Inflation like you have never seen before!

[Neubarth]

I can honestly say I do not know what is going to happen to the economy for the short term, but one thing I know is that we are going to see inflation like we have never seen before. Deficit spending in the past has always resulted in inflation.

Reagan's buildup of the military (I really liked the man, but have to be honest about what his policies brought us.) gave us a big run up in the deficit. The result was inflation.

In 1986 the inflation rate was 1.9%.
In 87 it was a high 3.7%
In 88 it was 4.1%
In 89 it was 4.8 %
In 90, almost two years after Reagan left office, inflation was up to 5.4%

We have just had eight years of horrific deficit spending and now we are adding to it in amazing fashion. (I will not argue as to whether it is necessary or not as I simply do not know. Does anybody for certain?)

What I do know is that we will see double digit inflation that more than likely will outpace anything we have ever seen. You do not want to be holding cash when that happens. Somehow, cash does not keep up with inflation. ;^)

What to do about that? Hummmmmmm? Put your money into an investment that will keep up with inflation. Stocks, Real Estate, maybe even gold, though I feel it is already too highly valued and might crash. What stocks? Right now, I'd go with the S&P 500 stocks as there is little chance that they will go under like the small cap stocks are. (About two a day.)

To each his own. I expect to see a run on S&P 500 Stocks in the coming weeks (More than likely in mutual funds that trade the S&P 500. They might go up ten percent or more as there are some indications that the economy is gradually turning around. That One Percent increase in retail sales last week just might be the first solid indicator that the tide is turning in this country. When people make a run on the S&P 500, don't be left standing on the sidelines.

Wait a week and you will have missed the boat.

Real estate? The turn around there will not be as sudden. The S&P 500 stocks could go up 40% before Real Estate goes up three percent. If you miss the S&P runup, there is always the small cap market and Real Estate. Me, I am going to slowly average into the S&P and see what happens.

 

[editec]

A yes, the dilemma of the working class.

When they're making money, inflation rears its head and their inability to keep up with inflation means they're getting poorer even while they're working harder.

But when enough of them are out of work, there's no inflation, but they also don't have any money so they have to sell their stuff to keep eating.

Nice racket the rich have isn't it?

 

[Neubarth]

There is only one thing that I am certain of, and that is the coming wave of inflation. It is not advantageous when that happens when you are holding cash.

Since I saved my money for the past few years (Prior to that, I was wasteful.) I know I need to invest in something that will keep up with the rate of inflation. I need to "Do it now," before everybody else gets the same idea. They will eventually, especially if they see the Stock Market start to move up on Tuesday morning.

I have a 401K that I am adding to. On Friday I changed the direction of investment to the S&P 500 fund. I have had $200,000 in Government Bonds for the past two years. That money I will average into stocks gradually in the days ahead. If I see the stock market take off, I may not be too gradual, as it could skyrocket if too many get the same idea at the same time. I hope (for my sake) that a lot of people take a gradual wait and see attitude.

 

[wimpy77]

god neb your mood changes often doesn't it. yes we will see inflation once the downturn ends. the question is how much, some economists say double digits.

 

[editec]

I wish you luck, Nar.

But obviously if you've made enough (and saved enough.. the most important factor after making it) to be able to set aside $200,000 into something so liquid as Government bonds, you've already had your share of luck. (good luck being defined herein as nothing more than not having had any really bad luck, you understand? I understand that most people worked damned hard for their luck, but they were lucky that they could work damned hard for it, too. Most people don't have that option)

But you are trying to figure out the direction that the dollar is headed well... none of us have that crystal ball.

I doubt very much that you've got to worry all that much about inflation while hundreds of thousands of American are losing their salaries every month. Remember how much perceived wealth was lost due to real estate prices crashing and the market crashing too.

I hear that Americans lost $9 trillion in unrealized assets when the market collapsed, so I am not afraid that Obama spending is going to inflate the money supply like you obviously are.


About the only thing that I think might set off rapid INFLATION is if the PETROdollars system collapsed or if other nations which hold so much in American bonds collectively decided that the American dollars weren't worth as much as other specie.

And remember, their governments are deficit spending too, because their economies are in the crapper like ours is, so I rather doubt that is very likely.

Were I sitting on 200K I'd seriously consider investing in income producing real estate in the best neighborhoods I could find them in.

I'd be bottom feeding seeking owners willing to finance their properties at a fixed rate, and then I'd pray for that inflation to hit or at least for the economy to remain not so bad so that you can count on renters to pay that mortgage for you.

Of course, I've managed rental properties, so I'd be thinking in terms of running those properties, too, whereas you probably don't have time for that kind of babysitting investment.

I would not buy gold (well maybe 10%) and I surely would NOT count on the stock market because I think the stock market is crooked and getting even crookeder ever year.

 

[Neubarth]

The mutual funds are crooked. The big ones manipulate the markets during the day. I know, as I studied to be a stock broker but quit when I saw how corrupt the brokerage houses were. We were actually told to recommend certain stocks that the brokerage house had bought previously so the house could turn a profit. I could not do that as I considered it to be unethical, and I walked away from a $65,000 a year job in 1995. Could have made some Primo Coin, but I could not do it with a clear conscience. I continued working as a data comm manager with Pacific Bell. With that job, I could sleep at night. I wasn't as rich as I could have been, but I felt good about my ethics and my conscience.

Having that background is the reason why I was in Government Bonds for the past two years. I knew what was coming and told as many as I could to get the hell out of the market. (Only a few listened to me.) Now, I am telling people to average into the market as it can take off and leave them behind. I expect that only a few will listen to me again.

One long time friend just took all of his money out of the market. He came over to tell me about it this morning. So I told him to buy back in as it was too late to take his money out. Some people are just real slow to learn.

 

[Neubarth]

god neb your mood changes often doesn't it. yes we will see inflation once the downturn ends. the question is how much, some economists say double digits.

Not so much my mood as my comments. I offer up topics for conversation. I do it to promote conversation on this board.

What I actually do with respect to the market, I am fully open about, as you can see in this post.

When I started telling people to get out of the market the market continued up for about five percent before it turned south. While it was still going up people laughed at me. Those same people rode their money all the way down when the market fell of the cliff half a year ago. My timing may not be exactly right, but my understanding of what should happen (cause and effect) is very real, as it should be for most common men.

We should see a spurt in the market. If I say it will happen this coming week, I will probably be wrong. If I say it will happen in the next few months, I know I am going to be right. You are free to pick the time. Just don't be left standing on the sidelines.

 

[Toro]

We are currently in a deflationary environment since debt is being destroyed and asset prices are falling. The Fed has undertaken steps to replace credit that has been destroyed in the private market. Net credit, I believe, has fallen. The money supply has risen dramatically but money velocity has collapsed as banks hoard cash.

For inflation to resume, there must be an increase in 1.) credit and 2.) velocity.

Velocity, last I checked, was below 1, the lowest level in decades. That will eventually rise back to normal as fear leaves the market, as it has been evidenced by falling indicators such as the TED spread and swap spreads, which are now below pre-crisis levels. That means credit should be the focus.

Credit will eventually come back. However, when it does, it will signal that the economic turnaround has begun. Thus, inflation will not start rising until economic growth resumes. We may already be seeing this as

1.) Gold and silver have been rising. Silver has outperformed gold, and the gold/silver ratio is now below 70. (A few months ago, I recommended that one short gold and go long silver when the ratio was 80. That trade would has yielded a return of 12% so far.) I think silver is a better indicator of the economy than gold since it is used in industrial production whereas gold is mainly a collectable.
2.) Commodity prices appear to be bottoming. Oil, metals and commodity stocks such as POT appear to be either bottoming or breaking out. This is positive for the economy.
3.) The yield curve is steep. When 10 and 30 year yields are as far above 1 and 3 month cash yields as they are today, there is something like a 99% chance the economy will grow over the next 12 months.

Much of the Fed's balance sheet expansion comes down swaps and other term facilities that can easily be withdrawn. However, the Fed will err on the side of caution and likely keep rates lower to ensure the economy is out of deflation. Then, rates will be ratcheted up much higher as inflation starts rising.

That means real assets such as gold, real estate and stocks will do well but sell when real rates get tight again as they will be high hard. Stay away from government bonds in this scenario as they will get slaughtered during inflation.

I don't know if inflation will get above 10% but it will eventually go much higher than anything we've seen for at least a generation IMHO.

 

[Neubarth]

Toro, I am not as technical as you are, but I DO agree with you. In spite of all the fear mongers on the Internet, we could be bouncing off of the bottom right now. I have no way of knowing for certain, but the initial indicators are there as you say. We will know what the wise investors think in a week or two.

 

[wimpy77]

Toro, I am not as technical as you are, but I DO agree with you. In spite of all the fear mongers on the Internet, we could be bouncing off of the bottom right now. I have no way of knowing for certain, but the initial indicators are there as you say. We will know what the wise investors think in a week or two.

i personally think we have a little before we bottom out. most economist say the stock market might not have even bottomed. we don't know quite yet how geithner will fix the banks or what the administration plan is for housing. we will know the latter on wednesday. apparently geithner was well received at the g7 meeting in rome.

 

[wimpy77]

We are currently in a deflationary environment since debt is being destroyed and asset prices are falling. The Fed has undertaken steps to replace credit that has been destroyed in the private market. Net credit, I believe, has fallen. The money supply has risen dramatically but money velocity has collapsed as banks hoard cash.

For inflation to resume, there must be an increase in 1.) credit and 2.) velocity.

Velocity, last I checked, was below 1, the lowest level in decades. That will eventually rise back to normal as fear leaves the market, as it has been evidenced by falling indicators such as the TED spread and swap spreads, which are now below pre-crisis levels. That means credit should be the focus.

Credit will eventually come back. However, when it does, it will signal that the economic turnaround has begun. Thus, inflation will not start rising until economic growth resumes. We may already be seeing this as

1.) Gold and silver have been rising. Silver has outperformed gold, and the gold/silver ratio is now below 70. (A few months ago, I recommended that one short gold and go long silver when the ratio was 80. That trade would has yielded a return of 12% so far.) I think silver is a better indicator of the economy than gold since it is used in industrial production whereas gold is mainly a collectable.
2.) Commodity prices appear to be bottoming. Oil, metals and commodity stocks such as POT appear to be either bottoming or breaking out. This is positive for the economy.
3.) The yield curve is steep. When 10 and 30 year yields are as far above 1 and 3 month cash yields as they are today, there is something like a 99% chance the economy will grow over the next 12 months.

Much of the Fed's balance sheet expansion comes down swaps and other term facilities that can easily be withdrawn. However, the Fed will err on the side of caution and likely keep rates lower to ensure the economy is out of deflation. Then, rates will be ratcheted up much higher as inflation starts rising.

That means real assets such as gold, real estate and stocks will do well but sell when real rates get tight again as they will be high hard. Stay away from government bonds in this scenario as they will get slaughtered during inflation.

I don't know if inflation will get above 10% but it will eventually go much higher than anything we've seen for at least a generation IMHO.

toro, i have some questions. most people perceive inflation as a bad thing. is this always the case?

also, i was wondering how is the government going to pay for this. geithner said during his committee hearing on tuesday that tough decisions are gonna have to be made. so my question is after the downturn ends are they going have to raise taxes, cut retired and disability social security benefits and other federal programs?

 

[xsited1]

I go here a lot. Interesting stuff.

On a seasonally adjusted basis, the CPI-U decreased 0.7 percent in December after declining 1.7 percent in November. The index for all items less food and energy was virtually unchanged (0.0 percent) in December for the second month in a row.

Consumer Price Index (CPI)

 

[Paulie]

I go here a lot. Interesting stuff.

On a seasonally adjusted basis, the CPI-U decreased 0.7 percent in December after declining 1.7 percent in November. The index for all items less food and energy was virtually unchanged (0.0 percent) in December for the second month in a row.

Consumer Price Index (CPI)

CPI tends to be a skewed statistic that isn't properly representative of true inflation numbers. Each household is weighted individually by its expenditures, rather than all households being weighted democratically. It's called the plutocratic gap.

 

[Toro]

toro, i have some questions. most people perceive inflation as a bad thing. is this always the case?

It is most of the time. Inflation is a transfer of wealth from savers to borrowers and distorts resource allocation.

However, right now, I think most people would take a little inflation.

also, i was wondering how is the government going to pay for this. geithner said during his committee hearing on tuesday that tough decisions are gonna have to be made. so my question is after the downturn ends are they going have to raise taxes, cut retired and disability social security benefits and other federal programs?

Two ways - taxes are going up and the government is going to at least partially monetize the debt by creating some inflation. Since government interest payments and debt repayments are fixed, by creating some inflation, the government will repay interest and debt in dollars that are worth less. That is why you don't want to own fixed-payment bonds when there is inflation.

 

[Paulie]

I'm not wealthy by any means, and I'm welcoming this deflation, personally.

I'd prefer we didn't just spend a couple trillion dollars the past few months. I'd gladly ride out this deflation to see how much better it could end up being on the other side.

 

[Neubarth]

I have not seen this deflation, yet. I'm 61 years old and really wonder what it is like. I know we have flirted with it in the past. The first time I read about the possibility of deflation was in 1959. I had to ask my father to explain it to me. I don't know what the hell I was doing reading the business page of the paper when I ws only eleven, but somehow I ended up reading an article about how we were headed for deflation way back then.

Personally I'd like to see the price of chicken go back to 25 cents a pound. The prices they get now-a-days are outrageous.

 

[Paulie]

People are losing jobs by the millions because funding is scarce. That is a tell-tale sign of a deflationary environment.

Inflation tends to stay steady over the long term, though, so this deflationary environment will only be temporary, and will eventually concede to the coming inflation you're already mentioning, Neubarth. I agree with you on that particular point, inflation is going to be bad. It doesn't seem as though the Fed has much recourse left but to increase the money supply, and pull a Volcker to reign in what's probably going to be double-digits.

 

[Diuretic]

You'd remember the early 1970s Neubarth - stagflation - that was a tough time.

 

[Zoomie1980]

I can honestly say I do not know what is going to happen to the economy for the short term, but one thing I know is that we are going to see inflation like we have never seen before. Deficit spending in the past has always resulted in inflation.

Reagan's buildup of the military (I really liked the man, but have to be honest about what his policies brought us.) gave us a big run up in the deficit. The result was inflation.

In 1986 the inflation rate was 1.9%.
In 87 it was a high 3.7%
In 88 it was 4.1%
In 89 it was 4.8 %
In 90, almost two years after Reagan left office, inflation was up to 5.4%

We have just had eight years of horrific deficit spending and now we are adding to it in amazing fashion. (I will not argue as to whether it is necessary or not as I simply do not know. Does anybody for certain?)

What I do know is that we will see double digit inflation that more than likely will outpace anything we have ever seen. You do not want to be holding cash when that happens. Somehow, cash does not keep up with inflation. ;^)

What to do about that? Hummmmmmm? Put your money into an investment that will keep up with inflation. Stocks, Real Estate, maybe even gold, though I feel it is already too highly valued and might crash. What stocks? Right now, I'd go with the S&P 500 stocks as there is little chance that they will go under like the small cap stocks are. (About two a day.)

To each his own. I expect to see a run on S&P 500 Stocks in the coming weeks (More than likely in mutual funds that trade the S&P 500. They might go up ten percent or more as there are some indications that the economy is gradually turning around. That One Percent increase in retail sales last week just might be the first solid indicator that the tide is turning in this country. When people make a run on the S&P 500, don't be left standing on the sidelines.

Wait a week and you will have missed the boat.

Real estate? The turn around there will not be as sudden. The S&P 500 stocks could go up 40% before Real Estate goes up three percent. If you miss the S&P runup, there is always the small cap market and Real Estate. Me, I am going to slowly average into the S&P and see what happens.

Index funds are a good bet right now, until we can figure out just what the next "boom" industry might be.

 

[Neubarth]

You'd remember the early 1970s Neubarth - stagflation - that was a tough time.

I remember it well there podner. But it was an animal of a different color. Some goofball in charge of the Fed had decided that higher interest rates promoted nearly full employment, so he kept intererst rates high and collapsed the economy. It took a couple of years to undo the wrong that goofball artificially created. What the hell was his name, anyway?