Investing in Times of Inflation

The purpose of this column is to explore the the future, so that our investments are where the money will be, instead of where the money is or was.

As we peer into the future together, we believe the markets are telling us that the money is going to be in places where it is safe from inflation.

The markets are also telling us that government-mandated ethanol targets mean there will be a worldwide shortage of grain stocks. Commodities are shaping up to be the next big bubble after the NASDAQ and housing bubbles.

These two pincers, inflation and tightening food supplies, will find us squeezed as we bid against the world for something to eat.

My first forecast is that the weight loss industry is so over. Garbage dumps behind restaurants are packed with food thrown away. Huge plates, in the interest of great value appearances called “plate coverage”, are covered with slabs of beef, rich gravies, cheesy vegetables smothered in butter, and rich sauces all topped off with a gargantuan heaping mound of Tiramisu and ice cream—all of it in the interest of getting the average check to higher and the average tip bigger.

Now comes the waist shrinking event: higher food prices and a dollar declining in value because of inflation. Can’t you just see plates getting smaller? Heck, even restaurant tables may shrink so plates look bigger. Smaller tables will be possible because waistlines will be dropping.

What are the size and strength of the pincers we’re being squeezed by?

Let’s start with inflation. We’ve come across two ways to measure it. Neither involve government pencil pushers, so these are probably more accurate. They’re both higher than the government’s official CPI, now at around 2 per cent.

S. Ranson of Wainright Economics uses gold to determine the rate of inflation. Here’s his calculation: “Divide the percentage change in the gold price over the past eight years by 80, and add three.” He points out that gold has risen 225% in the past eight years. This rule of thumb, which has worked for the past several decades, says inflation is close to 6 per cent. Inflation of only 4 per cent per year means your $100 bill buys only $70 worth of merchandise over the next nine years.

R. Russell calculates inflation by using the M-3 money growth supplied by shadowstats.org, which is currently about 16 per cent. Then Russell subtracts growth in Gross Domestic Product (GDP), currently about 2 per cent, to arrive at an inflation rate of 14 per cent. Most people would pick the 14 after filling their tank.

The United Nations has announced that, at these prices, there is little chance it will be able to continue to feed 70 million people, all of whom are having babies.

The world’s richest countries are abandoning the U.S. dollar in favor of gold, silver, and stronger currencies like the Swiss franc and the Brazilian real.
Growing numbers of Americans have maxed the refi on their homes, maxed their credit cards and are now cashing out of their IRAs and 401k plans. How will these people buy food when the Chinese come with their gold and rising currency?

Gold is outperforming all currencies, as it should because it doesn’t pay interest. Holders can make a good return on capital gains, but they are taxed at the same rate as taxable income.

Silver is playing catchup so it may perform more strongly than gold for the next while.

DBA especially and DBC look toppy after their big move up. See the DBA and U.S. dollar charts on this page. DBA has rocketed to new highs like funny cars at the quarter mile. The buck has fallen off a cliff.

Besides the obvious trade deficit, budget deficit and excessive money-printing by the Fed, here are some of the other U.S. conditions that are giving U.S. dollar holders sleepless nights:

Life insurers and banks are taking huge hits to their balance sheets as they write off illiquid subprime related holdings.

A report from the Bank For International Settlements says that credit default swap contracts have been written on the equivalent of some $43 Trillion in all types of bonds. The market value of all these swaps far exceeds the underlying $5.7 Trillion of corporate bonds whose defaults the swaps were created to protect against.

The U.S. Congress has brought in the Federal Homeowners Preservation Corporation, which will buy as much as $740 Billion worth of defaulted mortgages over the next few years. The money will come from printing presses and higher taxes.

Interest rates are going down, so savers will not want to hold cash or T-bills becauseinflation will eat up the savings.

The Iranian oil trade office is now open for business. Iran is accepting any currency but the U.S. dollar. Until now, all oil customers converted their currencies to the dollar to buy oil anywhere because the two places to buy oil were located in New York City and London. While most customers, including the U.S., must convert their money into Iranian rials, the Japanese may buy their oil in yen.

The U.S. dollar has broken below its all-time strongest support at 80 and is now breaching 74 in an index of 6 other currencies. The value of the U.S. dollar has plummeted since President Richard Nixon closed the gold window to Fort Knox in 1973, thereby unleashing the dollar from a gold backing.

Thus, it is time to invest in the stuff that things are made of, like base metals, precious metals, soft commodities, and energy which are not backed by debt like the weak currencies, various alphabets of paper debt and mortgaged real estate. Investors are fleeing to safety, but safety is no longer represented by paper that continues to diminish in value.