We begin a new week pondering the question that bedevils the conscientious market observer every day.Inflation? Deflation? Or as Agora founder Bill Bonner is wont to suggest, both?

“Inflation – rising prices, or a drop in the purchasing power of the dollar – will soon rise to the very top of economic concerns,” writes Chris Mayer. “I can’t understand why there are pundits who insist we can’t have inflation while the economy is weak. There are plenty of examples of weak economies with high inflation. After all, I don’t think they are hitting on all cylinders in Zimbabwe, where inflation is thousands of percent.”

Look at food prices, Chris says. “Soybean prices hit a nine-month high of $12.50 a bushel. The Department of Agriculture said that inventories would drop to only 110 million bushels – the lowest level since 1976-77, when inventories hit 103 million bushels. There were about 2 billion fewer mouths on the planet then. At today’s 32-year low, we can eat through that stockpile in about two weeks. Not a lot room for error; hence, the nine-month high in prices.

“We have a similar tight market in corn. In corn, we’re down to about a four-week supply, the lowest in six years. Corn has rallied also. In fact, the prices of a variety of grains are now at levels not seen since the last food crisis:”

“During the last food crisis, rice traded for $1,000 a ton and there were riots in different parts of the world. The financial crisis took the headlines away from the unfolding food crisis, but now we are looking at act II.”

To capitalize, Chris has some little-known agriculture plays in Mayer’s Special Situations – still available for a one-month trial for $1.

Neither are gasoline prices waiting for the deflation trend to go away. They’ve jumped an average 17 cents a gallon over the last two weeks. The Lundberg Survey puts the national average for self-serve regular at $2.66. San Franciscans are paying the most – $2.99 – while folks in Tucson, Ariz., shell out a comparatively paltry $2.41.

According to conventional wisdom, the numbers will be up because of rising energy prices, but “core” inflation for those of us who don’t consume food or energy will be mild. Forgive us for wondering if we’ve entered a time warp and it’s June 2008, instead of June 2009.

On the other hand… we’re looking still enjoying some deflationary crosscurrents. “Over the coming months,” says Dan Amoss, “as the Fed hints at restraint, we’re probably in for another bout of the ‘deflation trade,’ in which demand for Treasuries increases and most sectors of the stock market reverse their recent gains.”

The Fed, for the moment, is making hawkish noises, but it won’t last. “As the stock market falls and the economy weakens, we should expect the Fed to step on the accelerator again.”

“I find it useful to think about the Fed’s role in such terms; as fear of inflation grows, the Fed will tap the brakes on its monetary debasement, and as fear of deflation grows, it will push the accelerator to the floor, if need be. The endgame under this tragic scenario is the eventual destruction of confidence in paper money, rapidly rising import prices for U.S. consumers and lower standards of living.”

As far as markets are concerned today, it’s deflation, indeed.

Gold is down to a three-week low of $933. In large part, that’s a function of the dollar strengthening today. And that’s a function of comments from Russia’s finance minister over the weekend. At a summit of G-8 finance ministers in Italy, he said there’s “no alternative” to the dollar as the world’s reserve currency, and that right now the dollar’s in “good shape.”

With that, the dollar index has shot up to nearly 1%, to 80.9. The euro is down nearly 1%, to $1.38; the pound and yen have taken lesser hits.

“It sounds like, looks like and smells like a coordinated effort by those that have the most to lose should the dollar continue on its downward path of the last three months to put a lid on their losses,” writes Chuck Butler, his five senses as keen as ever.

“Makes sense… But you have to wonder about what they are really thinking and doing… I’m talking about China, Russia and Japan, who have ALL stated in the past weeks that ‘The dollar is fine, and there’s no substitute reserve currency’… These statements all give dollar bulls a boost, and tell them that these countries are not going to back away from dollars and dollar-denominated assets.”

“Now… there’s a BRIC meeting coming up soon… Brazil, Russia, India and China… And while the finance ministers of these countries are at the meeting, I doubt seriously that they will hold the same amount of ‘love’ for the dollar… But that sentiment will be kept to themselves, as they don’t want to send the dollar spiraling downward.”

“These BRIC nations had it all going for them until July of last year. They were sent spiraling downward like most assets until March of this year. I would have to think that the finance ministers of these countries would be interested in knowing how they can avoid another downward spiral caused by dollar buying… And… this… would be the key, folks… I don’t know what it would be, but if they did something like a currency swap/foreign exchange line between each other for trade, that would be colossal! Which is bigger than HUGE!”

The dollar strength has sparked a wave of deflation in commodities, too. Commodity indexes are down 2% today. Even oil is down $1.55 a barrel, to $70.49, traders unfazed by what sure looks like a stolen election in OPEC stalwart Iran, with the prospect of a power struggle there that could last weeks or months.

The tumble in commodities has cascaded into stocks. The Dow opened down more than 200. Every one of the 30 Dow stocks is down as we write.

China’s economic planners hope to pluck another strategic acquisition from Byron King’s Energy & Scarcity Investor portfolio. The state oil company Sinopec is bidding for a Geneva-based oil producer with a prime holding in Iraq’s Kurdish region.

The news comes about six weeks after the Chinese bid for another Byron pick – an Australian-based producer of rare-earth elements used in everything from flat-screen TVs to hybrid car batteries.

Byron recommended the oil stock last November when it sat below $15. It opened this morning over $45. A triple in seven months.

And he still has his eye on a basket of small gold stocks with similar potential. Officially, we have 356 copies of his special report, Set for Life: Eight Keys to Getting “Miserable Rich” With Gold remaining. But that was as of a week ago Friday, and we’ve sent roughly 100 copies out the door since then. You can get your own here.

An emendation to Friday’s edition: Household debt in the first quarter fell to $13.8 trillion, according to the Fed’s Flow of Funds report. Our thanks to a sharp-eyed reader for bringing the discrepancy to our attention.

While we’re on the subject, we’ll note that bloggers who’ve dug deep into the Fed report have reached a disturbing conclusion: Household debt is contracting, but the value of household assets is contracting much faster.

Still, don’t dismiss those falling household debt numbers out of hand, advises The Richebacher Letter’s Rob Parenteau. “Looking at the unique aspects of this recession, we find the sharp reversal of household financial balances from a deep deficit position to a net saving position quite important,” he writes.

“Households are reducing debt loads, in part with higher saving out of income flows, and this has implications for prospective bank loan volumes and sales revenue growth at consumer discretionary firms. Larger fiscal deficits are supporting the ability of households to net save, yet the shortening of maturity of Treasury debt issued, as well as the reaction of investors to a heavy calendar of issuance this year and beyond, is complicating matters. In addition, the shift toward inflation hedges like oil is draining income from households to foreign producers.”

Thus, “We can think of two sectors that have led the U.S. equity market charge – banks and consumer discretionary stocks – that can be questioned if we are correct that household deleveraging matters.”

Our friend and blogger Barry Ritholtz has been running the numbers on the General Motors bailout. How likely is it the Treasury will earn back its “investment”?

“GM has received $50.7 billion in taxpayer money,” Barry writes. When Government Motors comes out of bankruptcy, Uncle Sam will own 60% of it.”

“At its all-time high, GM’s market cap was $56 billion, which slid down to ~$7.3 billion prior to Chapter 11.”

“For the taxpayer to just break even on their investment , the New GM would have to have to reach a market capitalization of $84 billion – almost 150% of its all-time peak. That will be tough, even with the new GM’s better capital structure, employee contracts and much less debt . . .”

Barry is among the new faces you can see at this year’s Agora Financial Investment Symposium in Vancouver, along with familiar ones like Bill Bonner, Doug Casey and Marc Faber. Opening day is just five weeks away and slots are filling fast. Secure your access here.

Sign of the times: Name the best-selling car in the United States. Nope, not the Toyota Camry, although that’s a good guess. No, in these recessionary times the crown goes to…

No bailout money was used in the production of this automobile.

Yes, it’s the Little Tikes Cozy Coupe, a venerable model introduced in 1979 – earning itself a permanent spot recently at the Crawford Auto-Aviation Museum in Cleveland.

With an MSRP of around $60, the pedal-powered single-seater sold more than 457,000 units last year – more than any model of the gasoline-powered variety. It’s American-made in Hudson, Ohio, and free of the taint of bailout money or White House-engineered bankruptcy proceedings that hosed secured creditors.

As long as we have inflation on the brain today, a reader writes, “It seems there is an idiot academic at Harvard (only one?) whom Bernanke and Geithner have apparently been studying under, who says inflation is good because it induces people to spend their money before it loses value, rather than save for the future, and that creates jobs and prosperity. Yeah, just like in Zimbabwe.”

The 5: You could be referring to Ken Rogoff, the former chief economist at the International Monetary Fund, and Greg Mankiw, an adviser to Bush 43. Both of them, indeed, teach at Harvard and both of them went on record recently saying a 6% CPI would be just dandy “for at least a couple of years,” in Rogoff’s words.

We’ll just leave our remarks at that, lest our blood pressure rise to unsafe levels.

Source: Food Inflation Returns, Watching the Fed, Dollar Bulls Rampage, Bestselling “Car” and More!

Also, welcome back 6,000. Won’t you stay awhile this time? There were quite a few new 52-week highs set last week, including BHP Billiton, Coal and Allied, Oil Search, Fleix Resources, Macarthur Coal, Australian Worldwide Exploration, Western Areas, and Steamships Trading Company.

Do you notice a trend there?

The All Ordinaries finished last week at 6,006. That’s a 16% rally from the March 18th lowly low of 5,163. It erases most of the 20% year-to-date deficit. But it’s still down 12% from last year’s all-time high at 6,835 (on November 1st) and 6.46% for the year.

Does the index even matter? If you own a share portfolio that passively tracks the performance of the All Ords, we suppose it does. But you have to wonder if the All Ords are doomed to indirection, like Siamese twins trying to run in opposite directions at the same time. For investors, maybe the smartest thing to do is cut them apart and let them go their own way.

By “them” we mean the resource, energy, and basic material stocks in the one camp, and the consumer discretionary, listed property trusts, and financial stocks in the other camp. The energy sector is up on the year by nearly 20%. Materials are up about 14%. Meanwhile, consumer discretionary stocks are down by 26%, financials down by 17.4%, and listed property trusts (now called A-REITS) down 19.4%. Industrials are down 17.3% as well.

You don’t need to be DaVinci to decode this performance do you? Resource and energy producers are up with higher oil and bulk commodity prices (and probably some hot foreign money). Financials are down as investors wonder how banks will grow earnings in 2008. The consumer discretionary sector is the market shrieking in horror at the effect of all the interest rate rises on the Aussie consumer (not to mention food and fuel inflation).

The two sectors with the most questions are the A-REITS and industrials. Bottom-fishing contrarians would be attracted by the dismal performance of each. But let’s not forget the two big issues that hover over the property market: valuations and leverage. If property prices slump or simply grow less fast, this hurts the A-REITs. And leverage? You’ve seen what happens when it works in reverse.

The industrials—more than any other sector—show us the effects of rising energy costs in the real economy. These companies are unable to pass on the rising costs to customers. Margins are crunched. A fall in the oil price that lasted for a quarter or so might lead to a nice recovery in these stocks—or at least a tradeable move.

“Hey Gabriel?”

“Oui?”

“If you had to make one long and one short trade on ASX sectors today, what would they be?”

“May I have a moment to look at the charts?”

“Bien sur.”

After a few moments, he replied.

“ LONG on the Industrials sector. The Index has lost 32% between November and March, found a good support and rebounded on the previous low that was posted before the strong rise between August and November 2007. Here’s the chart:

“The decrease of 32% occurred in a bearish channel. The price action cleared this channel on the upside recently, which argues for a further momentum up. The 14-day RSI is well-oriented, therefore more upside to come before a potential overbought situation. 5,650 pts then 6,000 pts the next targets (23.6% and 38.2% retracement levels).

And short?

“The Utilities sector. The Index has rebounded 23% in 2 months, now the momentum is slowing and a few indicators argue for a shift in the price action in the near-term. Look at the chart.”

My grandmother, Oget Palm, was just a little girl when my family was scheduled to sail from Europe to New York in 1912. Her parents (my great-grandparents) and her siblings were prepared to make the trip from Gothenburg, Sweden, where they lived. They were scheduled to be in the steerage compartment — as all immigrants were — aboard the newest and “safest” ship on the sea, the RMS Titanic.

It’s funny how fate can change so many lives. Just before the trip from Sweden, my great-grandmother contracted rheumatic fever, or what they used to call consumption. Nobody is really sure why. She was only 33. Sad to say, she died.

But there is another side to the story. The family was delayed from sailing to America as they mourned their loss. Thus, they missed sailing on the Titanic. And everyone knows what happened to the Titanic.

Later on, my grandmother and her family sailed into New York Harbor on a different ship. She remembered gazing at the Statue of Liberty. I returned with her in 1997, and we walked through Ellis Island together. We even found her name in the book they used to categorize everyone who came through, an experience that is truly chilling. Back then, everyone was processed at Ellis Island and made their way to the places where they had relatives. Typically, the Swedes and Norwegians went to Minnesota, and that’s how yours truly ended up being born there.

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A $14,300 Gain Instead of $2,200

On a single $5,000 stake, just holding Occidental Petroleum’s regular “tier one” shares — the kind you hear everyone gabbing about on the financial shows — you might have walked with just $2,200 in profits.

Not so bad, but the “tier two equities” would have given back a hefty $14,300. On the same company, the same trend, and over exactly the same time period.

Here’s more…

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Fast-Forward: Doing More with Less

The light that burns twice as bright burns half as long. And America has burned very brightly for a long time. As the resource battles begin to heat up, we are already seeing where some of the major battle lines will be drawn, and it’s not a pretty picture. The simple fact of the matter is the world’s resources — not just oil — are dwindling faster than Britney Spears’ career.

While shortages of key industrial and energy commodities are frightening, no other sector will threaten global stability more than agriculture.

Food Fight

It seems ironic that as global population is reaching an all-time high, we are turning at least half of our crops into ethanol or biofuel. This is a questionable, if not idiotic, alternative that clearly does as much damage as good. While the short-term impact is obvious, the longer-term ramifications for agriculture on a global scale could be devastating.

In 2007, we saw stark glimpses of just how bad this situation will get. The “Tortilla Crisis” in Mexico, the “Pasta Protest” in Milan (I happened to be there for that one), the riots and crushing of one supermarket shopper in China over cooking oil…we have seen dairy, meat and bread prices skyrocket.

The idea of food inflation is new to many Americans, who are used to prices for food being only about 13-16% of income. Back when my grandmother got off the boat in 1912, they were more like 45%.

Bad Choices Beget Bad Choices

In recent years in the U.S., the number of immigrants has swollen. The porous borders continue to attract newcomers as if it were still 1912. Here in the U.S., a lot of people think that America can still absorb a massive influx of immigrants from all over the planet who are poor, tired and hungry. And while that is nice, romantic thinking, the fact of the matter is we cannot.

Now, I would hate for us to change the plaque on Lady Liberty to “Bring us your well-fed and rested, employable and intelligent,” but the truth is maybe we have to.

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For Over 500 Years, They’ve Used This Secret Strategy to Make Billions…

How a “Secret Alliance” Turns Crashing Stocks into Fortunes

For over five centuries, this mysterious “alliance” of quiet stock market masters has used this one simple technique to turn collapsing share prices into massive fortunes. And today, that strategy is working better than ever…

Check it out now…

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Get Smart or Get Gone

As investors, we must look at this situation as an opportunity for our portfolio. First of all, I suggest if you have some extra land (condo developers and house flippers, listen closely), grow a vegetable garden, and if you are ambitious, raise some sheep and cows, because they will come in handy. A little more practical and with less bunker mentality is to add stocks of some of the key agricultural companies that help support the industry, like those dealing with equipment making, fertilizer, irrigation and transport.

My grandmother may have missed the Titanic, and figuratively, I hope we all do too. But keep in mind that our ship (the USS America ) is sailing in uncharted waters and we had all better get smart fast. Really, the food supply is stretched and getting stretched thinner and thinner. There are only so many lifeboats, and unfortunately, that’s the new reality. Increasing population and rising demand for scarce resources mean that there is a big iceberg ahead. So man your stations.

Yours for resource profits,
Kevin Kerr