The Quiet Hyperinflation of 2011

Interest rates are rising around the world. Plus, globally, the price of light crude oil is up 37% so far this year. Coffee futures prices are up 100% in the past 12 months. Despite weakness in precious metals this week, as the Comex raised the margin requirement for trading silver futures, precious metals are at non-inflation adjusted record highs. So why is the consumer price index that the government reports each month continuously showing an inflation rate under two percent? Michael gives you the two worst kept secrets about the inflation rate.Inflation in Venezuela is running at 27.4% a year. The country devalued its currency earlier this year to deal with the rapid inflation rate.

Yesterday, the European Union statistics office in Luxembourg said that European producer-price inflation jumped 6.7% in March from a year earlier—the fastest pace in two and a half years.

In China, the government keeps raising interest rates to fight off its inflation rate, which sits at a 39-month high of 5.4%. China is the second largest economy in the world.

Globally, the price of light crude oil is up 37% so far this year. Coffee futures prices are up 100% in the past 12 months. Despite weakness in precious metals this week, as the Comex raised the margin requirement for trading silver futures, precious metals are at non-inflation adjusted record highs.

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So why is the consumer price index that the government reports each month continuously showing an inflation rate under two percent?

Here are the two worst kept secrets about the inflation rate: The official inflation rate we get in the monthly Commerce Department reports does not include the devaluation of the U.S. dollar. Secondly, the Federal Reserve tells us that it focuses on the core inflation rate, which excludes energy and food prices.

The greenback is very close to breaking below a record low against a basket of six major foreign currencies ($USD on most charting services, referred to as the U.S. Dollar Index). The world’s most followed stock market index, the Dow Jones Industrial Average, is priced in U.S. dollars. If we took that index and priced in hard money (gold), the Dow Jones Industrial Average would be down 44% since October 2008.

Oil and food are things we cannot live without. Hence, excluding the hyper price rise in both items does not reflect the true rising cost of living in America today. Fill your gas tank today and see how much it costs you compared to a year ago. Take your family for dinner at a decent restaurant and see how much more it costs you than two years ago.

To my theory of a quiet devaluation of the U.S. dollar, which I started talking about years ago (and which many in the media have picked up and written about in the past few months), you can add a theory of quiet hyperinflation. Unfortunately, we all know the only way rapid inflation can be dealt with, a lesson former Fed Chairman Paul Volcker taught us very well in the early 1980s.

Michael’s Personal Notes:

Congratulations to Stephen Harper on his re-election as Prime Minister of Canada…and a majority government to boot. I like Harper’s governing model for three reasons.

A majority government means that Harper’s Conservatives will now be able to proceed with their previously announced cuts to personal and corporate income taxes. Harper has promised to eliminate the Canadian deficit by 2014. His government plans to achieve a balanced budget by cutting government expenses, as opposed to raising taxes.

Lowering taxes, reducing government spending and eliminating the deficit…exactly what we here in America should be focused on.

But there’s more.

While America opens the door to foreign takeovers of its vital assets, Harper’s government has blocked many proposed foreign asset purchases. Last year, the government vetoed a takeover of Canada’s Potash Corporation (the world’s largest fertilizer company) by resource giant, BHP Billiton Ltd.

Harper has gone on record as saying that his government is weary of foreign takeovers of key Canadian resource companies. Meanwhile, foreign companies, mostly China- and European-based, continue to cherry pick the vital American assets they want.

There’s a lot we can learn from those Canadians…

Where the Market Stands; Where it’s Headed:

Amid a sea of dollars, monetary liquidity and short-term interest rates still at record lows, the bear market rally that started on March 9, 2009, continues to defy gravity. The Dow Jones Industrial Average opens this morning up a huge 10.6% for 2011.

As I have gone on record as saying, I don’t expect the second half of 2011 to be as good as the first half. This bear market rally has been particularly successful and has been bringing investors back into the stock market, but is it also getting “tired.” The number of stock advisors who are bullish is only 10% away from the level they sat at before the market topped in October of 2007.

Yes, a bear market rally continues to prevail. But I’m very cautious and bearish short- to long-term.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.