Pretty much everyone in the world wants the Federal Reserve to begin its "rate liftoff." September is the latest target date for this market consensus. But permit me one dissenting question: Are you sure?
Or as the saying goes, be careful what you wish for.
Take a look at a bunch of forward-looking, inflation-sensitive market indicators. They're flashing deflation, not inflation. In the past year or so, gold has dropped to $1,100 from $1,300 and oil has plunged more than 50 percent to $42 a barrel.
A 20-percent rise in the dollar has completely erased inflation fears. Economist Michael Darda calls it a de facto tightening. The end of quantitative easing and the expectation of higher future rates are behind the King Dollar move. Inflation expectations have been crushed.
Read More Here's where inflation is alive and well
So normally, with a rising dollar and all these commodity declines, the Fed would be thinking about lower rates and easier money.
But there's more. In the Treasury bond market, the yield curve has flattened. Anticipating a couple of Fed rate hikes, 2-year Treasury paper has bumped up about 30 basis points over the past year, while the yield of the 10-year note has dropped 20 basis points. Now, it's not an inverted curve, where short rates move higher than long rates - so there's no recession forecast. But as investor Brian Kelly pointed out many weeks ago, if Fed rate-hiking is accompanied by a drop in bond yields, we'll have another deflationary signal.
In fact, the so-called Treasury break-even inflation spread (the difference between the market rate, which is about 2.2 percent, and the inflation-protected rate, which is only 56 basis points) has actually fallen 50 basis points over the past year. Indeed it should. The year-to-year change in consumer prices is flat. So is the change in the consumer price deflator, something the Fed watches carefully.
Just last week import prices registered a 10.4-percent decline, another consequence of the sharp increase in King Dollar. Meanwhile, producer prices in July fell by nearly 1 percent. If you use the old PPI measure for finished goods, these prices have dropped 2.6 percent.
Read More This strange event could send oil soaring
And if you are a monetarist, the 12-month change in the M2 money supply is only 5.6 percent. With nominal GDP through the second quarter coming in at a meager 3.3 percent over the past year, the turnover (or velocity) of money is still falling.
Now, to some extent, this is all statistical mumbo jumbo. But if you are a Fed watcher it's important. Some people argue that the Fed should raise its target rate because we've had steady jobs growth and a low unemployment rate. Putting aside the validity of the U-3 unemployment rate (labor participation and employment/population ratios are abnormally low), the fact is that more people working doesn't cause inflation. As Milton Friedman taught us years ago, inflation is a monetary phenomenon: too much money chasing too few goods, and a sinking currency.