 Don't Be Fooled by Inflation
Peter Schiff
May 11, 2009
Strike up the band, boys, happy
days are here again!
Recently released short-term
economic data, including unemployment claims, non-farm payrolls,
home sales, and business spending, which had been so unambiguously
horrific in February and March, are now just garden-variety awful.
With the Wicked Witch of Depression now apparently crushed under
the house of Obamanomics, the Munchkins of Wall Street have sounded
the all clear, pushing the Dow Jones up 25% from its lows. But
the premature conclusion of their Lollipop Guild economists,
that the crash of 2008/2009 is now a fading memory, is just as
delusional as their failure to see it coming in the first place.
Once again, the facts do not
support the euphoria. Over the past few months, the government
has literally blasted the economy with trillions of new dollars
conjured from the ether. The fact that this "stimulus"
has blown some air back into our deflating consumer-based bubble
economy, and given a boost to an oversold stock market, is hardly
evidence that the problems have been solved. It is simply an
illusion, and not a very good one at that. By throwing money
at the problem, all the government is creating is inflation.
Although this can often look like growth, it is no more capable
of creating wealth than a hall of mirrors is capable of creating
people.
We are currently suffering
from an overdose of past stimulus. A larger dose now will only
worsen the condition. The Greenspan/Bush stimulus of 2001 prevented
a much needed recession and bought us seven years of artificial
growth. The multi-trillion dollar tab for that episode of federally-engineered
economic bullet-dodging came due in 2008. The 2001 stimulus had
kicked off a debt-fueled consumption binge that resulted in economic
weakness, not strength. So now, even though the recent stimulus
administered a much larger dose, we will likely experience a
much smaller bounce. One can only speculate as to how much time
this stimulus will buy and what it will cost when the bill arrives.
My guess is that, at most,
the Bernanke/Obama stimulus will buy two years before the hangover
sets in. However, since this dose is so massive, the comedown
will be equally horrific. My fear is that when the drug wears
off, we will reach for that monetary syringe one last time. At
that point, the dosage may be lethal, and the economy will die
of hyperinflation.
As always, the bulls fail to
understand that investors can lose wealth even as nominal stock
prices rise. As a corollary, the bearish case is not discredited
by rising stock prices. While there are some bears that mistakenly
cling to the idea that deflation will cause the dollar to rise,
those of us in the inflation camp understand that the opposite
will occur.
In the meantime, stocks are
not rising because the long-term fundamentals of our economy
are improving. If anything, the rise in global stock prices is
due to investors realizing that cash is even riskier then stocks.
The massive inflation that is the source of the stimulus is essentially
punishment for those holding cash. To preserve purchasing power,
investors must seek alternative stores of value, such as common
stock.
It is important to point out
that despite an impressive rally, U.S. stocks have substantially
underperformed foreign stocks. In the past two months, while
the Dow Jones has risen 30%, the Hang Seng and the German DAX
have risen by over 50% in U.S. dollars. Commodity prices are
also rising, with oil hitting a five-month high. And gold is
shining as well, with the HUI index of gold stocks up 30% during
the past two months, and 2/3 of those gains occurring in the
past month. If this rally really were about improving economic
fundamentals, gold stocks would not be among the leaders. Further,
during those two months, the U.S. dollar index fell by 7%, with
commodity-sensitive currencies such as the Australian and New
Zealand dollars surging 20%.
To me, the relative strength
of foreign stocks and currencies indicates that perhaps the global
economy is not as impaired as many have feared. It has been my
view all along that after the initial shock wears off, the world
will be better off - once it no longer subsidizes the American
economy. The shrinking U.S. current account deficit is evidence
of this trend in action. Renewed strength in foreign stocks and
weakness in the dollar may indicate that not only is the world
decoupling from the U.S., but benefitting as a result.
So let the Munchkins dance
for now.
But remember, the Witch is
not dead, only temporarily stunned by an avalanche of fake money.
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May 8, 2009
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
321gold Ltd
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