Beware inflation. Beware how the bond market responds.

From Bloomberg:

Food Prices Stay Near Record as Meat Costs Rise

World food prices lingered near record levels in May as meat and dairy costs rose, contributing to inflationary pressures that may drive millions into hunger, even as grain prices fell...

The European Central Bank raised interest rates on April 7, joining nations from China to Sweden that increased borrowing costs this year in a bid to control inflation partly blamed on food costs. Egypt, where rising food prices helped spark protests that led to February’s ouster of President Hosni Mubarak, yesterday forecast “elevated” inflation.

Link:  http://www.bloomberg.com/news/2011-06-07/world-food-prices-stay-near-record-as-meat-costs-increase-grains-decline.html

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Low Yields on U.S. Treasuries No Guarantee Against Fiscal Crisis

Treasury Secretary Timothy F. Geithner takes comfort from the government’s ability to borrow at low interest rates as the budget deficit hits a record high. “There’s a lot of confidence” in America’s capacity to meet its commitments, he told Bloomberg Television.

History suggests that such faith may prove to be misplaced in the long run. A study of 116 financial crises in 25 countries found that rates had a poor track record in foreshadowing financial difficulties, said Carmen Reinhart, a co-author of the analysis and the female economist whose work is most frequently cited by other researchers...

Reinhart is the No. 1 ranked female economist worldwide as of May, based on criteria used to judge the popularity of her work, according to RePEc: Research Papers in Economics, an online database of economic material operated by volunteers in 74 countries.

The research she did ... looked at crises from 1970 to 1995, focusing on everything from bank-deposit rates to yield spreads. “None of them worked well” in presaging financing problems, she said. The results were contained in “Assessing Financial Vulnerability: An Early Warning System for Emerging Markets,” a book published by the institute in 2000....

Link: http://www.bloomberg.com/news/2011-06-06/low-yields-on-treasury-debt-no-guarantee-financial-crisis-won-t-hit-u-s-.html

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Are you in danger of being surprised?  Beware inflation.

Inflation destroys the value/purchasing power of your money.  Bonds lose value when inflation rears its ugly head.  Now is the time to pay close attention and time to start taking action.

Things are not clear. 

The yield curve argues against a recession.  Read Carolyn Baum on Bloomberg.

But also read PIMCO's Bill Gross. 

Start taking independent action to make sure you have enough liquidity in your portfolios.  That means raising cash.