Thursday, November 5, 2009

Inflation Trade Picks Up

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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Spot gold traded as high as $1099 yesterday. Gold is the most sensitive of inflation assets and it keeps hitting new all time highs. Spot gold was at $1092.90, up $7.60 at the 5:15PM close in New York. Silver closed at $17.46 up 23 cents. Nymex oil closed up at $80.40 at the end of pit trading. Interest rates rallied sharply with the 10-year and 30-year treasuries reaching 3.55% and 4.43% respectively. The trade-weighted U.S dollar sank, slicing through key support and falling almost a full percent (a big move for a currency). The major stock indices went nowhere, closing flat after giving up all their gains in the last hour with the exception of the small-cap Russell 2000, which closed down 1.3%. Big rallies in inflation-sensitive assets and stocks going nowhere - it's the same story as what happened in the U.S. markets in the high inflation 1970s.

Only the incredibly dull and oblivious could miss the inflation message of the markets. People who live in Washington, D.C. and are involved with the U.S. government in economic policy positions are the most likely to be in this category. The Federal Reserve rarely disappoints. The FOMC (Federal Open Market Committee) concluded its two day meeting yesterday and added the following sentence to their post-meeting statement: "With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the committee expects that inflation will remain subdued for some time." The committee also expected there wasn't going to be a subprime crisis and that recession could be avoided months after the recession had already begun (apparently nobody had told them).

When I read this sentence, I immediately pictured someone painting themselves into a corner. The committee is going to have to do some explaining early next year when the inflation numbers start picking up. This statement also indicates the committee members complete ignorance of inflation history. Resource slack is a frequent accompaniment of hyperinflation. Our contemporary example of this is Zimbabwe where unemployment reached 94% and inflation reached the sextillion percent level. In Weimar Germany in the early 1920s, unemployment reached 24% and rose along with the inflation, which reached the trillion percent level.

As we have gone over many times at the New York Investing meetup meetings, the inflation trade consists of the precious metals gold and silver and their mining stocks, energy (oil, natural gas, coal, nuclear and alternative) and their stocks and agricultural commodities. Shorting bonds, which is the same as being long on interest rates is also part of the inflation trade as is getting out of the U.S. dollar and into stronger currencies such as the Australian dollar. Some of these assets will be much stronger or much weaker than the others at different points in time and investment money needs to be shifted accordingly. It will probably takes years before the average investor fully adjusts their investing strategies to the inflation trade assets. In all likelihood, the very last people to do so will be the FOMC members.

NEXT: 'Recovery' Leads to Double-Digit Unemployment

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.

1 comment:


Inflation will devalue wages.