A Storm is
When the tech bubble burst in 2000, Greenspan tried to
“fix” the problem by cutting rates and printing money. Fix the
problem he did … well sort of! What Greenspan did was create
two new bubbles in the credit and real estate markets to replace the tech
bubble that had burst. Millions of jobs were created in these two
industries. Much needed jobs to replace the ones lost as the tech
boom came to an end.
I think we will all admit it was one heck of a party, but
like all good parties there’s a price to pay. The Hangover!
The truth is the economic boom of the mid 2000’s was
built on a lie. Instead of a foundation of productivity the last bull
market was founded on an ocean of liquidity. That ocean of liquidity
fostered risky investments and massive speculation. It was only a matter of
time before the house of cards came crashing down. And crash it
did. The world suffered through the second worst bear market in
history almost taking down the global financial system in the process.
Apparently the powers that be have learned nothing from
this near death experience because they are back at it again, printing,
printing, printing in another vain effort to create prosperity with
the printing press. I dare say the average 6th grader can understand
that the act of putting ink on paper does not create wealth.
It’s too bad our elected officials can’t understand this.
So here we are, we’ve survived the credit crisis
and all appears to be well in the world. I’m here to say that
all is not well. We now have a cancer growing under the
surface of the economy many times bigger than the one Greenspan created.
This cancer isn’t going to show up in real estate or credit markets,
that bubble has already burst, never to be inflated again. No, this
time I expect the cancer is going to flare up as inflation in the commodity
Witness the strange resilience of oil at $80 despite a
very strong dollar the past 3 months. Gold has been holding over $1100.
Sugar is at multi-year highs. Copper is less than 15% from all-time highs.
The commodity markets are now poised to unleash a massive
inflationary storm. I think there’s a very good chance that
storm will strike this spring.
The dollar is now deep into a counter trend rally and in
jeopardy of putting in an intermediate term top at any time. When it does
the flood gates could break and we will have to deal with the unintended
consequences of Bernanke’s actions.
Unfortunately, there are no painless cures for spiking
inflation, especially in an ongoing recession. The cure is to let the
market clean out the excesses. The cure is to raise rates and drain
liquidity, to induce a recession. That course leads to 20%+
unemployment and a deflationary depression. Does anyone really
believe our elected officials will choose the that course of action?
On the other hand, doing nothing leads to higher and
higher inflation and running the presses faster and faster to stay ahead of
rising prices, eventually culminating in a hyperinflationary event if
government debt is allowed to spiral beyond the point of no return.
Unfortunately, I think it’s probably too late to
stop the storm. Let’s face it, you don’t start turning
the Titanic when it’s 100 yards from the iceberg. By then
it’s too late and the ship is doomed.
The same principle applies with our economy. If the
Fed waits until inflation starts to pop up it is too late. The damage
is already done and there’s no going back. If the inflation
Genie gets out of the bottle there’s no easy way to get him back in.
I would argue that the commodity markets are already trying to tell us
there’s trouble coming.
History has been crystal clear - every time oil spikes
100% or more within a year’s time, it has pushed the our economy into
a recession. We already have a spike from $32 to over $80 and this is
against a backdrop of high unemployment. The last thing we need in an
economic environment that’s already under stress is surging energy
The question investors have to ask themselves is whether
it’s more likely the powers that be will do the right thing, raise
rates, drain liquidity and force the world into a deeper recession before
inflation gets out of control or will they continue to kick the
can down the road making the problem bigger and bigger?
Knowing human nature, my bet is that our elected officials
will do whatever they have to do to avoid short term pain - even if it
means compromising our future.
The storm is brewing. It’s time to batten down the
That means gold and silver!
The Smart Money
John Townsend is a co-author
and editor of the Smart Money Tracker.