Sunday, November 16, 2008

Critical Week Upcoming

We are hearing both the "bottoming process" camp and the "nowhere near the bottom" camp state their case this weekend. Many are encouraged that we bounced so hard off of 7950 on the down on Thursday. Others are looking at the fact that we couldn't hold gains on Friday as a sign that we will retest the lows and likely break through them. We will most likely find out who is right this week and I hope the bulls are. Nevertheless, I have done more research and feel that my inflation call is on target.

I have received many emailed opinions as to why my inflation call is wrong---so let me further detail my thoughts. Now many in the deflation camp have said that wealth has disappeared as investors have lost wealth in the markets and that will not only mitigate inflation, but cause deflation. Those same individuals further argue that as companies default on loans you have the same deflationary effect. Now here is my issue, the government has stepped up to fill this gaps with all of the taxpayer money. So while we will have the deflationary effect we are currently seeing----it will be short-lived. The government printing presses are running at full speed and even though they haven't kept up with declining wealth on a daily basis, they will catch up and cause hyperinflation.

For those of you that have heard our interviews with John Williams you have heard him talk about the government's plunge protection team---which is charged with the task of making sure that our markets don't collapse. Has the plunge protection team strengthened the dollar? Have they forced down the price of oil? If they have, then you better enjoy it while it lasts, because it will be short in duration. How can we add all of this money into the economy without it causing inflation? As we tax the rich and give credits to the lower income earning individuals, this will further compound the immediate problem. Why? Because much of the money that will be coming out of the pockets of the higher earners was going into savings or into the stock market. The money that is going to the lower income individuals will be spent. Real dollars out of savings and into the economy----spells inflation in my book.

Some have argued that we are going into debt and that borrowed funds will only be inflationary if other countries quit buying our debt. Their argument further centers around the fact that the government is borrowing funds at record low interest rates as investors seek the safest investments they can find. I argue that it doesn't matter where the money is coming from or how low the rates are, it is going into the economy. That is exactly why I have argued that deficits are not bad for the economy in the short run. These deficits are going to get the economy humming again---with the cost being inflation.

So are there any other factors that we should be taking a look at right now? I think so. Are you aware that many baby boomers are being forced to take distributions out of their 401k accounts? Forced selling at unfavorable prices. We must think about this phenomenon as we go forward. The very group that has been helping the market over the past 10 years by making regular contributions that wind up holding stocks either directly or through mutual funds. So now as we tax the higher earners in the economy we further punish the markets. All of these factors are why I am using patience as natural gas has declined. I don't mean to be boring when I constantly talk about oil, natural gas, and gold. If you like stocks its FLR,XTO, FCX. Will I change my tune anytime soon? I will for the short and medium term investments when we get some clarity. But I keep drilling the inflation story for the long term because I believe that it is almost certain.

If you have an argument for deflation, please post it in the comment section. We will be happy to discuss it.