Friday, October 30, 2009

Inflation is pending--but when?

According to Milton Friedman and his fellow monetary theorists, an increase in the money supply precedes consumer price inflation--but with a time lag.

What the monetarists (or the first of them to be equipped with computers) found was that when the growth rate of the money supply rises:

* The initial effect is on the prices of bonds and stocks, an effect that comes within a few months.

* The peak effect on the growth rate of economic activity comes about 18 to 30 months after the pick-up in the growth rate of the money supply.

* The peak effect on the rate of consumer price inflation comes about 12 to 18 months after that, which is to say it comes 30 to 48 months after the peak growth rate in the money supply.

Specific to this financial cycle:
If you apply the findings of the monetarists to the present situation, here's what you get. The peak growth rate in the money supply occurred last December, so based on the general monetarist schedule:

* Some of the effect on stocks and bonds should already have been felt.

* The peak effect on economic activity should come between the middle of 2010 and the middle of 2011.

* The peak effect on consumer price inflation should come between the middle of 2011 and the end of 2012.

Investment implications:
1. When you hear would-be opinion leaders cite the current absence of rising prices at the supermarket as proof that all the new money isn't a source of inflation, don't believe them. It is much too early for the inflation bomb to be going off, even though the powder has been packed and the fuse has been lit.

2. If the large and growing federal deficits and the Federal Reserve's unprecedentedly easy policies tempt you to leverage up on inflation-sensitive assets, such as gold, give the idea a second thought. It likely will be a year or more until price inflation becomes obvious and undeniable (which is what it would take to bring the general public into the gold market). In the meantime, your inflation-sensitive assets could get paddled rudely as the deleveraging that began last year continues.

For at least the next year, the simple, fire-and-forget strategy is 50-50 gold and cash – gold for what looks to be inevitable but on its own schedule, cash to be ready for the bargains that may show up while we're waiting for the inevitable to arrive.

Wednesday, October 28, 2009

Unfunded US government liabilities

This is an old theme, but needs repeating: the US government is bankrupt, so our financial leaders feel compelled to keep printing US Dollars like confetti.

The countermeasure to protect your purchasing power when currency debasement occurs is not well-traveled, but is becoming increasingly transparent: buy real assets.

Countertrends will reappear occasionally, but the trajectory of the dollar is well-established.

Monday, October 26, 2009

The tipping point for hyperinflation

Economist Peter Bernholz has conducted extensive studies on hyperinflation. He has studied all the major cases of hyperinflation since 1980. His conclusion: The tipping point occurs when a government’s deficit exceeds 40% of its expenditures.

The US has reached that threshold, despite fears of asset deflation.

Richard Clarida on the US Dollar

Former Assistant Treasury Secretary--and current global strategic advisor at PIMCO, Richard Clarida candidly states the obvious in a Bloomberg interview:

"The public statements--and again, I worked for two Treasury Secretarys, I drafted those statements...they always have to say they're in favor of a strong dollar policy. But I think if you look at the IMF studies, if you look at the independent analysis, everyone agrees that if we're going to have a balanced global situation for the next 5 years, it will feature a somewhat weaker dollar."

This is what happens when your currency collapses

Icelandic banks collapsed last year, causing a run on deposits and their currency, the Krona. The economy imploded, drowning in debt and over-speculation (sound familiar?) amidst a financial crisis. Inflation soared overnight. As a result, the McDonald's hamburger chain is closing all their franchise restaurants in Iceland.

Two doomsday forecasts

One contemporary, and one from the 18th century.

Dr. Marc Faber:

"Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline." Success makes us our own worst enemy.

18th century Scottish historian Alexander Fraser Tytler:

"The average life span of the world's greatest civilizations has been 200 years" progressing from "bondage to spiritual faith ... to great courage ... to liberty ... to abundance ... to selfishness ... to complacency ... to apathy ... to dependence and ... back into bondage!"

Saturday, October 24, 2009

Pension funds joining the gold party

Gold bugs have been bullish on the yellow metal for years--and have profited immensely as a result over the last decade. Hedge funds joined the party earlier this year. Sovereign funds, as well as governments from China and India are encouraging retail investors to invest in silver and gold as diversification away from paper currencies, especially the USDollar. Now, big pension funds are providing support levels as they enlist in buying "financial insurance" against dollar debasement and future inflation.

The commercial bullion banks with their permanent short positions are running against formidable foes.

The Gold standard

This is one argument for a return to the gold standard. Note the author and date.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Alan Greenspan
[written in 1966]

Friday, October 23, 2009

It could be lights out for Cramer's

Biotech investors have had a hate/hate relationship with's biotech "analyst" Adam Feuerstein, as he has bashed promising companies, probably as an accomplice in bear raids against microcap biotech companies, orchestrated by shorts and hedge funds. Well, Jim Cramer's is about to get de-listed in an ironic comeuppance. Perhaps Cramer should have hired an analyst with a biotech background, instead of a political science hack.

He failed as a hedge fund manager before becoming a cheerleader on CNBC. And now he has failed as the CEO of an investment company. Mr. Cramer better keep his daytime job at CNBC. Booyah!


Biocryst Pharmaceuticals finally receives Emergency Use Authorization from the FDA for Peramivir, the intravenously-applied anti-viral for the novel H1N1 flu virus.

Now doctors can get down to the business of saving lives for patients with severe cases of the swine flu.

Expect orders domestically and abroad.

Disclosure: long BCRX shares.

Sprott Management on the US Dollar

These write-ups on the dollar, deficit spending, and inflation are worth reposting:

India encourages gold to the public

In a previous blog, a TV commercial was shown depicting the Chinese government has been encouraging its citizens to purchase gold and silver. Gold coins and bars are available at Chinese banks and post offices.

Indian consumers, already the world's largest purchasers of gold jewelry, are also joining the gold party, but this time as an investment. The government is encouraging purchases of gold coins through 2200 banks and post offices nationwide. The coins are available in various denominations and weightings.

Thursday, October 22, 2009

The Warning

In a new DVD, the origins of last year's financial crisis is exposed. Our nation's leaders demonized the top official of the commodity futures exchanges, Brooksley Born, former head of the Commodity Futures Trading Commission (CFTC). She attempted to regulate the over-the-counter (OTC) derivatives market, which ultimately caused the economic meltdown and financial crisis in 2008. In hindsight, she was eerily prescient, even against a backdrop of naysaying government officials who still rule the roost. Instead of preventing it, former Fed Chairman Alan Greenspan, former Treasury Secretary Robert Rubin and current National Economic Council Director Lawrence Summers caused the financial crisis by allowing derivatives traders to run amuck. Lauded as financial heroes, they actually enabled these weapons of financial mass destruction to fluorish, instead of reeling them in. Unfortunately, these same players and their financial progeny haven't fixed the structural problems, and another financial crisis is looming. The same perps who got us into this mess in the first place are back again in government and at leading banks trying to undo it. Good luck to us all.

In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation's worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.

"I didn't know Brooksley Born," says former SEC Chairman Arthur Levitt, a member of President Clinton's powerful Working Group on Financial Markets. "I was told that she was irascible, difficult, stubborn, unreasonable." Levitt explains how the other principals of the Working Group -- former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin -- convinced him that Born's attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was "clearly a mistake."

Born's battle behind closed doors was epic, Kirk finds. The members of the President's Working Group vehemently opposed regulation -- especially when proposed by a Washington outsider like Born.

"I walk into Brooksley's office one day; the blood has drained from her face," says Michael Greenberger, a former top official at the CFTC who worked closely with Born. "She's hanging up the telephone; she says to me: 'That was [former Assistant Treasury Secretary] Larry Summers. He says, "You're going to cause the worst financial crisis since the end of World War II."... [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.'"

Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. "Born faced a formidable struggle pushing for regulation at a time when the stock market was booming," Kirk says. "Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves."

Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.

"It'll happen again if we don't take the appropriate steps," Born warns. "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience."

Eric Hommelberg on Gold

Of course, it's not in the interest of China or Russia to see the dollar crash because they have so many dollars. On the other hand, they don't want to go forward with a world reserve currency that no longer has any value. Something needs to be adjusted. They demand that the U.S. do something about its ballooning deficit and the U.S. promises to take care of it. The problem, however, is they can't. It's impossible. If you try to run a business with debt growing much faster than income, you know you're heading into bankruptcy. It's no different for a nation.

Regarding the manipulation you referenced, the U.S. has been very much involved in suppressing the gold price for more than 30 years. The reason is quite simple—in order to maintain the illusion of a strong dollar they had to keep a lid on the gold price. A sharp rising gold price would set off all kinds of alarm bells which would undermine the dollar's credibility as a world reserve currency.

Sunday, October 18, 2009

Google Analytics

The internet and specifically--the blogosphere, may be the last free market frontier, an electronic ecosystem still largely unfettered by taxes, regulation, and government meddling (well, unless you're in China and a few other countries). Let's hope our government doesn't try to attack one of the few free market-driven industries left, where the little guy has as much chance to engage in content and commerce as the big corporate behemonths.

And Google Analytics can enhance the organizing, planning and marketing of that content. Based on their metrics, I can decipher the following information for this blog:

1) readers come from many countries: the US, Brazil, Canada, United Kingdom, South Korea, Australia, (not set)--could this be China?, Faroe Islands, Venezuela, Poland, Spain, India, Qatar, Bahrain, in order of frequency.
2) the pages per visit is 1.88
3) average time on site is 3:53 minutes
4) % of new visits is 37.30%

The data is carved up into geographic locations, referring site sources, bounce rate, search engines, direct traffic, visits, visitors, page views, etc.

Bottom line: you can never predict with accuracy who your audience is, and where they come from. But Google helps uncover some of the mysteries of the online world. If I was running a commerce website, I would definitely monitor these data sets more seriously, because it can reveal helpful data on content demand.

Saturday, October 17, 2009

Gold backwardation--again

I was scanning the Bloomberg TV ticker tape after hours on Friday, when most traders in the US had gone home. Trading was resuming in Asia (their Saturday morning), and gold had gone into backwardation by at least $2, indicating a severe shortage in physical gold.

Here are a couple explanations on backwardation from previous blogs:

I'm not sure if the correct interpretation of backwardation means gold longs are starting to win the battle. It's probably more correct to surmise that shorts are losing the battle.

Disclosure: I am long physical gold and silver, and long gold and silver mining shares.

Friday, October 16, 2009

Unmasking the Fed

We can do something about the opaqueness of the Fed.

There is a bipartisan bill seeking Fed transparency and accountability being passed around Congress, written by Republican Ron Paul, and endorsed by Democrat Alan Grayson.

Russia and China joining the anti-dollar party

It's not just rumor and rhetoric anymore:

It's a resonating chorus of allies, enemies, and trading partners. In fact, foreign governments hate a weak dollar for several reasons:

1) USDollar weakness makes exports to the US more expensive, dampening their export-driven economies
2) it reduces the value of their reserves, which comprise of dollar-denominated assets like US Treasuries

Ultimately, dollar weakness should be stimulative domestically for these countries, as imports are cheaper, but it reduces the competitiveness of their exports. And since their economies depend more on exports and less consumerism, the weakness of the dollar threatens their attempts to stimulate their own economies.

The deal-breaker is the fact that the US Treasuries in their reserve accounts decline in value, and these IOU's are promises of repayment from a bankrupt borrower--the US government.

Thursday, October 15, 2009

John Mack, outgoing CEO of Morgan Stanley

Warning: language inappropriate for children under age 18.

Upstairs, Mack was on the phone with Mitsubishi’s chief executive, Nobuo Kuroyanagi, and a translator trying to nail down the letter of intent.

His assistant interrupted him, whispering, “Tim Geithner is on the phone—he has to talk to you.”

Cupping the receiver, Mack said, “Tell him I can’t speak now. I’ll call him back.”

Five minutes later, Paulson called. “I can’t. I’m on with the Japanese. I’ll call him when I’m off,” he told his assistant.

Two minutes later, Geithner was back on the line. “He says he has to talk to you and it’s important,” Mack’s assistant reported helplessly.

Mack was minutes away from reaching an agreement. He looked at Ji-Yeun Lee, who was standing in his office helping with the deal, and told her, “Cover your ears.”

“Tell him to get fucked,” Mack said of Geithner. “I’m trying to save my firm.”

- excerpt from "Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves" by Andrew Ross Sorkin

I'm going to guess Mack's assistant didn't relay the message to Turbo Tax Timmy.

The USDollar's decline

This economist sounds like an Elliott Wave loonie until you find out he's the Chief Strategist for the trading desk at Japan's 3rd largest bank, Sumitomo Mitsui (ed. I've have business transactions with Sumitomo before). He also has credibility as he correctly called the Dow Jones Industrials decline to the 6500 level, and the decline of the USDollar relative to the yen.

The tragedy becomes comedic when fringe politicians like Ron Paul end up prescient, despite being marginalized by mainstream economists.

Must read for free market thinkers

It's long, but it explains how the financial crisis unfolded, and what the authorities should do next. Alas, our government will probably drop the ball again.

Alan Greenspan-isms

These quotes by former Fed Chairman Greenspan have been mentioned on this blog before, but since they are so relevant, I felt compelled to include them again:

Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies...What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.

-Alan Greenspan, 9 Sep 2009

The other quote:

Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

From "Gold and Economic Freedom" a 1966 Essay by Alan Greenspan

You can buy gold bars at Harrod's now

This is surreal, but you can now buy gold bullion and coins at the upscale London retailer Harrod's. Apparently, it's not just the Chinese, Russians, Brazilians, and middle Easterners who are nervous about the USDollar.

Wednesday, October 14, 2009

IMF joining the liquidity party

The International Monetary Fund is now flooding global markets with liquidity, issuing Special Drawing Rights (SDR), which is basically a basket of the USDollar, the Euro, the Japanese Yen, and the Pound Sterling currencies. Due to liquidity exhaustion by the Fed, the IMF is now stepping up in its role as the international central bank, injecting SDR's into the global financial system. Is this inflationary? You decide.

Near the end of the interview, Rickards sums up well the disdain for gold from central bankers:

"The problem is: when you own gold, you're fighting every central bank in the world. Central banks hate gold, because it limits their ability to print money. But the market is the market; the market will do what it wants. Even the central banks are not bigger than the market."

Gold chart

The chart for gold still looks bullish, with support at $975, and $875, should $975 not hold. In other words, the long-term bullish trend is in place unless support levels are broken. Either way, expect violent corrections, as the commercial shorts vigorously attempt to put a lid on prices.

The short USDollar / long precious metals trade is getting crowded, so corrections won't be unexpected.

Disclaimer: this chart only depicts previous price levels, and does not indicate future performance. Investing is risky, so consult with your professional investment advisor. Do your own due diligence.

Disclosure: I am long physical gold and silver, and long gold and silver mining shares.

Tuesday, October 13, 2009

Gold bugs

Whether gold bugs are government and central bank conspiracy theorists--or monetary realists, is debateable, but their bullish stance on the precious metal has paid off handsomely since the millenium. The following article postulates why the price of gold may continue to rise going forward.

Monday, October 12, 2009

Why raising taxes won't work

And why it never has worked, as capital will flee where it's treated better. Tax the productive to subsidize the non-productive, and capital flight will be pervasive.

Friday, October 9, 2009

Russia's growing influence in world energy markets

Russia threw their weight around late last year regarding natural gas pipelines which provide heat for European homes. They ended up cutting off Ukraine until the latter acquiesced to Russia's demands for higher prices. Meanwhile, the rest of Europe was held hostage and forced to accept higher prices as well.

The US recently scrapped plans to build missile defense shields in the Czech Republic and Poland, again bowing down to Russian threats, implied and otherwise.

Russia is now the world's #1 producer of crude oil, 25% higher than #2 Saudi Arabia. You think that has something to do with them getting their way recently?

Government bureaucracy

From Ross R., a reader of Doug Casey's newsletter:

Does anybody remember the reason given for the establishment of the Department of Energy.... during the Carter Administration? Anybody? No?

Didn't think so! Ready??
It was very simple... and at the time, everybody thought it very appropriate.
The Department of Energy was instituted on 8-04-1977… to lessen our dependence on foreign oil.
Hey, pretty efficient, huh???
And now it’s 2009 – 32 years later – and the budget for this “necessary” department is at $24.2 billion a year. They have 16,000 federal employees and approximately 100,000 contract employees. And look at the job they have done!
Good ole bureaucracy.
And now we are going to turn the banking system, healthcare, and the auto industry over to the same government?

Thursday, October 8, 2009

Point, counter-point

Sell the dollar, go long commodities has been the easy trade so far. The endless printing of the USDollar has made the trade profitable.

But with USDollar bears out in full force, will we see a temporary bottom in the USDollar, and conversely, a temporary top in equities and precious metals? According to one sentiment indicator by MBH Commodity Advisors, 96% of traders are either bearish or flat on the dollar. History shows that when sentiment is that lopsided, it's best to take the opposite side of the extreme majority.

But other momentum trading rules declare you should never get in the way of a stampede, because you will just get trampled. My thoughts? We are due for a correction on the short dollar/long commodities trade, perhaps even a severe one of up to 20%. But longer-term, as long as central bankers worldwide continue to print their way out of this financial crisis, the overall short dollar/long commodities trend is still in place.

This is an opinion, and not a recommendation. Do your due diligence.

Disclosure: long gold and silver mining shares.

John Paulson

Most of us know who Warren Buffett is, because he is considered the world's best long-term investor, buying undervalued companies with high cash flow, solid balance sheets, and defensible, moat-like market share in their respective industries. In other words, he buys solid companies when they are cheap and under appreciated by the markets.

But the average person knows little of John Paulson. Paulson has been the most successful trader in recent years, making billions of dollars for his hedge fund by betting against subprime mortgage companies and agencies. He went against the crowd in doing so, making the unpopular bet that home values were artificially set too high, and that subprime borrowers would default en masse. He also bet against the banks that were making these reckless loans, and holding toxic assets.

In hindsight, he was a genius for placing these bets. But when he did make them, he would have been considered a lunatic for betting "against America", as most financial pundits, experts, and economists were predicting clear sailing for the economy, despite the looming subprime iceberg ahead. Most didn't see it coming, but he applied logical reasoning and was prescient enough to place huge bets on his investment thesis. The result was billions in profits for him personally and for his clients.

Flash forward to 2009, and John Paulson made another unpopular bet earlier this year. He gobbled up gold mining shares, the GLD ETF, and physical gold. In all, they represent the largest percentage of his holdings. Why did he do that? In his own words:
Once the Fed began directly buying Treasuries and mortgages, I lost faith in the dollar as a reserve currency for my assets... What I'm looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I'm looking at is where is gold going to be vis-a-vis the dollar one year from now, three years from now, five years from now.

And I think with a high probability at each of those points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go, and the magnitude of that difference also increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point. - John Paulson

Tuesday, October 6, 2009

What's happening and what could happen

Bad and worse, I'm afraid. The first article (see yesterday's reference to the Independent in the Bloomberg blotter) reiterates sovereign government funds diversifying away from the weakening dollar, which is causing inflation domestically.

Expect denials from all sides, the it's becoming increasingly apparent the USDollar is doomed long-term.

And here is a dour prediction from a normally conservative Swiss banker. It's convincing, but let's hope he's dead wrong.

Monday, October 5, 2009

The beginning of the end for the USDollar

It's already been occurring, as a few middle eastern Arab states have already unpegged from the USDollar for their oil exports. According to Bloomberg:

Oct. 6 (Bloomberg) -- Arab states have started talks with China, Russia, Japan and France to stop using the U.S. currency for oil trading, the Independent reported, citing Middle Eastern and Chinese banking officials it didn’t name.

The oil-producing nations are seeking to move to a basket of currencies, including the yen, the yuan, the euro and gold to settle transactions, the newspaper said.

I've predicted this, but didn't realize it would occur this soon. Kuwait, Syria, and the United Arab Emirates had already unpegged to the dollar last summer, in order to combat domestic inflation caused by the weak USDollar.

The rest of the world is now unpegging, as they diversify away from the USDollar. The financial implications of this are enormous, and could cause a run on the dollar. This will roil any economic recovery, as US borrowing costs will soar, and yields on US Treasury bonds will have to rise to attract diminishing demand.

Gold soared on the news.

Co-founder of Home Depot, Ken Langone

In this Bloomberg interview, he calls it as he sees it:

We could use a little honesty from the government.

Video on the financial crisis...

and why we're not out of the woods yet.

Saturday, October 3, 2009

Greenspan speaks on gold

Now that he is former Federal Reserve Chairman, Alan Greenspan is speaking more freely (and truthfully) on the topic of gold. In a segment on the website:

Alan Greenspan has just lent some support to the theory. Specifically:

Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.
The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said...

“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.
In other words, Greenspan is saying that investors are moving out of the second-to-lowest step on the pyramid (currencies and government bonds) and into the lowest step (gold).

Greenspan is also verifying what goldbugs like Exeter, Fekete and Schoon have been claiming: that "the barbarous relic" still holds an important place in the modern investor's psyche.

Gold suppression confirmed

Enclosed is a declassified letter on gold price suppression schemes:

This is a letter from the State Department:

And here's a commentary by on a letter written by former Fed Chairman Arthur Burns to President Gerald Ford on gold policies:

These letters are part of the mounting prima facie evidence that the US government and central bankers worldwide are suppressing the price of gold, in an attempt to control inflation and maintain confidence in the financial system. This not only damages investors in precious metals, but it also harms gold producers as low gold prices make mining operations unprofitable and discourage exploration. The other unintended consequences include a lower standard of living and political instability in other countries.

The conspiracy theorist gold bugs aren't so nutty after all.

Thursday, October 1, 2009

Timothy Geithner, real estate investor

This video about Tim Geithner's home for sale is hilarious--typical Jon Stewart humor--snarky, smart, and true.

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Home Crisis Investigation
Daily Show
Full Episodes
Political HumorRon Paul Interview

Deflation or Inflation?

That is the big question, because the answer to that question is a key driver for investment decisions.

My answer? It depends. That sounds like a cop out, so I will need to clarify.

Top-down, the answer is that essential goods and services will experience a surge in prices as a by-product of a weakening dollar. We will pay more to heat our homes, fill up our gas tanks, and put food on the table. Why is that, when we have slackening industrial demand? Because we are now competing with a growing middle-class population in Asia--billions of them, in fact. As their standards of living continue to rise, they will eat more meat, putting pressure on grains. They will drive more, and buy more homes as they urbanize. Hence, we should continue to see an uptrend in prices of basic commodities--even as the economy sputters in and out of recovery.

The Consumer Price Index (CPI) may continue to flash deflation, as the US consumer de-levers and cuts back on consumption. A moribund economy will keep a lid on labor rates, which will help control inflation on some services. Not only are home prices declining, but so are rentals. The cost of high-end consumer discretionary goods will also be dampened due to cuts from even the wealthy. The government will declare that deflation is the boogey-man--not inflation, self-rationalizing that continued deficit spending and quantitative easing will be necessary to keep "stimulating" the economy.

Yet, US consumers will feel the brunt of this bifurcation, as our wages decline while the cost of essentials rise. This is a consequence of our economy being driven by the US consumer, who is tapped out. Seventy percentage of the US economy is consumer-oriented. By contrast, only 40% of China's economy is consumer-driven. As their economy matures and continues to fluorish, consumption will surely rise, even as manufacturing exports to the US and Europe decline. A rising Chinese (and Indian) consumer will strain tight supplies. Coupled with a weakening dollar, the US consumer will have to grapple with diminished purchasing power, even though prices for some items will be deflated.

Enclosed is an article on what to expect going forward: