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"Freedom by Friday"

While The West Sleeps

Kevin Raymond February 14, 2011 Freedom by Friday 3 Comments on While The West Sleeps

The economy might finally be pulling out of the doldrums in the US, but it has a long way to go before it recovers. Much of the gains we have seen in GDP and the gains we will see in the months ahead are the result of government stimuli. While the talking heads in Washington proclaim that a recovery is at hand, as Treasury Secretary Geithner did last week, and as Fed Governor Lacker echoed, there still remain the twin problems of high unemployment and housing. Just this past week numbers came in showing that distressed markets like South Florida are nowhere near recovery with prices falling again in January.

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Nationwide, from peak to trough, prices have fallen by an average of 27% (not counting Washington, DC of course, since that’s where money is literally being printed). But in areas like South Florida, Nevada and Arizona, prices have fallen by double that amount and there’s more to come.

But, one look at the stock market and one would think that everything is coming up roses. Why is the market setting new highs daily. Well, there is the cheap money theory. It’s so cheap to borrow money, investors are putting it into the market – well maybe not all of it is borrowed…but it has the same effect. Let me explain. When you are only getting 0.5% on your savings and you need to make 5% to 8% (especially if you are retired) just so that you don’t dig into your principal, then you have little choice but to invest in riskier assets. The stock market fits that bill. Maybe you don’t think you’re in there, but if you own funds, insurance policies, managed pensions or retirement plans, then that’s exactly where your money is right now.

That’s not the only reason the market is going higher. There are two more. One is the good reason, and the other is a very scary reason. The good and obvious reason is that the market senses that the current recovery has legs and is looking forward for gains as it has always done…. except when the not so good reason is in play. The not so good reason is inflation. I’m not talking your run of the mill 1% to 2% inflation that has been the norm for a couple of decades. I’m referring to the serious currency debasement that is occurring in the US Dollar. Look, I don’t care how Ben Bernanke spins it. When you print dollars, there are more dollars, and each dollar is worth less and less. That is a fact.

Chinese Superiority

And, when you print a lot of dollars as the Fed is doing right now then you start to see inflation. Inflation in commodities, food prices, and other goods and services here and abroad. Look at the Chinese Yuan. It is trading at a 17-year high and China is trying all it can to keep a lid on it. A strong currency like the Yuan implies strength in the underlying economy and its future prospects. The US dollar is sending the opposite signal. It is getting weaker. The Chinese are raising interest rates to squelch out of control growth and property speculation – we only wish we could. Imagine an announcement from the Fed that they were going to abandon the easy money policy and RAISE rates. If that were to happen today, the market would fall 10% in one session. We have a long way to go before the Fed even hints at raising rates – maybe if and when unemployment falls to 8% or below. Commodities are not the only things that can be inflated – so can the stock market.

As currencies decline, stocks, which are based on real businesses, tend to move in the opposite direction. But, wait. If inflation is only running at 1% as the Fed would have us believe, then the US market should not be tearing higher. But it is. That could mean that the Fed is actually fibbing about inflation. One prominent free thinker of our times certainly thinks so. Last week Dr Marc Faber, an Economist who pens the Gloom, Boom and Doom Report from Hong Kong proclaimed that Ben Bernanke  and the Bureau of Labor Statistics are lying and the real rate of inflation is probably between 5% and 8%.  I am inclined to agree with him as I see no evidence of prices falling except for housing.

The last word…

Gold has been trading in a very tight range lately. The inability of the markets to force a correction in gold is testament to its current bull run. Just the other day JP Morgan announced that it would start accepting gold as collateral…you can read about it here:

http://www.goldalert.com/2011/02/jp-mogran-starts-accepting-gold-as-collateral/

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3 Comments

  1. douglas February 14, 2011 at 7:27 pm

    Hi I live in south africa. My name is Douglas Procter. I tend to agree with u on the economy. Last night I saw the dollar trading @ 7,23 to the rand. And the oil 102.95 this is ridiculous. The whole market seems to be controlled by oil. We have 1 of the most volatile markets when it comes to fuel. Every month our prices will go up on the fuel. By the way I am a salesman of oils to the industry.
    The engineering market and manufacturing sector always seems to be getting it right but I know as a reseller of oil and soluble oils for engineering sector that this is not so.my sales for 2009 was R4000000. And my sales for 2010 were R2500000 and quiet honestly this year has started out pretty awful. Thanks to our brilliant government. What they say and what happens is two entirely different things.
    My customers complain all the time that things are going bad so yes when you say we live under false pretenses. I have to say I agree with you!
    Douglas from south africa.

  2. Dale Bunnell February 14, 2011 at 10:16 pm

    Forget gold! tell your readers to look at investing in silver….it is much much more rare than gold and at 30.00+ per ounce it is a much better investment.

  3. Kevin Raymond February 15, 2011 at 5:55 pm

    Hi Everyone, Thanks for your comments. Douglas, yes the oil market continues to remain volatile and I don’t see this changing even with Mubarak stepping down. Dale, you bring up a good point on silver. I might have to discuss this in a future issue.

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