Thursday, July 30, 2009

Inflation or Hyperinflation?

Thoughts from Axel Merk of the Merk Hard Currency Fund (MERKX)and Merk Asian Currency Fund (MEAFX).

Nothing during the financial crisis seems to have worked as planned by the Fed. Policies have been far more expensive as the Fed’s credibility has eroded. The Fed has repeatedly shown that it completely underestimates the political dimensions of its policies. Will the market really buy its tough talk? And if not, what will happen? If the Fed substantially increases its market interference, it can lead to hyperinflation down the road. How likely? We are reluctant to quantify it, but the risk is real. The appropriate way for the Fed to regain credibility may be to not only announce that there is a viable exit strategy to the policies that have been pursued, but to embark on it. So far, this hasn’t happened, the printing press continues to be very active with the Fed’s balance sheet growing steadily. We hope the balloon won’t pop, but hope is not a strategy.

Saturday, July 25, 2009

How to Build a Portfolio Wisely and Safely




Article from WSJ on portfolio construction depending on your inflationary view.

Inflation
If you believe all the government spending in response to the financial crisis will ultimately beget inflation, you want a portfolio that thrives in a period of surging prices.

Commodities are the primary play, because everything from oil and corn to copper and pork bellies should gain. Plus, commodities -- particularly gold -- hedge against the dollar, offering a 2-for-1 benefit if a weak dollar accompanies inflation, as some expect.

Since commodities contracts can be a hassle for individual investors, consider a fund such as Pimco's CommodityRealReturn Strategy Fund, which offers exposure to a broad swath of industrial and agricultural commodities.

Friday, July 24, 2009

Jim Rogers: Commodities are 'the best place to be'

Interview with Globe and Mail here.


Throughout history, when people have printed lots of money, it has always led to higher prices. Throughout history, when governments printed, the money has to go somewhere. Historically, it has always gone into real assets, as people try to protect themselves. … It's not going to go into people buying new cars, it's going to go into wheat and silver and oil first. It may go into new cars eventually, but it's going to go into real stuff first – at least it always has. I'd rather own commodities than just about anything I can think of in a period when the whole world is debasing paper money.

Tuesday, July 21, 2009

5 Non-Traditional Inflation Indicators

Nice article from seeking alpha.

We essentially use five indicators:

  1. Emerging market small caps vs. developed market small caps (EWX vs. GWX)
  2. Commodities in general relative to gold (CRB vs. GLD)
  3. Non US inflation protected Treasuries vs. ex US unprotected Treasuries (WIP vs. BWX)
  4. Commodity stocks vs. the broad US stock market (CRX vs. VTI)
  5. Commodities vs. US 30 year Treasuries (CRB vs. USB)

...To us the market is sending very strong signals that world growth and inflation is picking up. We are not above the market (and have seen very few cases of anyone who has consistently outperformed the market) that is why we follow it.

Tuesday, July 14, 2009

Interview with Jim Rogers.

Transcript here.

In the near term, markets seem to be more concerned about growth than they are
about inflation. The difference between the 10-year and the two-year bond yield
in the US has narrowed some 40 basis points since early June. Unlike you Jim,
people are actually going out and buying long maturity treasuries because they
don't see growth, don't see inflation. So, what do say to these bond buyers?
Good luck?

When you see anomalies like this in the market, you are
supposed to take advantage . The spread is very low. So, why would anybody buy a
10-year when he can buy a two-year ? Not worth the extra risk to go out 10
years. I would urge people to keep their wits. Now, granted Mr Bernanke and the
US are buying a lot of government paper and driving the price up. That's why I
am not sure. He has got more buying power than I do, at least for the
foreseeable future. So, you are seeing longer bonds going up. That gives you an
opportunity to get out if you own them or think about selling them short if you
don't own them and know how to sell short.

Some video here....Kind of an odd interview....

Friday, July 10, 2009

The great 'output gap' masks the real threat of inflation

Edward Hadas argues that the so-called 'output gap' is masking the real threat of inflation.

The so-called output gap isn’t as big as it seems. The gap – a measure of slack in the economy – may seem large after over a year of a deep recession. But some of the capacity built up during the boom is useless. That means it may not take a lot of growth before the economy hits inflationary buffers.

Warren Buffett on Inflation

Not the first time he has commented on potential inflation, however he goes a little bit more into depth this time.

Right now they are pouring on the medicine...we are likely to get a lot of inflation down the road.












Saturday, July 4, 2009

David Tice Interview with Bloomberg

Interview with the manager of the Prudent Bear Fund (BEARX).

The deflationary legs are early before we to get to another inflationary leg.



Friday, July 3, 2009

PBS Interview with James Grant

Here.

GRANT: Well, the interest rate that people tend to watch of course is the rate that the Fed Reserve sets or fixes to use a less delicate word and that's the Federal funds rate, the overnight lending rate in the banking system and the Fed in its august, Solomonic wisdom has fixed a rate very near zero. And I keep on -- I keep on waiting for an outraged cry from the constituency of American savers. Maybe there's not enough of them to form a quorum. But the Fed has now really promised us it will keep that particular rate close to zero for a long time, which leads me to think that we're going at some point -- inconvenient (ph) point without the ringing of a bell, we're going to have an inflation problem.

Hyperinlation Nation Part 3

Hyperinflation Nation Part 2

Hyperinflation Nation Part 1

Two Short-Term Scenarios for Gold

Two Short-Term Scenarios for Gold. From Seeking Alpha

Given the certainty of enormous long-term gains in the precious metals sector, investors should maintain a long-term outlook. “Buy and hold” may be a dead strategy in many conventional sectors of the economy, but it is certainly a viable (and prudent) strategy for precious-metals holders – as well as in other strong, commodity-plays.

Worthwhile Articles from Seeking Alpha

Inflation Is Going to Be a Major Problem... But Not Today

Inflationary spirals take a long time to play out. The problem is by the time people realize we are in an inflationary spiral, it is too late. Rapid inflation can only be stopped by draconian measures at that time. There will be a time to get long commodities to protect against inflation, but not in 2009.

Is Inflation a Fact… Or Just an Opinion? Part I

Whenever everyone begins to think the same thing, you HAVE to question it, regardless of whether or not you personally believe it too. You never, and I repeat, NEVER make money by investing alongside the mob. So if the mob is screaming “inflation,” you have to be willing to re-consider the facts. It’s quite possible the mob is wrong (it usually is).


Is Inflation a Fact… Or Just an Opinion? Part II

To be blunt, either the market has lost any ability to discount the future what-so-ever, or the inflation story is not actually as simple as inflationists have claimed (money printing= inflation). I’m inclined to believe the latter, as indeed, nothing is ever quite what it seems or as simple as people make out.

Indeed, the dollar chart and commodity charts paint a very different picture from the common opinion that “the Fed is printing dollars ad infinitum and inflation is exploding higher.” Clearly, the market is trying to tell us something different. What is it?

Moonwalking with Faber

Comments from Marc Faber at the AsianInvestor Investment Forum.

Marc Faber thinks there are opportunities in Asian healthcare, in banks in countries like Thailand (where the Lehman structured note salesmen found the people too unsophisticated to buy their product), tourism, and naturally gold. On the property side, he recommends avoiding condos in financial centres and buying farmland.

Some Random Articles About the Fed and Inflation

- Fed's Bullard says must shield Fed independence
- About Auditing the Fed
- BIS Sees Risk Central Banks Will Raise Interest Rates Too Late
- ROSENBERG: DEFLATION ALL OVER EMPLOYMENT REPORT

Leading Inflation Indicator Up in June

July 2 (Bloomberg) -- A gauge of future inflation in
the U.S. rose last month, according to the Foundation
for International Business and Economic Research.
FIBER’s leading inflation index for June rose to
82.7 from 80.7 in May. The smoothed growth rate, which
is expressed as a compound annual rate, was -10.5 percent
in June.

==============================================================================
June May April March Feb. Jan. Dec. Nov.
2009 2009 2009 2009 2009 2009 2008 2008
==============================================================================
Inflation index 82.7 80.7 77.7 76.4 77.3 78.1 78.7 82.9
Smoothed growth rate -10.5% -18.2% -27.2% -32.6% -33.7% -34.8% -36.1% -31.6%
Monthly % change 2.5% 3.9% 1.7% -1.2% -1.0% -0.8% -5.1% -6.9%
Yearly % change -23.1% -24.3% -26.4% -26.8% -23.2% -22.9% -21.5% -18.1%
==============================================================================

Latest Global Inflation Numbers from Bloomberg

The US looks a lot more deflationary than the rest of the world.

=============================================================================
Consumer CPI CPI CPI BP Chng Latest
Prices Last Last 2 Years vs. Report
YOY% Month Year Ago last yr Date
=============================================================================
-----------------------G7 & Eurozone----------------------
U.S. -1.3% -0.7% 4.2% 2.7% -550 5/31/2009
Euro Region 0.0% 0.6% 3.7% 1.9% -370 5/31/2009
Japan -1.1% -0.1% 1.3% 0.0% -240 5/31/2009
Germany 0.1% 0.0% 3.3% 1.9% -320 6/30/2009
France -0.3% 0.1% 3.3% 1.1% -360 5/31/2009
Italy 0.5% 0.9% 3.8% 1.7% -330 6/30/2009
U.K. 2.2% 2.3% 3.3% 2.5% -110 5/31/2009
Canada 0.1% 0.4% 2.2% 2.2% -210 5/31/2009


=============================================================================
Consumer CPI CPI CPI BP Chng Latest
Prices Last Last 2 Years vs. Report
YOY% Month Year Ago last yr Date
=============================================================================
--------------------------Europe--------------------------
Austria 0.3% 0.7% 3.7% 2.0% -340 5/31/2009
Belgium -1.1% -0.4% 5.8% 1.3% -690 6/30/2009
Bulgaria 3.9% 4.8% 15.0% 4.3% -1,110 5/31/2009
Croatia 2.7% 3.9% 6.4% 2.2% -370 5/31/2009
Czech Repub. 1.3% 1.8% 6.8% 2.4% -550 5/31/2009
Denmark 1.3% 1.4% 3.4% 1.8% -210 5/31/2009
Estonia -0.3% 0.3% 11.3% 5.7% -1,160 5/31/2009
Finland 0.0% 0.8% 4.2% 2.4% -420 5/31/2009
Greece 0.5% 1.0% 4.9% 2.6% -440 5/31/2009
Hungary 3.8% 3.4% 7.0% 8.5% -320 5/31/2009
Iceland 12.2% 11.6% 12.7% 4.0% -56 6/30/2009
Ireland -4.7% -3.5% 4.7% 5.0% -934 5/31/2009
Latvia 4.7% 6.2% 17.9% 8.2% -1,320 5/31/2009
Lithuania 5.2% 6.3% 12.0% 4.8% -680 5/31/2009
Luxembourg 0.3% 1.2% 3.5% 2.2% -323 3/31/2009
=============================================================================
Consumer CPI CPI CPI BP Chng Latest
Prices Last Last 2 Years vs. Report
YOY% Month Year Ago last yr Date
=============================================================================
Netherlands 1.6% 1.8% 2.3% 1.8% -70 5/31/2009
Norway 3.0% 2.9% 3.1% 0.3% -10 5/31/2009
Poland 3.6% 4.0% 4.4% 2.3% -80 5/31/2009
Portugal -1.2% -0.5% 2.8% 2.5% -400 5/31/2009
Romania 6.0% 6.5% 8.5% 3.8% -251 5/31/2009
Russia 12.3% 13.2% 15.1% 7.8% -280 5/31/2009
Slovak Repub. 2.2% 2.3% 4.6% 2.3% -240 5/31/2009
Slovenia 0.3% 0.7% 7.0% 3.6% -670 6/30/2009
Spain -0.9% -0.2% 4.6% 2.3% -550 5/31/2009
Sweden -0.4% -0.1% 3.9% 1.7% -430 5/31/2009
Switzerland -1.0% -0.3% 2.9% 0.5% -390 5/31/2009
Ukraine 14.7% 15.6% 25.8% 10.3% -1,110 5/31/2009
---------------------------Asia---------------------------
Australia 2.5% 3.7% 4.2% 2.4% -170 3/31/2009
China -1.4% -1.5% 7.7% 3.4% -910 5/31/2009
Hong Kong 0.0% 0.6% 5.7% 1.2% -570 5/31/2009
=============================================================================
Consumer CPI CPI CPI BP Chng Latest
Prices Last Last 2 Years vs. Report
YOY% Month Year Ago last yr Date
=============================================================================
India 8.6% 8.7% 7.8% 6.6% 88 5/31/2009
Indonesia 3.7% 6.0% 11.0% n/a -738 6/30/2009
Malaysia 2.4% 3.0% 3.8% 1.4% -140 5/31/2009
New Zealand 3.0% 3.4% 3.4% 2.5% -40 3/31/2009
Philippines 3.3% 4.8% 9.5% 2.4% -620 5/31/2009
Singapore -0.3% -0.7% 7.5% 1.0% -780 5/31/2009
S. Korea 2.0% 2.7% 5.5% 2.5% -355 6/30/2009
Sri Lanka 0.9% 3.3% 28.2% 13.5% -2,730 6/30/2009
Taiwan -0.1% -0.5% 3.7% 0.0% -379 5/31/2009
Thailand -4.0% -3.3% 8.9% n/a -1,290 6/30/2009
Vietnam 3.9% 5.6% 26.8% 7.8% -2,286 6/30/2009
-------------------Middle East & Africa-------------------
Cyprus 0.5% 0.6% 4.6% 1.9% -410 5/31/2009
Egypt 10.2% 11.7% 19.7% n/a -950 5/31/2009
Iran 15.5% 17.8% 24.2% 16.8% -870 4/29/2009
Israel 2.8% 3.1% 5.4% -1.3% -260 5/31/2009
=============================================================================
Consumer CPI CPI CPI BP Chng Latest
Prices Last Last 2 Years vs. Report
YOY% Month Year Ago last yr Date
=============================================================================
Kazakhstan 7.6% 8.4% 20.0% 8.1% -1,240 6/30/2009
Kenya 17.8% 19.5% 29.3% 11.1% -1,150 6/30/2009
Kuwait 6.8% 9.0% 9.5% 3.9% -273 1/31/2009
Moracco 0.4% 2.6% 5.4% 0.5% -500 5/31/2009
Oman 5.1% 6.5% 12.4% n/a -730 4/30/2009
Pakistan 14.4% 17.2% 19.3% 7.4% -488 5/31/2009
Saudi Arabia 5.5% 5.2% 10.4% 3.0% -488 5/31/2009
South Africa 8.0% 8.4% 11.7% 7.0% -370 5/31/2009
Tunisia 3.3% 3.1% 5.4% 2.2% -207 5/31/2009
Turkey 5.2% 6.1% 10.7% 9.2% -550 5/31/2009
-----------------------Latin America----------------------
Argentina 5.5% 5.7% 9.1% 8.8% -360 5/31/2009
Bolivia 3.2% 5.3% 16.9% 6.4% -1,365 5/31/2009
Brazil 5.2% 5.5% 5.6% 3.2% -38 5/31/2009
Chile 3.0% 4.5% 8.9% 2.9% -590 5/31/2009
Colombia 4.8% 5.7% 6.4% 6.2% -162 5/31/2009
=============================================================================
Consumer CPI CPI CPI BP Chng Latest
Prices Last Last 2 Years vs. Report
YOY% Month Year Ago last yr Date
=============================================================================
Costa Rica 9.5% 11.8% 11.9% 9.2% -238 5/31/2009
Ecuador 5.4% 6.5% 9.3% 1.6% -388 5/31/2009
El Salvador 9.0% 8.4% 0.7% 4.4% 836 6/30/2008
Guatemala 13.7% 14.2% 6.2% 7.0% 748 8/31/2008
Mexico 6.0% 6.2% 5.0% 4.0% 103 5/31/2009
Panama 2.5% 3.7% 8.8% 3.4% -630 5/31/2009
Peru 3.1% 4.2% 5.7% 1.6% -265 6/30/2009
Uruguay 6.6% 7.1% 7.2% 8.3% -57 5/31/2009
Venezuela 27.7% 29.4% 31.4% 19.5% -370 5/31/2009
=============================================================================

Commodities Outlook - Monetary Base Doubling Benefits Gold

Bloomberg interview with gold bull Peter Boockvar of Miller Tabak.

Eventual Inflation Still a Concern

Seeking Alpha articles responds to Janet Yellen's (Chairman of the San Francisco Fed) comments on deflation as the bigger concern.
But it is clear that Yellen thinks the Fed should err on the side of accommodation. The mantra: ‘Don’t fire monetary policy bullets until you see the whites of inflation’s eyes.’ To me this means that eventual inflation risk is real despite Yellen’s present fears of deflation.

The Fed must reassure markets on inflation

Martin Feldstein on the Fed and the move in the 10-year. (which has since come off a bit)
It would be wrong for the Obama administration and Congress to reduce the fiscal stimulus in 2009 or 2010, since there is no clear evidence of a sustained upturn. But it would be equally wrong to allow the national debt to double to 80 per cent of GDP a decade from now. Increasing taxes even more than proposed would weaken demand in the near term and hurt economic incentives in the long run. The fiscal deficit should therefore be reduced by curtailing the increases in social spending that the president advocated in his election campaign.


The Fed must also be careful not to tighten too soon. But it needs to reassure markets that it will prevent the excess reserves of the banks from financing a surge of inflationary lending when the economy begins to expand. It must make clear now that it will be willing to do so even if that involves big rises in short-term rates.

Wednesday, July 1, 2009

Marc Faber on Korea, Natural Gas, Hyperinflation

Interview with the Korea Times. He touches on the usual, however has some interesting thoughts on natural gas:

As for investors interested in commodities, the Swiss-born investment advisor said natural gas would be his best pick, adding crude oil prices will undergo corrections in the coming months. ``Natural gas is cheap, compared to crude oil. I would buy natural gas. Oil was traded as low as $32 per barrel late last year but has jumped to $72. From a pure demand and supply perspective, the demand from both advanced and emerging economies is not strong. But in the long-term, prices will be much higher than now,'' he said.

I'll go on record and say I wouldn't be buying natural gas (and certainly not UNG) until we get through September/October and see that containment isn't an issue.

Faber Banging the Drum again on Hyperinflation (and Gold , of Course)

Break-even Rates Update (5 Year TSY/TIPS spread)


Inflation expectations (at least measured on the yield difference between TIPS and treasuries) have come off a bit over the past month although we are still well above the -86bps low from December and now stand at 1.4% implied 5 year rate.

I'll take the over.