Thursday, March 26, 2009

No Longer Gilt Edged - the Inflation Implications

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Yesterday, a regular government bond auction in Britain failed for the first time since 1995. There were more 45-year gilts for sale than buyers willing to purchase them. The British government is only printing money to buy its bonds in the 5 to 25 year range and it is now obvious the printing presses are going to have to be reved up to expand this program if Britain wants to fund its various bailout and stimulus packages. Meanwhile the U.S. bond auction yesterday was a 'success', although in order to insure that success the Fed had to purchase a higher amount of bonds than was previously thought necessary. The inflation implications of more money printing did not escape the market's attention with almost every commodity rallying strongly this morning.

The commodity rally took place even though the economic news was gloomy across the board. U.S. fourth quarter 2008 GDP was revised further downward to a drop of 6.3%. Businesses and consumers are both cutting spending and unemployment roles are swelling weekly. The mainstream press has continually told investors that commodity prices can't pick up until demand increases and this will require the economy to start picking up. They have been continually wrong. Commodities are all inflation hedges and the big money is well aware of this. Even the most cursory examination of the charts indicates many commodities bottomed last fall and their prices have been moving up since then. You should ask yourself why doesn't the press just report this simple factual information?

This blog has covered the mainstream media's misreporting of the oil market in detail many times. Headlines for the weekly supply picture from Cushing, Oklahoma were uniformly bearish yesterday. Oil in storage increased 3.3 million barrels, instead of the 1+ million increase that had been predicted and was more than 15% higher from the same time last year. As usual the press quoted 'experts' indicating demand has to pick up or the current rally will falter (as opposed to the previous reporting that stated that demand has to pick up or there wouldn't be a rally). Oil indeed sold off on this bearish news. What the press didn't report or buried at the bottom of its coverage was that demand for gasoline has actually risen for the last four weeks (even though the press will tell you this is not possible during a recession - the facts sometimes get in the way of the story the media wants to tell you). Gasoline in storage is actually more than 5% below year ago levels and the beginning of the heavy usage summer driving season is only two months away.

Investors should all keep in mind that commodities are inflation hedges and the U.S. and Britain are admitting they are printing new money. This doesn't mean that they just started printing additional money, but that the money printing is so out of control that it can't be hidden any more. There is no time in history where the money supply hasn't been expanded beyond the economic growth rate and inflation hasn't resulted. The inflation this time is going to be considerable. If you haven't done so already, you should be adjusting your portfolio accordingly. By the time the mainstream media tells you to do so (they are currently telling you the deflation is your big worry), it will already be too late.

NEXT: In the Eye of the Financial Hurricane

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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