Montreal, Canada

Unless you’re over-weighted in commodity equities, the majority of stocks will struggle to stay above water ahead of the next inflation jolt. Yesterday’s market action might be a sign of tougher times ahead as we eventually shift from slowing disinflation to rising inflation.

Speaking just ahead of me at the Agora Wealth Symposium last July in Vancouver, Dr. Marc Faber delivered an excellent presentation.

I’m a big fan of Faber and enjoy his analysis in the celebrated Doom, Gloom and Boom Report, which he publishes from his base in Hong Kong. Faber is a deep thinker and always makes a strong case for his position in the financial markets – whether bullish or bearish.

In Vancouver, Faber assailed bonds as one of the worst investments over the next several years as U.S. inflation makes a comeback. I agree completely. He also suggested that stocks will hold their ground or certainly lose a lot less compared to bonds as the Fed continues to flood the financial system with cheap money and a tirade of unorthodox monetary experiments. Again, I couldn’t agree more.

But Jim Rogers, recently quoted on Bloomberg television on the same subject, lamented how stocks fared poorly in the 1970s as inflation accelerated. His advice is to stick with companies in the resource sector because they’re capable of passing on rising costs, unlike most other industries.

World markets plunged about 1.5% to 2% on Tuesday following remarks from Fed Chairman, Ben Bernanke, warning that inflation was accelerating. Virtually the entire universe of stocks in the MSCI World Index declined, except gold mining and several consumer staples like Coke (NYSE-KO).

Overall, it was a pretty ugly day and exemplified a market reaction under the duress of rising commodity prices, lax monetary policy in the West and heightened risk aversion since the spike in oil prices last month.

Western central banks are truly cornered. At this stage of the economic recovery, interest rates should be much higher, especially in the United States and Europe. But ongoing credit dislocations remain a thorn on both continents with municipal debt under siege in the United States and Europe once again procrastinating over the size and scope of its bailout fund.

Bernanke is heavily long inflation. It would be wise for most investors to do the same and stick to gold and silver, oil and oil equipment companies, agricultural stocks and large-cap companies that can successfully pass on rising inputs, like Néstle (Zurich-NESN) and McDonald’s (NYSDE-MCD).