Fed To The World: Blame Emerging Markets For Inflation (EEM, EFA, SPY)

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April 27, 2011 4:29pm NYSE:EEM NYSE:EFA

Ben Bernanke is right to look toward emerging markets when he talks about rising oil and gas prices, but the question is whether this situation is “transitory” or “sustainable.”

Half of the Fed chairman’s logic is clear. Emerging market economies are expanding, which creates new demand for oil, gas and other commodities that are already in limited supply.

Even though demand may be declining in developed markets, this fundamental equation can still pump up inflation around the world.

And when supply is threatened — as with ongoing tension in the Middle East — prices climb even faster.

But Bernanke applied the term “transitory” to the current inflation backdrop, even though he seems to believe that emerging markets growth is “sustainable.”

How can a fundamental shift in the supply/demand equation be both transitory and sustainable?

In fact, this is the fundamental raison d’etre for EmergingMoney.com.

There is a structural long-term change going on in the global economy as emerging markets shift from being almost exclusively producers of raw materials to a more balanced role as producers and consumers.

This is why we believe in the commodity super cycle and that inflation can revert to the long-term historical mean despite years of very limited price pressure.

And among the things the Fed cannot control are tension in the Middle East, emerging markets growth and oil prices.

That said, commodity prices do not necessarily have to be this high right now — the supply threat is in fact “transitory” — but over the long term, the emerging markets demand is definitely there.

Watch the iShares MSCI Emerging Markets Index (NYSE:EEM), iShares MSCI EAFE Index (NYSE:EFA) and the SPDR S&P 500 ETF (NYSE:SPY) to see how emerging markets, developed markets and Wall Street all react to these pressures and the reversion to the mean from here.

One thing: emerging markets know inflation as an omnipresent fact of life. Developed markets have had it easy.

Written By Tim Seymour From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.

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