John Paulson Says Double-Digit Inflation is Coming

 

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.   

As average U.S. gas prices head toward $4.00 a gallon, billionaire hedge fund operator John Paulson recently told a standing room only crowd at New York’s University Club that double-digit inflation is about to rear its ugly head. Paulson assumes that the Fed will continue to engage in its inflation-creating behavior.

John Paulson is famous for making a killing on shorting subprime bonds before their collapse. Most of Wall Street was bullish at the time and Fed Chair Ben Bernanke famously declared that he didn't see subprime mortgages causing any problem. The market completely fell apart weeks after Bernanke spoke.

The Paulson Bernanke dynamic is now back in play with predictions of inflation. Bernanke doesn't see it now and doesn't anticipate it. In an interview with ABC News done around the same time that Paulson gave his talk, Bernanke stated "We haven't quite yet got to the point where we can be completely confident that we're on a track to full recovery," and he continued that the central bank would take no options off the table to further stimulate the economy.  The interviewer didn't ask Bernanke the obvious question of whether or not the need for further Fed stimulus after four years indicates that the previous efforts have been a failure.

Paulson's presumption that the Fed will continue to feed inflation forces is completely supported by Bernanke's actions and statements. The Fed Chair further blamed rising oil and U.S. gasoline prices on geopolitical tensions. Prior to the mid-2000s though, geopolitical tensions only raised the price of oil to $40 a barrel. This time it's well over $100 a barrel. Money printing accounts for the price difference, but you'll never hear that from the Fed's money-printer-in-chief. And this is to expected. No government in inflation's 2000 year history has ever taken full responsibility for causing it.

Governments also have a history of finagling with the inflation numbers as well. This seems to be a universal practice once some form of indexation takes place (adjusting prices for inflation). The U.S. introduced indexation for social security and tax brackets in the 1970s. Starting it the 1980s, a number of statistical "improvements" were introduced in how the inflation rate was calculated. Interestingly, all of these "improvements" lowered the reported rate.

When it comes to inflation predictions, investors have a choice between John Paulson, who has made billions from his knowledge of how markets works, and Ben Bernanke, who has repeatedly shown he is oblivious to their dangers (remember how he let Lehman Brothers go under and this almost led to the complete collapse of the global financial system?). If you are betting on Bernanke, you are betting against history repeating itself. Money-printing has always led to massive inflation in the past. Apparently, John Paulson knows this.


Disclosure: None


Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

So Much for No Inflation

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.

Our Video Related to this Blog:

The monthly PPI and CPI came out yesterday. Even the government's highly manipulated figures indicate that inflation has suddenly resurfaced (you can assume that inflation is actually a lot worse, see http://www.shadowstats.com/ for a more accurate set of numbers). But don't worry, the mainstream media assures us that "inflation is not expected to be a problem any time soon given a severe recession which is keeping a lid on wage pressures". Of course, they also said the same thing last month before inflation zoomed this month. They will probably also still be saying the same thing when you are paying $50 for a loaf of bread.

The PPI yesterday was the real shocker, rising 1.8% month over month (expectations were for it be up by 0.9%). While the media blamed this on a rise in energy prices, the core rate, which excludes food and energy prices, was up a substantial 0.5%. Media reports assured us that this was nothing to worry about though because PPI was down 4.6% year over year. The core PPI however was UP 3.3% year over year. This huge discrepancy indicates that the PPI went down because of falling energy prices. According to the media, a drop in inflation caused by falling energy prices is important, but a rise in inflation because of energy prices increasing is irrelevant. Those of you who are capable of basic logical thought may not think this makes any sense.

The CPI report had consumer prices up 0.7% last month. The core rate was up 0.2%. As with the PPI, the media said it's nothing to worry about because its all because of energy prices going up. However, the price of food, clothing and medical care all went up as well. While the price of almost every necessity went up, some luxury items like airline travel went down in price and this helped moderate the reported inflation rate. CPI was down 1.4% year over year, while the core was up 1.7%. Once again falling energy prices accounted for the drop.

What is causing inflation is that the U.S. government is printing a huge amount of additional currency. Since commodities are priced in dollars, in the long term it is going to take a lot more dollars to buy a given amount of oil, food or any other commodity. Prices have to go up. And it doesn't matter if there is a recession, or excess capacity in the system. This was the case in the U.S. in 1974 and prices zoomed. It has also been the case in every incident of hyperinflation throughout history.

NEXT: CIT DOA; Liquidity Injections Rally Market?

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

U.S. Trade Deficit - There's Good News and Bad News

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.

Our Video Related to this Blog:

The U.S. Trade Deficit dropped by a whopping 29% in November, one of the biggest drops in history, if not the biggest. Much of the 'improvement' was accounted for by price changes in imports (the numbers are not adjusted for inflation or deflation as is the case for most U.S. government economic reports) Nevertheless, both imports and exports declined significantly, indicating a shrinking global economy. Imports of course dropped much more than exports and this took place because of falling oil prices.

Oil prices (the U.S. is a major oil importer) have the biggest influence by far in determining the U.S. Trade Deficit. The trade deficit overall dropped 29% and oil imports dropped by a similar amount. Based on the average price for a barrel of oil used in the report, oil prices dropped 27% during the month, although the report itself states that 'petroleum prices' fell 32%. Imports of industrial supplies, the category in the report that includes petroleum products and natural gas, fell by 25%. Based on these figures it looks like a little less oil is being consumed by the U.S., but not much. Almost the entire change is merely a change in pricing.

On the flip side of the equation, imports were also falling in November, but that decline seems somewhat more related to an actual drop in trade than a drop in prices. U.S. exports of industrial supplies, capital goods, autos, consumer goods, and food and feed all fell. The one significant rise was in the aircraft category, which jumped 7.1%. This was caused by a strike in Boeing ending and should be assumed to be a one-time event. Drops in imports and exports of services were approximately equivalent.

The average price of a barrel of oil used for the November report was $66.72 a barrel and oil has fallen much lower since then. 'Improvements' in the U.S. Trade Deficit are likely for the next few months because of this. As the price of oil gets to its cost of production, the 'improvements' will disappear however. When the price of oil rises again, the 'improvements' will reverse. The drop in U.S. exports is actually the much bigger story. It was a collapse in U.S. exports that was a key marker of the Great Depression in the 1930s.

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Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.

The Myth About the U.S. Dollar and the Trade Deficit

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.

One of the most widespread pieces of misinformation that is believed in and broadcast by the financial community is that as the U.S. dollar falls, the trade deficit will improve and by implication even disappear. It is almost impossible to view financial TV or read the press without seeing this incorrect piece of information being cited with great certainty and authority by the 'experts'. While this idea was indeed true when the U.S. was on the gold standard, it is not true in a monetary regime where where the dollar floats instead of having a fixed value.

It is only necessary to look at two charts to see that the generally accepted relationship between the U.S. dollar and the trade deficit is false. Those charts are the value of the trade-weight dollar (the value of the U.S. dollar based on the currencies of its major trading partners) and the trade deficit itself. It becomes immediately obvious when examining these charts the declining dollar has had less and less positive impact on the trade deficit over time and seems to have actually made the trade deficit worse since 2000. New York Investing meetup thought this issue was so important that we made one of our first videos about it (please see: "The U.S. Dollar Relationship to Inflation and the Economy" at: http://www.youtube.com/watch?v=3amH-T1B9pQ).

The U.S. went off the gold standard in 1971. There has been a continual trade deficit since 1977 and the amount of the deficit has gotten bigger and bigger over time. Classical economics would infer from this that the value of the dollar has been steadily rising. Instead the value of the dollar has been in a long-term downtrend since 1984. The trade-weighted dollar in fact lost around half its value between 1984 and 1992 and while the trade deficit decreased at the end of this period, at no point did it disappear. The dollar has been in a sharp decline since 2002 and the trade deficit, in total contradiction to classical economic theory, has skyrocketed during that time.

A hint as to how the U.S. trade deficit has managed to grow while the dollar was in sharp decline appeared in the report on the January 2008 trade deficit. Even though the U.S. dollar had been almost in free fall for the preceding several months because of Federal Reserve easy money policy, the trade deficit once again defied classical economic thought and increased instead of decreasing. An explanation in the report mentioned that the price of oil had gone up so much (and the U.S. is a major oil importer and has imported an increasing amount of oil since the early 1970s), that it had more than wiped out any benefits from the falling dollar elsewhere. Since the falling dollar itself makes the price of oil go up, a possible destructive feedback mechanism could be at work. In this scenario a falling dollar causes oil prices to rise and overwhelm the benefits elsewhere of the falling dollar, so the trade deficit goes up. In turn, the rising trade deficit damages the U.S. dollar (since the U.S. has to borrow money from foreigners to fund the trade deficit) and the dollar goes down further. The cycle then repeats itself over and over again.

Next: Housing Market Collapses, but the Statistics Hold Up

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to our web site: http://investing.meetup.com/21