is how investors make money in the stock market. But there will be little or no room for growth when you buy expensive stocks of companies, even if the company is doing exceptionally well.

The past week saw the S&P 500 Index reach a 4-year high, approaching the level not witnessed before since the 2008 recession. It shows you that there is only one stock market chart you need to see. This high growth came on the back of some improvements in recent weeks. There were improvements in payrolls and housing numbers, which gave investors some level of confidence that the Unites States economic recovery is gaining momentum. There is also a growing confidence that Europe will try and rescue the euro zone, giving exporters the confidence to do business.

Apart from the S&P Index, other indexes are equally doing well: Dow Jones has increased by 9.6% this year, while the NASDAQ has gone up by 3.7%.

Although the S&P 500 bounced back from its four-year high, investors believe that the worst economic era is seemingly behind them. Even after some negative results in the springs, investors are still brewing with confidence and stocks are still resilient.

There is no doubt that the U.S stock market has been overvalued for a long time. Investors who still want to pitch their investment tent with well known companies can still make some profits, but the real movers of the market would be those that can spot and invest in good performing stocks that are still selling low.

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