As I sit here writing this essay, Mr. Mark Haines, Co-Host of CNBC's Squawk on the Street, is disputing the need to "seasonally adjust" economic data. Although he's out-numbered, three to one, he hangs in there and says, "Just give me the number, all I want is the truth."

Lots of luck buddy boy. Mr. Haines is not a flashy, financial kind of guy, often seen on CNBC. He's a lawyer by training and consistently challenges his co-workers and guests on the credibility of what they say and the data they present. When last Wednesday's durable goods data was spun around to make a down report look like it went up, he said he'd like to have an economist keep score for his struggling Mets. Now he's accused of being an old curmudgeon.

Frankly, I feel a lot like Mr. Haines does. I'm tired of being lied to. I'm tired of hearing about durable goods orders, ex-transportation, and CPI inflation data, ex food and energy. I read an article in the Wall Street Journal this morning which explained why the CPI did not fully reflect the runaway housing prices during the bubble and will mask the drop in housing prices in the current market. The CPI does not include housing prices, actually. It uses a measure called "owner's equivalent rent," which is supposed to reflect what homeowners would pay to live in their homes if they were renters. Brilliant!

Regardless of what you hear or read, you've got to understand that a tidal wave of inflation is sweeping around the world and engulfing America. This month's CPI report of 3.9% inflation, year-over-year, is a joke. Everyone knows that the cost of living is going up much faster than that. Yes, I'm talking about the cost of living, not a phony number, conjured up by a slick government economist.

Crude oil prices have skyrocketed and gasoline is up 30% from a year ago. Food prices have soared, thanks in part to the ethanol fiasco, and now, Dow Chemical is raising prices as much as 20% on its products. USA TODAY says it's just the most recent of a flurry of price hikes affecting everything from tissues, to coffee to paint. I can go on and on with stunning examples of price increases on steel, copper, coal and so on, but where can we get the truth on inflation?

Many observers believe the price of gold is the best leading indicator of inflation. I have no reason not to believe them. When I created VectorVest, I used the CPI in my valuation formulas and I still do. But VectorVest also tracks the Commodity Research Bureau Index, which we report in the Investment Climate section of these Views. You may see an 11-year, weekly graph on the CRB Index by clicking on Graphs on the main toolbar, clicking on Market Climate Graph and selecting the CRB Indicators.

Note that the CRB formed a double bottom in 1999 and 2001; then made a long steady climb from 184.49 to a high of 338.64 in May 2006. It fell to a low of 290.62 in January 2007 and embarked upon a parabolic rise to 431.07 since then. That's a 48% increase in 16 months, i.e. an average of 3% a month, not a measly 3.9% per year. Coincidently, the price of gold has gone up an average of about 3% per month since the middle of 2001.

The thing I like about using the price of gold or the CRB Index to track inflation is that their prices are what they are. No B.S. No Lies.

P.S. You may also enjoy reading my essays of 06/08/2007 and 06/15/2007.

When I was a kid, I accepted things pretty much as they were. Sure, I would fantasize about being the next Otto Graham or Joe DiMaggio, but I never dreamt of distorting reality. For example, I caddied at a prestigious Country Club and would get to play there on Mondays. Like all golfers, I used to visualize my shots before I struck the ball. If I had done what I had visualized, I would have made Ben Hogan look like a duffer. But I hardly ever made shots as I had visualized and I had to accept the consequences of my failures. I never thought of changing fact to fantasy back then, but I learned how it's done later in life.

I learned this wonderful skill from a bunch of whiz kids from the best business schools in the country. If they didn't like a business or situation, they just sold the business or took an eraser and changed the numbers. Selling a business or changing numbers is easy. It takes no skill or expertise. But it's not dealing with reality. As a chemical engineer, I had to deal with physical reality. If a vessel were leaking a poisonous chemical, we had to physically fix the leak. We couldn't stop the leak by assuming it wasn't leaking. A lot of people in today's world don't understand that because they never dealt with physical reality. So they create a fantasy world of false assumptions and distorted numbers that doesn't exist. They are lying to us, and we believe them.

Today we got the CPI inflation report for May 2007. It showed that consumer prices rose at the fastest rate in 20 months, powered by surging food and energy prices. That's really bad news -- but not if you don't count food and energy prices. "They're too volatile." The core rate of inflation, i.e., without food and energy, rose only 0.1 percent in May, much less than 0.7% for all items. So today's inflation report was really good news. Really?

What we have here folks, is The Federal Reserve Board's version of "The Big Lie" as promulgated by Adolph Hitler and Joseph Goebbels. Make the lie preposterous enough, make it big enough and repeat it often enough and the "thick-headed numbskulls" will believe it. Indeed, stock traders swallowed the spin and stock prices took off. Even if you're offended by Wall Street's antics, forget about it. It's more profitable to fly on the wings of Inflation Fantasies.

It's been a long time since rising inflation and rising interest rates have been headline news. But they were this week, and that's not good for stock prices. Rising inflation destroys wealth and rising interest rates raises costs. Ironically rising inflation is seen as an enemy, which it is, and rising interest rates is seen as a weapon to fight inflation. Together they can devastate an economy, torpedo corporate profits and cause a bear market.

As Chairman of The Federal Reserve Board, Dr. Bernanke's job is to maintain monetary stability and to ensure full employment. (The latter task was added to the Fed Chairman's job a few years ago to make the politicians happy.) Nevertheless, his real job is to fight inflation. So he and his associates, known as Fed Governors, have been railing against inflation ever since he took office in February 2006. Moreover, Dr. Bernanke followed in the footsteps of his predecessor and raised interest rates several times after taking office. The last interest rate increase took place in June, a year ago. At that time he said the Fed would consider pausing in their rate hikes since a slower economy would moderate inflation.

First quarter, 2007 GDP growth recently was the lowest in four years, a tepid 0.6%. So investors thought Dr. Bernanke would finally lower interest rates. This move, they thought, would spur the economy, ensure solid corporate earnings and help stock prices go higher. But Dr. Bernanke fooled them. In a speech this week, he said he expects the economy to get stronger over the next few quarters, so he would remain vigilant in the battle against inflation. In just a few words, he crushed any thoughts of an interest rate reduction anytime soon. Stock prices fell sharply.

To be fair, Dr. Bernanke never indicated that he was more likely to lower interest rates than he was to increase them in his fifteen months in office. On several occasions his statements were misinterpreted, (see my essay of 05/05/06), and even I thought that he would lower interest rates. But I should have known better - The Fed Chairman lowers interest rates only after the economy has gotten into trouble, not while it's still showing signs of life, (see my essay of 07/14/06).

Our Market Climate Graphs show that interest yields on 90-Day T-Notes, 10-Year T-Notes and AAA Corporate Bonds bottomed in June 2003, but have not risen substantially since Dr. Bernanke took office. Inflation, as measured by the CPI, is about where it was in June 2003, but hit a high of 4.7 %/yr. in October 2005 and a low of 1.3 %/yr. in December 2006. At this point, it is much lower, 2.6 %/yr., than it was in February 2006, 3.4 %/yr., when Dr. Bernanke entered office. So it seems to me that neither inflation nor interest rates have moved much since Dr. Bernanke has been in office and that the media is overreacting to Dr. Bernanke's comments. So we should not worry at this time.

We should start worrying about high inflation and interest rates when they stifle the economy and cause earnings to go lower. VectorVest tracks these data in our Investment Climate report, shown below, and it interprets the data with the Truth Chart. (See my essay of 03/28/03.) Right now, the Truth Chart is saying we are in a Case 4, Bull Market Scenario in which earnings, inflation and interest rates are rising. This scenario has been going on for a long time and will continue to do so, provided that Dr. Bernanke is right about the economy. For now, we do not have to worry about high inflation and high interest rates, The Deadly Duo.

Three weeks ago, I wrote about the Investment Climate and how we track the key factors affecting stock prices. Then I wrote about the Truth Chart and the role that The Fed plays in deciding the fate of the economy and the Investment Climate. Two weeks ago, the Truth Chart said we were in a Case (2) Bull Market Scenario, the most desired Investment Climate. This combination of factors, in which earnings rise while inflation and interest rates fall, is often called the Goldilocks scenario.

Now we need to see whether Dr. Bernanke does, in fact, lower interest rates in time to sustain a Bull Market Scenario or whether he waits too long and allows the economy to go into the tank. I believe he will lower interest rates soon simply because of the Presidential Election Cycle. Nevertheless, what is the factor in the Investment Climate that will signal to us whether Dr. Bernanke has done his job or not?

It's the earnings trend. The Truth Chart shows that earnings must be rising in order to have a Bull Market scenario. In other words, the market will be in a Bull Market scenario as long as the earnings trend indicator is above 1.00 and a Bear Market scenario when it is below 1.00. So does this mean that the earnings trend is the only thing we have to watch?

No, not at all. As noted in my essay of 03/28/03, the only difference between Case (1), Bull Market Begins, and Case (4), Bull Market Ends is that interest rates were falling in Case (1) and rising in Case (4). Currently, the market is in a Case (3) scenario. It attained a Case (2) scenario three weeks ago, after being in a Case (4) scenario for months on end. It is very difficult to avoid a Bear Market scenario after being in Case (4) for a long time. That's why it's important to watch the earnings trend so closely. There are several ways to do this.

The easiest way is to simply go to the Investment Climate section of these Views and read what it says in the row marked S&P Earnings. Another way is to click on Graphs on the Main Tool Bar and Market Climate Graph. Once you have checked S&P Earnings and S&P Earnings-VV, you'll see that while earnings have been rising smartly for over three years, its trend indicator peaked at 1.19 in mid-2004 and has now fallen to where it was three years ago. A third way to see S&P earnings is to click on WatchLists on the Main Tool Bar, click on Stock WatchLists, click on S&P WatchLists, click on S&P 500, click on the data row at the bottom of your screen and click on Graph on the Local Tool Bar. Use the Edit Field List to chart EPS.

The sum of all this is that earnings are still rising, but the rate of increase has been diminishing. Nevertheless, I don't expect to see a Bear Market scenario soon. In any event, we'll let you know when we get a change in The Bull/Bear Market Indicator.