This from an email Ron sent Dan on Tuesday after the market closed (hat tip, The S&A Digest ):

This from a recent interview with Steve Forbes, which you can watch in full on Forbes.com

But then even buying Treasuries, you have the risk of under-performing inflation at today’s rate that you’re getting on Treasuries, right? Certainly with today’s yield, relative to the stock market, I would think Treasuries would be a terrible investment. In fact, we’re short an ETF that owns 20-year Treasuries because we think rates are going up. My point, though, is you can do one of two things.

Generally speaking, to the extent that you can, you can own bonds and stocks, and then within stocks you can pick stocks on your own or you can own a mutual fund or an index fund. I think that picking stocks and doing better than the market over time is very, very, very difficult. Most professionals can’t do it and most individual investors can’t do it. Human beings are hardwired to do precisely the wrong thing, which is buy things when they’re high and popular, and sell them when they’re low and unpopular. And of course to be a successful investor you have to do the complete opposite. I think most average people, who don’t have the time and the training to pick stocks, would be better off in mutual funds or index funds.

Tilson is right that we are “hardwired” to buy high and sell low. That’s why here at Notes we follow only contrarian investors – those that take advantage of the crowd’s uncanny ability to do the wrong thing when it comes to their money. As our commodities investing guru Rick Rule puts it, “You’re either a contrarian or a victim.” Amen to that…

The Fed wants you to believe hyperinflation is looming. Or at least, it shouldwant that, if doubling its balance-sheet – purchasing and lending against investment junk – is going to work the wonders that modern central-bank theory says it can. And the Fed certainly wants you to believe it will stop at nothing to avoid deflation (”whatever means necessary” as the chairman put it back in 2002).

So anyone touting the hyperinflation risk in public is playing the shill, a decoy – seemingly unconnected – proclaiming the miracle powers of Dr.Ben Bernanke’s snake oil to CNBC anchors at every chance.

In fact, they’re doing the Fed’s work better than the Federal Reserve itself. Really.

“The major danger with a zero lower bound for the interest rate,” said Swedish policy-wonk Lars Svensson(also a Princeton colleague of the Fed chief and his credit-bubble associate Paul Krugman) in a speech earlier this year, “is that inflation expectations will be too low and even negative, and that the real interest rate will thus become too high.”

With it so far? Slashing interest rates to the very minimum of 0% suggests inflation has vanished, at least in the central bank’s eyes. But that, in turn, reduces the rate of inflation expected by consumers, investors and business. Central banks are credible forecasters, you see. At least in central-bank eyes. So in Svensson’s philosophy, the zero-rate solution to falling inflation proves self-fulfilling as people hoard cash and sit tight in bonds.

“It is thus necessary to…to counteract expectations of falling inflation, and preferably to create expectations of higher inflation,” Svensson went on. But “as Paul Krugman put it” says the Riksbank’s deputy governor, “How will the central bank ‘credibly promise to be irresponsible’…?

Heaven knows the Fed’s trying. (So’s Krugman, to no one’s surprise.) But while it’s embraced credible recklessness, the Fed’s stop short of French kissing it.

Why so coy…?

“We have a very serious recession, we have a 9.4% unemployment rate,” said San Fran Fed governor Janet Yellen in a speech in California on Tuesday. “If we were not at zero, we would be lowering the funds rate…We should want to do more.”

Just how much further would the Fed go – all the way to hyperinflation perhaps? Racing to first base, “The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won’t be tolerated,” Yellen said.

“Based on measures of inflation expectations,” she went on, an apparently reading straight from Svensson, “the public appears confident that the Fed will adopt policies that will maintain a low, positive rate of inflation. Evidently, the credibility that the Fed and other central banks have built over the past few decades in bringing inflation down has spilled over into a belief that we won’t allow inflation to get too low either.”

Steady on, cheeky! Second base next, and “A glance at history shows that many countries with massive structural deficits and without an independent central bank turned to the printing press to pay off their debts,” Yellen continued.

Straight to third then, and “That’s a recipe for high inflation and, in some cases, hyperinflation.”

Gulp, almost home! But then, somewhere between third and fourth base, the Fed’s gone shy and rebuttoned its blouse. Because “I don’t believe the United States faces that threat,” Yellen said, showing the come-on to be just one big tease.

“Looking back in history, runaway fiscal deficits have often been accompanied by high inflation,” she explained in Tuesday’s speech in the bankrupt state of California. “But, since World War II, such a relationship has only held in developing countries. In countries with advanced financial systems and histories of low inflation, no such connection is found.”

Oh man, what a let down! Who’s gonna put out hyperinflation if not the Fed…?

“In order to make up for the collapse of credit, we are effectively creating money,” said George Soros, the legendary if only occasionally accurate hedge funder, at a Washington forum in March. “If and when credit is restarted, you would then have an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation.”

The trouble comes, as Lars Svensson guessed back in January, with that “if and when”. Because it opens the door to the idea that a central bank might opt instead to withdraw all this new money after the deflation panic has ended. And that in itself is enough to make creating it useless. Pointing to Japan’s five-year experiment with ‘Quantitative Easing’ between March 2001 and March 2006, said Svensson, boosting the monetary base by some 70% failed to “noticeably affect expectations of inflation and the future price level.

“For example, the Yen did not depreciate as it should otherwise have done. Firms and households clearly believed that the expansion of the monetary base was temporary and not permanent, which subsequently proved to be true. The monetary base fell back to normal levels when the interest rate was later raised to above zero.”

Sure, the Bank of Japan’s trillions did triple Japanese Gold Prices. But even with gold refusing to drop back against the Dollar right now, eagle-eyed readers will note that, quite apart from the urgent debate in Europe, the US authorities are at pains to deny they need an ‘exit plan’ any time soon. White House advisor Christina Romer made that much plain in last week’s Economist magazine, blaming the double-dip depression of 1937 on “an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy.” Yellen said it again Tuesday.

So Team Bernanke have got the right idea – at least on Planet Svensson – if not the right level of irresponsibility just yet. Slip a little vodka into their juice though, and they might start talking up inflation like Alan Greenspan, Bernanke’s predecessor and the Maestro himself, writing last week in the Financial Times. He tried to spook everyone out of cash and into the stores by warning of a decade of inflation ahead!

“A pending avalanche of government debt is about to be unloaded on world financial markets,” Sir Alan of Greenspan warned sagely, almost visibly winking from behind those enormous spectacles. “The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.”

Or given enough sauce to get really loose, the Fed might even get crazy like Asia-based doomster Dr.Marc Faber. (He’s been known to enjoy the odd cocktail or two.) Stop warning on hyperinflation. Just come out and say it instead.

“I am 100% sure that the US will go into hyperinflation,” as Faber told Bloomberg in late May, and again onJune 29th. “The US central bank has structured and introduced policies without considering exponential credit growth and its consequences,” added the Gloom, Boom & Doom author in an interview with the Korea Timeson Wednesday.

See what I mean about being a shill? It’s like he’s on the payroll…

“The United States will not raise interest rates for many years to come because it needs to pay off its huge debts,” he went on, recommending inflation-friendly assets such as equities and Gold Bullion. “In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation.”

There, now that’s the way to do it! Greenspan and Faber on song, while the Bernanke Fed tip-toes around stating its aim:

Spark inflation and leave it to burn. Because putting it out worsened both the Great Depression and Japan’s “lost decade” – the one that started two decades ago and hasn’t yet ended. Everyone who’s anyone in monetary theory knows that.

And if they claim otherwise, maybe they’re the ones kidding.

Source:  Faber and Greenspan: Shills for Fed Snake Oil

Here’s Tanner Callais from The Street Authority who recommends “Two Timber Stocks For Your Watchlist.”

Wealth From Wood

Stocks… bonds… annuities… real estate… the investment tools that can fund a comfortable retirement are endless.

But there’s one very profitable asset class that is worth its weight in… wood.

In fact, it’s outperformed many other investments and markets for several years now – and a recent downturn gives savvy investors an enticing entry point. So if you want to unlock timber’s profit potential that timber holds, the time to invest is now – and we’ve uncovered one place where prime timberland is selling for less than $30 an acre.

Not Just For Rugby And Kiwis

It didn’t seem to matter where I went during my stay in New Zealand… all I saw was entire hillsides covered from top to bottom, as enterprising farmers had planted trees anywhere they could.

And with good reason. “It’s their 401(k),” said my brother, who’d lived in New Zealand for nearly a year. “They plant trees, let them grow, then cut them down when they want to retire.”

When I think back to seeing the rows and rows of these farms, the investment potential of timber didn’t immediately occur to me. But these farmers have really got things figured out.

After all, they don’t worry about how the inflation rate is going to affect their holdings. They aren’t worried about what the Fed is doing to bail out struggling companies. They simply plant trees, let them grow, and know that the money they’ll make from selling the timber will take care of their retirement.

And based on the historical performance of timber, it will be a comfortable retirement, too…

A Strong Track Record Of Impressive Returns… During Both Bear Markets And Inflation

From 1972 to the present day, investing in lumber has produced annual returns of 11%. That means a $100,000 investment in lumber in 1972 would be worth about $4.3 million today.

In the U.S., you can often pick up land for under $1,000 an acre if the trees on it are still small. Within 10 to 15 years, you can thin out your tract and get paid about $500 an acre for the pulp. And after 25-30 years, when the trees are mature, you should pocket $4,000 to $5,000 an acre for them at current prices.

What’s more… lumber is also a fantastic way to diversify your portfolio. Like gold, timber tends to do better during periods when stocks and bonds go down. In fact, during three of the four largest bear markets of the 20^th century, the value of timber actually rose.

And during the highest inflationary cycle in modern U.S. history – between 1973 and 1981 – timber returned an impressive 22% per year.

Two Timber Stocks For Your Watchlist

If you’re looking for the biggest and “best of breed” timber stocks, take a look at Plum Creek Timber (NYSE: PCL) or Rayonier (NYSE: RYN). Both companies own massive tracts of timber in the United States and offer solid yields of 5.6% and 7.1% respectively.

But if you’re looking for an even more lucrative play, buying actual timberland is as attractive right now as we’ve ever seen. That’s why institutional investors like Harvard Management Company, which manages the university’s endowment, bid on timberland in May 2008.

But why? Despite all the factors that suggest lumber prices should be high – the industry’s long-term performance… the imminent infrastructure boom… and the fact that timberland is a limited resource – prices are still down.

But what Harvard arguably sees here is an excellent chance to invest at more favorable prices. And there are deals to be found… if you know where to look.

In fact, as I was conducting my research for The Street Authority Market Advisor, I uncovered some unbelievable prices for timberland.

For example, small tracts of 200-acre land are going for only $45,000 ($225 per acre). Some plots are as low as $165 per acre. The absolute best we found was priced at only $29 per acre of timberland – less than the cost of dinner for two.

Granted, buying timberland takes a little more time and investment than simply buying a few shares on the NYSE. But with this low cost per acre and the historic performance of this most basic material, we see right now as the opportunity of a decade.

Source: For $29 A Pop, You Can Put Your Retirement On Autopilot

Of all food categories, prices for cereal and baked goods hit U.S. consumers the hardest, zooming 11.7% in 2008 over 2007. Prices for meats, poultry, fish and eggs gained 5.1%. Fruits and vegetable rose 3.4%, while dairy products advanced 2.7%.

It was the second straight year U.S. consumers were forced to pay a lot more for their groceries. In 2007, food prices at supermarkets rose 5.6%. Prices rose only 1.4% in 2006.

Consumers had to pay the price last year because food makers battled the largest spike in commodities they’ve ever faced, walloped by duel increases in key food ingredients and fuel, which all marched to historic highs in July, a month in which crude oil peaked at an all-time record of more than $147 a barrel.

This major escalation in food prices calls to question contentions that inflation is not a problem, a stance that – on the surface – appears to be supported by government statistics that appear to be fairly benign.

“The notion that U.S. government inflation statistics are accurate has been the subject of intense debate for years,” said Money Morning Investment Director Keith Fitz-Gerald. “My own belief, based on nothing more than what I feel in my wallet, is that those statistics are more cooked than a Christmas goose. I hear the same thing from tens of thousands of investors that I talk to around the world each year.”

The Lowdown on Inflation

For instance, inflation averaged 3.85% last year, according to InflationData.com, which offers investors statistics that are said to be more-specific versions of government figures. But just like stock prices, the inflation figures were whipsawed from one month to the next. The monthly U.S. inflation rate actually eclipsed the 5.0% mark in June, July and August, and was still above 4.9% in September. By December, however, the inflation rate for the month was a nearly imperceptible 0.09% – the lowest rate for any month in this decade.

The “official” consumer price index (CPI) – the measure of price changes that directly impact U.S. consumers – also seems to indicate that we’re right now in a fairly benign environment for prices.

On Friday, the Labor Department said that consumer prices dropped 0.7% in December, slightly smaller than the 0.9% drop economists expected, Yahoo! News and The Associated Press reported. For the year, consumer prices as measured by the consumer price index edged up by just 0.1%, down from the increase of 4.1% reported for all of 2007 and the smallest annual change since consumer prices actually fell by 0.7% in 1954.

The Labor Department said that the big yearly improvement occurred because of the sizable declines in energy prices that we’ve seen in recent months.

The so-called “core” CPI for December – which excludes volatile food and energy prices – was unchanged in December. For the year, the core CPI rose a moderate 1.8%, down from the modest 2.4% increase for all of 2007. Price pressures have eased as the recession intensified, The AP said.

Even back in July – the month in which crude oil prices reached their all-time peak – the overall CPI was only up a reported 2.1%.

The U.S. government actually has an incentive to understate inflation rates, since scores of payments – ranging from Social Security payments to retirees, to the interest payments on inflation-pegged Treasury bonds – are pegged to inflation calculations.

“The U.S. government is suffering from attention-to-deficits disorder,” Money Morning’s Fitz-Gerald says. “Scores of financial calculations are based on the inflation rate, and the additional increases could boost the deficit by trillions of dollars.”

The government contends that the decline in inflation is due to the economic slowdown. Further evidence of that slowdown came Friday in a separate report from the U.S. Federal Reserve that showed that production at the nation’s factories, mines and utilities plunged 2.0% percent in December, capping the worst year for manufacturers since 2001. Last month’s drop, double the amount analysts expected, came after a 1.3% in November, which was even sharper than initially reported.

For all of last year, industrial production declined 1.8%, a major reversal from the 1.7% increase reported last year. It marked the worst showing since a 3.4% decline in 2001, when the country last suffered through a recession.

The theory here is that a drop in industrial output means there’s an accompanying drop-off in demand for commodities used to make the products, meaning there’s no need for price increases.

But, as we’ll see, that’s not the case.

Food Prices Still Escalating

For December, gasoline prices fell by 17.2%, the biggest monthly decline on records that reach back 71 years. Overall energy prices also dropped by a record 8.3% as home heating oil and natural gas showed declines.

For 2008, energy prices fell 21.3%, with gas costs tumbling by 43.1%.

The story was different for food, however. While food costs were unchanged in December, they rose 5.8% for all of last year – including the 6.6% increase at the grocery store.

Some experts say these CPI figures drastically understate the real situation with regards to consumer prices. ShadowStats.com, for instance, has posted a chart on its Web site that shows an “alternate” CPI that peaked at better than 13% last year, and that ended 2008 at nearly 8% – far above the “official” government statistics.

The problems emanating from the big increase in food and commodities prices weren’t limited to the United States, either. In April, the leader of the United Nation’s World Food Programme warned that a “silent tsunami” of hunger was sweeping the globe because of soaring food prices, a situation that threatened the well-being of an estimated 20 million children in the world’s most poverty-stricken areas. At that time, food prices had risen 83% in the previous three years, and rice – a staple of daily diets throughout Asia – had actually doubled in price in the prior five weeks.

Here in the United States, however, the reported 6.6% jump in food prices – and the increase in the producer prices that necessitated the increase in the price of the products at retail – had widespread implications.

For instance, Pilgrim’s Pride Corp. (OTC: PGPDQ), the No. 1 U.S. chicken producer, declared bankruptcy on Dec. 1, according to MarketWatch.com.

Analysts claim that relief is on the way – for producers and consumers alike. Commodity prices – particularly prices for corn, wheat and energy – have plummeted since peaking last summer. And inflation at the grocery store level has eased since prices reached their peak in September, the Labor Department says.

But real-world developments continue to contradict the predictions of research economists and the “official” government reports.

Price Hikes Play Out in the Marketplace

Just consider Kellogg Co. (K), the No. 1 U.S. cereal maker, and the producer of the Frosted Flakes and Rice Krispies brand cereals, as well as the popular Pop-Tarts breakfast pastries. Kellogg was to increase prices on all three plans to lift prices in the “low-to-mid single digit” range this week to help offset the increase in commodity costs. It won’t increase prices for its All-Bran and Special K brands, however.

Kellogg said it was raising prices because it sets pricing behind increases or decreases in the value of the commodities it uses. A spokeswoman said a 2008 price hike didn’t help the company recover all its manufacturing costs.

And that may not be the end. UBS AG (UBS) analyst David Palmer said in a research note that the price increases by Kellogg’s will likely be matched by rivaling companies – the ones that make branded products, as well as manufacturers that make so-called “private-brand” or “private label” cereals.

On Friday, Palmer upgraded Kellogg’s shares to a “Buy” from a “Hold,” noting the company’s price pricing actions and moderate input costs put the company in a good position to aggresively promote its products in 2009, The Wall Street Journal reported.

(Many analysts say that reasonably valued stocks can be sound buys during inflationary periods for this very reason – they can pass any increases in input costs along to consumers in the form of higher retail prices).

General Mills Inc. (GIS), Kellogg’s top cereal rival, would not say whether it will follow Kellogg’s lead, telling MarketWatch that it doesn’t comment on pricing decisions it may or may not take.

Ralcorp Holdings Inc. (RAH), marketer of the Honey Bunches of Oats and Raisin Bran cereal brands, increased prices last year.

Grocery-store operators often try and push back on price increases, something that discount retailer Wal-Mart Stores Inc. (WMT) is known for in the hardline goods world.

Supervalu Inc. (SVU) and the A&P Supermarkets (The Great Atlantic & Pacific Tea Co. Inc.) (GAP) have said they plan to negotiate lower prices with food suppliers, while Weis Markets Inc. (WMK) has instituted a price freeze through April 1 on 2,400 items it sells in 155 stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia.

The mere fact that pricing is an issue with these supermarket chains underscores that price increases are a very real problem in the marketplace, meaning prices aren’t in the benign holding pattern many economists would have us believe.

Is the Financial Crisis Stoking Inflation?

Although the federal government says that the U.S. recession is reducing inflationary pressures, the opposite may actually be true – and the economic slowdown may actually stoke inflationary pressures, experts say. For one thing, even though stated interest rates are low, the fact is that there’s a credit crisis under way right now. That means banks aren’t lending. As a result, companies may be forced to look elsewhere for needed financing – financing that comes at a much higher cost.

And higher costs, as we’ve seen, are inflationary.

There’s also the massive bailout and stimulus packages the government is deploying to fight the financial crisis. To create the capital needed for these programs, the government is printing money. And that massive increase in the money supply can only be inflationary, says Money Morning Contributing Editor Martin Hutchinson, an expert on the global banking system. He believes inflation rates of 7% to 10% may well be in our future.

“Once the bottom has been reached, the excess liquidity that has been created over the last few months through the various bailouts – such the Treasury Department’s $700 billion Troubled Assets Relief Program (TARP), which is fueling bank takeovers, and not expansionary lending, and the follow-on $800 billion credit-market stimulus unveiled late last month – will combine with the huge federal budget deficit to spur inflation,” he said.

Source: Big Jump in Food Prices the Latest Suggestion That Inflation is Much Higher Than the Government Says

• Alcoa Inc. (AA) said late yesterday (Tuesday) that it will cut 13% of its global workforce. The company will also sell four business units, cut output, freeze salaries and hiring efforts, MarketWatch reported. The measures will result in a fourth-quarter charge of $900 million to $950 million after tax, or $1.13 to $1.19 a share.

• Electronics retail Best Buy Co. (BBY) said it will sell used Apple Inc’s (AAPL) iPhone 3G -returned 30 days of their purchase -at $149 for the 8-gigabyte version and $249 for the 16-gigabyte version, Reuters reported. Similarly, Wal-Mart Stores, Inc. (WMT) said last month it would begin selling the latest version of the iPhone.

• Apple Inc.’s (AAPL) stock got an upgrade from Oppenheimer & Co. after Steve Jobs made his health issues public and reassured customers and investors that he will remain at the company’s chief executive. Oppenheimer & Co. upgraded Apple to “outperform,” Reuters reported.

• As many as 10 million Indian exporters may lose their jobs by March, as the country faces a global slowdown caused by widespread recession. “The year 2009 is going to be the worst year in history. Exporters don’t have orders beyond January,” A. Sakthivel, president of the Federation of Indian Export Organizations, an industry lobby group, told Bloomberg.

• Europe’s inflation rate hit a two-year low in December, falling to 1.6% from 2.1% in November. Slowing consumer demand and falling oil prices pushed down prices, Bloomberg reported. The European Central Bank may continue lowering interest rates to push inflation above its 2% target rate.

• Despite its current economic travails, the United States remains the world’s most innovative economy, with unrivalled business sophistication and competitiveness, according to a new study by Paris-based business school INSEAD. The school’s Global Innovation Index assessed institutions, policies, infrastructure, and business and market sophistication, as well as people’s skills. It also factored in wealth, competitiveness and overall knowledge.

• Belarus is close to obtaining a $2.5 billion International Monetary Fund (IMF) emergency loan to help it weather the global economic crisis, according to the Financial Times. The country would be the fifth former communist state to obtain IMF support in recent months, following Georgia, Hungary, Ukraine and Latvia.

Source: Global Investment News Roundup Wednesday, January 7th, 2009

This from Sovereign Society:

The time to start building fresh positions in oil, gold, silver and TIPs has arrived. Even distressed real estate should be accumulated if credit can be secured.

Over the next 6-12 months the United States, Europeans, Japanese and Chinese will eventually arrest deflation. And long before that materializes, hard assets will begin a major reversal following months of crippling losses.

Since peaking in July, the entire gamut of inflation assets has collapsed amid a growing threat of deflation or an environment of accelerated price declines. The last deflation in the United States occurred in the 1930s, purging household balance sheets, corporations, states, municipalities and even the government following two New Deals.

Thus far, U.S. CPI or the consumer price index has not turned negative year-over-year. Yet as oil prices continue to lose altitude and other commodities have been crushed, input costs and price pressures continue to decline dramatically since October. The only major component of CPI that continues to post modest year-over-year gains is wages. And with unemployment now rising aggressively this quarter it’s highly likely wage demands will also come to a screeching halt.

Plunging Bond Yields Discount Danger

In the span of just six months, foreign currencies (except the yen), commodities, stocks, non-Treasury debt, real estate and art have all declined sharply in value in the worst panic-related sell-off in decades. More than $10 trillion dollars’ worth of asset value has been lost worldwide in 2008.

What’s working since July? U.S. Treasury bonds and the U.S. dollar as investors scramble for safety and liquidity.

On December 5, 30-day and 60-day T-bills yielded just 0.01% – the lowest since the 1930s while the benchmark 10-year T-bond traded below 2.55% – its lowest yield since Eisenhower was president in 1955. Even 30-year bonds have surged as the yield recently dropped below 3% for the first time in more than four decades.

The market is now pricing a severe recession and – possibly – another Great Depression. Despite a series of formidable regular market interventions by central banks since August 2007, the credit crisis is still alive and kicking. The authorities have not won the battle …at least not yet.

Heightened inter-bank lending rates, soaring credit default swaps for sovereign government debt and plunging Treasury yields all confirm that the primary trend is still deflation.

To be sure, credit markets worldwide have improved markedly since the dark days of early October. Investment-grade corporate debt is rallying, commercial-paper is flowing again and companies are starting to issue debt once more – but only the highest and most liquid of companies. For the most part, banks are still hoarding cash and borrowers can’t obtain credit.

The real economy is now feeling the bite as consumption falls off a cliff, foreclosures soar and the unemployment rate surges higher. These primary trends are deflationary as broad consumption is severely curtailed, with consumers preparing for the worst economy since 1981 and rebuilding devastated household balance sheets.

But at some point over the next 12 months, the market might transition from outright deflation or negative consumer prices to some sort of disinflation or at least an environment of stable prices. That’s when inflation assets should start rallying again.

Inflate or Die: The Name of the Game in 2009

The battle now being waged by global central banks, including the Federal Reserve is an outright attack on deflation. Through the massive expansion of credit, the Fed and her overseas colleagues are on course to print money like there’s no tomorrow to finance bulging fiscal spending plans, bailouts, tax cuts and anything else that helps to alleviate economic stress.

Earlier in November, the Fed announced it would target “quantitative easing” and “monetization,” unorthodox monetary policy tools rarely or never used in the post-WW II era.

Without getting too technical, the term “quantitative easing” means the Fed will act as the buyer of last resort to monetize Treasury debt and other government agency paper in an attempt to bring interest rates down. Quantitative easing aims to flood the financial system with liquidity and absorb excess cash through monetization or purchasing of government securities.

Through monetary policy, the Fed controls short-term lending rates but cannot influence long-term rates that are largely set by the markets; the Fed now hopes it can influence long-term rates through quantitative easing. And since its announcement two weeks ago, long-term fixed mortgage rates have declined sharply.

These and other open market operations directed by the Fed and Treasury will eventually arrest the broad-based deflation engulfing asset prices. It will take time. Inflation is the desired goal and is the preferred evil to deflation, a monetary phenomenon that threatens to destroy or seriously compromise the financial system. Policy-makers have studied the Great Depression, including Fed Chairman Bernanke, and the consequences of failed central bank and government intervention in times of severe economic duress are unthinkable.

Ravenous Monetary Expansion

According to Federal Reserve Board data, the Fed is now embarking on a spectacular expansion of credit unseen in the history of modern financial markets.

The total amount of Federal Reserve bank credit has increased from $800 billion dollars to $2.2 trillion dollars (or from 6% to 15% of gross domestic product) as the central bank expands its various liquidity facilities in an attempt to preserve normal functioning of the financial system.

The Fed’s ongoing operations to arrest falling prices are targeted namely at housing – the epicenter of this financial crisis. It is highly unlikely that the United States economy will bottom until housing prices find a floor. Quantitative easing hopes to stabilize this market.

Buy Gold Now

Relative to other assets in 2008, gold prices have declined far less. The ongoing liquidity squeeze has forced investors to dump assets, including gold to raise dollars. I suspect this short-term phenomenon will end in 2009 once the ongoing panic subsides and credit markets become largely functional again.

Gold should be accumulated now ahead of market stabilization. As the financial system gradually comes back to life over the next several months or sooner, the dollar should commence another period of weakness; there will be little incentive to hold dollars with short-term rates at or close to zero percent. The Fed will be in no hurry to raise lending rates.

Still, the Japanese experience in the 1990s warns investors of the travails of long-term deflation.

The Japanese, unlike the United States, only started to seriously attack falling prices in the economy in 1998 through massive fiscal spending. In contrast, the U.S. is already throwing everything at the crisis after just 17 months.

I expect the United States to print its way out of misery and, over time, and conquer deflation. But the cost will be humungous and at the expense of the dollar, U.S. financial hegemony and calls for a new monetary system anchored by gold.

It’s literally “inflate or die” for global central banks. Inflation will win.

Source:  Inflation on “Sale” as Deflation Dominates Global Markets

This from Taipan Daily:

We came, we saw, we ate too damn much.

(One of these days, I’ll ask my oldest daughter to translate that into Latin for me. She never did master the more common romance languages. But she’s the family whiz at Cicero and Caesar.)

The second phase of the “Great Annual Pig Out” (the first being the candy-fueled grotesquery that has swallowed All Hallows’ Eve and the third, the week-long debauchery that is Chanukah-Christmas-New Years) is now officially over and done with.

Under our belts, as it were.

We drove, we flew, heck, those who couldn’t avoid it might even have walked. We did the family thing – hugged some, shook hands with others, shuddered to myself at my nephew’s newest facial piercing, caught up on the details of each other’s lives (read as “gossiped”) and counted our blessings.

Then I napped.

The Best of Intentions

The plan was to glue myself to the couch till Sunday with a stack of good books, interrupted only by a brief descent to my home office for an hour or two to knock out this missive. And then: football on the widescreen!

But even the best-laid plans are oft put astray. On Thursday evening, my wife informed me that the malls would have all sorts of Black Friday sales on, and we ought to plan on being there for most of the day.

Oh the horror!

Putting a Sock in it

But I fooled them all, heh, heh, heh! (Evil laughter.) I set the alarm for five in the morning, and hit a single store, an off-the-beaten-track shoe store, for a single ½ price pair of boating moccasins. And some socks.

I was home enjoying a hot cup of coffee before the rest of my horde was even out of bed.

I share these hoary details with you for a reason. While I for one am most thankful I missed them, I don’t doubt that there were sizable crowds at our nation’s malls and shopping centers this weekend.

As I peruse the wire reports, I note that one particularly unruly throng actually destroyed the doors and killed the greeter at a Nassau County Wal-Mart, when he did not clear the entranceway swiftly enough. Shades of the “running of the bulls!”

The Gorillas of Retail Get Shaved

However excitable the crowds were on Black Friday, what they craved most was not quality or even quantity. It was discounts on a relatively small number of cheap gifts.

Initial word from such 800lb retail gorillas as Macy’s, KB Toys, Best Buy and Toys R Us note that while the crowds comparable to previous years, actual sales are nowhere near par. It seems that folks are actually doing pretty much the same as I did: buying only what they absolutely must, and at marked discounts to boot.

Interviewed shoppers are reporting that they have cut the size of their lists by some 15%. The larger (read as “profitable”) purchases, like TVs, PCs, et al. are languishing on shelves, as shoppers ponder instead just what color socks Junior likes best and whether Mom would settle for a new toaster.

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“No Bonus” For You (And That’s the Good News!)

There is certainly no mystery as to what’s holding shoppers back. Pollees all mention the same sordid reasons: unsafe jobs figured high on the lists, and even those who were relatively sure of continued employment were still coming up short on the monthly bills. Gas may have suddenly dipped have under two bucks, but five odd years of sky-high costs have still pushed the average family’s till to dangerously low levels.

Add a paltry Black Friday to the reports of October’s 1% drop in retail sales, and we are looking at a black season for retailers.

As I sit to write, the usual purveyors of dream stuff are trying spin “Cyber Monday” as the trade’s new savings grace. “It’s not that folks don’t want to spend, it’s just that they are too gorged on turkey to go out!”

This fantasy is being put over by the same shysters who claimed back in 2001 that “Gift Card Day” would be the savior of that year’s dismal numbers. Wasn’t true then and it won’t be true this year either.

Printing Their Way to the Next Bubble

I don’t doubt that those masters of the printing press in Washington will eventually succeed in creating the appearance of success. Forget about the Treasury’s beleaguered “TARP” program. All that talk of $25 billion or $50 billion for Detroit? Chump change.

Current figures out of the Fed (released on Black Friday no less! Who says that these guys have no sense of history, irony – or shame) have commercial banks borrowing some $93.6 billion per day, up from $91.6 billion per day the week before. Investment firms have also increased their borrowing from the Fed’s emergency loan program from $50.2 billion to an average of $52.4 billion a day.

And yet precious few of them have been convinced that they should in turn lend any of our capital (yes, it is our money after all) to anyone. They claim they are just too nervous that borrowers would not be able to pay them back.

Not to worry: The President-elect’s team is talking about printing and “lending” even more, and forcing the banks to lend it in turn to Washington’s “borrowers of choice.”

Retail Runs Out of Time and Money

Eventually, Washington will succeed in forcing the economy and markets into a semblance of life. Companies will appear to make a profit. Stocks will appear to go up (for a while anyway). And traders who can stand the stench will make profits off this farce.

But not retail. At least not this year. There simply isn’t enough time for Washington’s “free money” to trickle down to these bottom feeders. It’s still an easy short-side candidate. In fact, every time the dream spinners try to foist their shoddy lies on us, they become an even sweeter short candidate.

You can use the money to buy the kids some socks.

Source: Black Friday Crowds into the Red

The bank cited a variety of reasons for the cut, including turbulent financial markets, falling commodity prices, slowing economic growth China, and the recent rash of rate cuts issued by other central banks around the world.

Specifically, Australia joins the United States, China, India, Japan and South Korea, all of which lowered borrowing costs in the past week. The European Union and United Kingdom are expected to follow suit this week.

“International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well,” Reserve Bank Governor Glenn Stevens said in a news release. “These conditions have contributed to further falls in world commodity prices.”

Also in the bank’s release, Stevens said the rate cut could hamper the central bank’s goal of reigning inflation to 2% to 3%. CPI inflation in year‑ended terms picked up to 5%, while underlying measures were just over 4.5%.

But Stevens said he expects inflation to cool by the end of the year.

“Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of the inflation rate to the target could take longer than would otherwise be the case,” he said

Possible Recession

Last month, Australia’s All Ordinaries stock index plummeted 14%. And that’s on top of falling home prices and retail sales.

The Reserve Bank hasn’t been this aggressive in cutting rates since Australia’s last recession in 1991, Bloomberg reports.

And more cuts could still be in store.

“We think the cash rate will bottom at 4% by early next year,” Stephen Halmarick, co-head market economics at Citigroup Inc. (C), told Reuters. “They are obviously very concerned about the outlook for global growth, I think that is warranted.”

The caution is warranted given the carnage around the world, but Australia’s economy could be one of the few to emerge relatively unscathed.

Housing prices haven’t fallen nearly as bad as those in the United States. Australia’s government budget is in surplus – a likely effect of soaring commodity prices earlier this year.

And by Christmas, $8.7 billion of a $10.4 billion stimulus package will arrive in mailboxes around the country – which may be the life preserver the economy needs to keep GDP from sinking into the red.

Source: Sensing Recession, Australia’s Central Bank Cuts Interest Rate 75 Basis Points

“What’s different?” asked colleague Manraaj Singh at this morning’s conference.

Early every morning, while most Americans are still in their beds, your editor joins a group of analysts and financial journalists to discuss the day’s news.

“What happened to the price of copper? Why are Asian stocks going down? Are they really going to cut rates today?” The answers are not always satisfying, but the questions keep coming.

And the question this morning was: what has really changed?

U.S. stocks held steady yesterday, but they’re down 5% so far this year. The dollar held steady yesterday too, but it is down for the year too – about 6% against the euro and the yen. The Europe- or Japan-based stock market investor has lost more than 10% of his money.

Meanwhile, the fall of the dollar has increased prices for imports. While the United States used to “import deflation” from Asia and elsewhere, now it imports inflation. Prices are rising all over the world.

Yesterday, European producer prices were reported rising at 6.1% per year. High prices have caused the biggest drop in retail sales on record. And yesterday, they had to call out the riot squad in Brussels, to battle fishermen who were kvetching about high fuel costs.

In China, retail prices are rising at an 8.5% rate – the fastest in 12 years.

In Russia, prices are going up at a 14.39% rate.

In Vietnam, the consumer price inflation rate is running at 25%.

In Venezuela, the inflation rate is 29%.

And in Zimbabwe…well, Zimbabwe is another story altogether, with inflation going up so fast they can’t even measure it. Prices are said to be increasing at 160,000% to 200,000% per year. But who can tell? There’s nothing to buy.

Back in Asia…the region’s central banks had hoped that Milton Friedman was wrong. They had hoped that a worldwide economic slowdown would reduce domestic inflation rates. So, they left their lending rates low – considerably lower than the CPI – in order to keep their economies turning over. In Thailand, for example, the central bank lends at 3.25%, while consumer prices rise at more than 6%.

Sound familiar? The United States also keeps its key-lending rate well below the inflation rate – and for the same reason. The Fed lends at 2%. Inflation was last clocked running twice as fast.

We pause here in honest admiration for our fellow investors – the kind of admiration we feel for members of a bomb disposal unit, or a knife-thrower’s assistant. What are we to think? They are lending money to world’s biggest debtor – the U.S. government – for 10 years at 3.94%. That’s yesterday’s yield on the 10-year T-note. If nothing changes, they will get nothing for their trouble. If inflation rates rise (or just happen to be understated), or the dollar falls, the speculation will blow up in their faces.

But along comes Ben Bernanke, with an apparent change of brain. Now, says the captain of the Fed’s rapid response recession-fighting team, further inflation is unwelcome in the United States of America. Supposedly, these words alone took $5 off the global oil price.

But what really has changed? Can the U.S. central bank really begin fighting inflation in a serious way?

The feds have discovered the same two things that their Asian central banker colleagues have found out: that the globalization street goes both ways…and that Milton Friedman was right. Inflation is a monetary phenomenon, observed Friedman. When you increase the amount of money in circulation, ceteris paribus, prices are going to go up. That they didn’t go up much in the last 15 years is merely because there were important other trends going on – notably, globalization, which was driving down prices. But now, traffic on the Avenida de Globalization is going in the other direction. And just as it was very difficult to cause inflation while globalized markets were cutting prices, so is it very difficult to stop inflation when globalized markets are increasing them.

*** Can the Fed really begin fighting inflation? Ah, dear reader…do you see the cruel twist to the story?

While the Fed couldn’t seem to create inflation in those wonderful years of the Great Moderation…now, it probably can’t do much to stop it. The U.S. imports an Everest of stuff from overseas. And stuff made overseas is becoming more expensive. The Fed can raise rates to try to cool the U.S. economy and reduce the amount of stuff Americans buy. But those darned Asians and Europeans can still buy more, and prices can still go up.

Besides, any further ‘cooling’ of the U.S. economy is risky. It could freeze up.

The crisis is said to be over on Wall Street. But the Financial Times says new IPOs are being taken off the schedule…short action on Lehman Bros. is at a record level (speculators are betting that the company is going down) and Moody’s says it might downgrade credit ratings for MBIA and Ambac.

The money just isn’t flowing as fluidly in Manhattan as it used to. An AP story tells us that apartment sales were off 21% in the first quarter. And over on Long Island, where the Wall Streeters have their weekend homes, lenders are said to cutting off home equity lines.

In the center of the country, bankruptcy filings are up 27% in Illinois. And out in Las Vegas, the mortgage fraud capital of the world, a $5 billion casino project has just been cancelled.

And this just in – California is officially suffering a drought.

Under these conditions, we’d expect Ben Bernanke to make some gestures toward protecting the dollar and reducing inflation. But we’d also expect that most of the air coming from the Fed will be hot, not cold.

“The Fed seems to be trying to create a situation whereby they are seen to be fighting inflation, simply by not lowering rates any further,” says MoneyMorning. “This is because, while the Fed may have no interest in fighting inflation, they have a big interest in fighting what they call ‘inflationary expectations’. In other words, they are more interested in fighting people’s perception of the problem, rather than the problem itself.