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Harry Schultz Life
Strategies 
~ For THINKING
humanoids ~ (in 80 nations)
 Hot Inflation Meteorites
Harry Schultz
extracted
from HSL #646 March 27,
2005 - DJIA 10,443
posted April 17, 2005
US$382 for a 1
year! subscription
Big Picture As our cartoonist shows, below, planet
earth is about to be bombarded by hot inflation meteorites. It's
coming as a surprise/shock to mkts (especially bonds). But page
1 HSL cartoon on May 9, 2004, showed inflation was quietly
launched in 2004 (unseen by outmoded & govt "adjusted"
indices, like the CPI's in various nations). We forecast it would
evolve into high-pitched inflation in 2005-06. Then, move into
stagflation in perhaps 2006-7, then into recession -- perhaps
in 2008-09. Precise dating isn't possible, but this is a long-range
guided Biggy Big Picture as I see it. And the heating-up
inflation stage is now becoming apparent in the US, UK, China,
Oz, NZ & a few other places. It'll be broader & more
extreme as we move into Q2.
 As friend, author, online daily market
advisor Chick Goslin (chickgos@adnc.com)
recently put it: "Stocks & bonds finally woke up to
the new reality, ie, inflation increasing
rapidly, & sold off sharply, accordingly. We knew markets
would eventually catch on to this, but did not expect this to
happen so soon, since these markets have been slow to notice
what's happening in commodities." Indeed, commodities are
a vital part to understanding the WHY of inflation's upcoming
tidal wave. Most commodities were in a 20-year bear mkt, wherein
production infrastructure shrank. It will take years to increase
production.
Meantime, Asian demand can't wait; appetite must be met NOW.
So prices rise, since supply can't meet demand. The soft commodities
(eg, grains) are still at decade lows; their best days are ahead.
Oil appears to be high but, in fact, is not even back to where
it was in the 70's oil crisis days, in inflation-adjusted US$s.
OPEC is not getting fat, because the $ has been falling for years
& very sharply in the last 2yrs. Oil is not high,
but psychologically it feels high -- as we don't mentally
adjust for paper currency weakness - so it adds to the rush to
raise prices in everything else.
Dan Norcini (dnorcini@earthlink.net),
an off-floor commodity trader tells us: "From where
I sit, in one recent week, the status quo has all changed. It
now appears, at long last, the bond vigilantes have finally awakened
from their long winter hibernation, have come out growling in
a surly mood. Perhaps it was the CRB index making daily 25-year
highs they could no longer ignore. Perhaps it was the hints the
big buyers of Treasuries, Asian Central Banks, can no longer
be automatically & mindlessly counted on to do their magic
& bid up the bonds. Perhaps it was the sinking $ heading
back down to the increasingly critical support region near the
.80 level. Whatever the reason, the flattening trade appears
to have reached an end for now." Floor traders have the
best nose.
Inflation is growing worldwide, but among 1st world nations,
the US will have the highest rate, due partly to its fastest
falling currency & fastest rising deficits. What goes around
comes around. The world's biggest currency-polluter will pay
the highest price, via higher prices! As ye sow,
so shall ye reap. ••As U know, inflation is akin to
a tax. It will squeeze retirees hardest & shock babyboomers.
••US interest rates will increase beyond the benign
4-4.5% predicted by some who think that's being wise & generous.
••At first this won't crack the housing mkt, but will
only gradually let air out of the bubble. Housing will hold up
partly because, as most currencies become bad places to hold
assets, people put their money in anything solid - from art to
land to commodities, including metals -- precious & base.
Likewise with stocks. Some companies thrive on inflation, passing
on increases to customers. Other companies choke on inflation,
where their costs are fixed &/or can't hike prices due to
Asian competition. So, again, the stock mkt can rise with growing
inflation, but fewer stocks benefit over time & the air goes
out of the stocks bubble & all bubbles. The bond mkt can't
handle inflation & its multi-year bubble will implode far
more quickly than the others. Here the pain will be greatest.
•••On the other hand, gold is seen as a measuring
stick, & will benefit richly, as people first walk, then
run, then panic into gold as the safest & most liquid of
havens. Paper money is faith-based, & faith in the US$, already
sagging badly, will move toward collapse if inflation approaches
double digits.
We may then go from inflation to stagflation. That would happen
if rising prices put huge strain on some businesses, causing
stagnation while prices remain high - but not rising much. If
govts don't reform at that stage &/or utilize a gold standard,
&/or slash govt spending & taxes (which is unlikely),
we move on to recession. Whether that leads to depression depends
again on whether wise heads are able to make the changes needed
by govt. Forecasting beyond this point is even more hazardous.
Sadly, govts are full of men who understand little about mkts
or monetary structure, & nothing about the gold standard.
Yet, hope springs eternal that at some point this repeating cycle
will be broken. But don't plan your retirement funds on it. If
U haven't already, erect firewalls against the ravages of inflation.
Indeed, take advantage of it. Bet your chips on continuance.
As said, stocks don't dislike inflation, in moderation.
Many love it (it covers up business mistakes). But big
inflation is not expected; I can safely assume this based
on a chart of combined world stk mkts, the DowJones World
Index (*DJW). It shows an incredibly bullish pattern, thus optimism,
via a breakout from a downwedge from a 1999 peak. Chart implication:
world stks, on average, may return to the 1999 high. The big
upswing from the 2002 low shows, right or wrong, that biz is
anticipating an inflation upturn, but not extreme. If biz changes
its mind due to already slipping earnings, the uptrend will break.
It already has a potential upwedge, which conflicts with
the downwedge. We have a bull/bear battle here. Our in-house
Spinner index is shorterm negative on DJW chart. I'll keep U
posted on this from now on in every HSL & in our FMU
& in Gold
Charts R Us. Our economic future depends on it.
The Myth of Price Stability by Economics Professor Antony
Mueller (www.mises.org), was printed in full in latest HSL
Mkt Update. It reveals the public knows the price
of almost everything important is sharply higher, but the myth
of low inflation is fomented by govt indexes that factor in "computer
storage capacity" (what trickery) & imported gadgets,
which introduces deflationary factors, thus cancelling
out much of the inflation in the index - but not in reality!
Govt has deliberately conned the public with this contrived shell
game. Prof M. calls it "a cheat." He adds that in addition
"Central banks easy money policies become visible only when
inflation begins running wild & can only be stopped by a
deflation contraction." "When the game slips out of
hand, hyper-inflation & depression loom."
Inflationary straws in the wind: Oz raises cash interest
rates to 5.5%. Govt says productive capacity surplus has been
eroded. Predicts higher inflation. ••NZ raises interest
rates to 6.75%. ••Thailand raises benchmark interest
rate by 1/4% to highest level in 3yrs "to curb inflation."
••US airlines raise fares on 1-way tickets, the 2nd
rise in a month! ••Iron ore prices, after a 20-yr bear
mkt, are rising by 70-80%. Iron prices impact steel prices. ••China
growing faster than ever, despite earlier rubbish talk re slowdown,
which I debunked in HSL, grew 9.5% in 2004, is keeping
up the pace in 2005 thus far. Industrial production +17% in 1st
2mos of '05. Inflation also rising.
•US feeble Fed raised rates for 6th time in Feb, will do
so again shortly. One day soon it will be 1/2% not the usual
1/4 pt. If they don't, they'll be further behind the curve. Fed
has more than doubled overnight lending rates from their 46-yr
low of 1%, 9mos ago. Present rate is below the official inflation
rate (which in turn is below the truth). ••US manufacturing
prices rising after years being flat. ••Russian inflation
was 11.7% in '04. Economists predict much higher in 2005. Bag
of groceries are up 20-30% on yr ago, reports NYT. ••US
house prices are not included in the CPI (to avoid honesty &
higher pension payouts). US avg home prices rose 11% in 2005
over 2004 in latest qtr. Rose 32% in LasVegas, 20% in Hawaii,
Calif & DC in '04. ••House prices in France, Spain,
Ireland & UK rose 15.5, 15 & 12 & 12% in '04. ••Insiders
predict int/rate rises in UK & Eurozone soon. ••People
aren't totally stupid (just 85%). They realize every interest
rate hike is done to fight inflation - which govts say is not
a problem. If it's not a problem, why raise rates?
•FT reports "UK Jan manufacturing input prices
were terrifying, shot up 9.5%, yr on yr. Is inflation
slipping out of control? The pressure cooker is quietly heating
up." ••China steelmakers accept 71% price rise
in iron ore. ••Bond mkts causing much nervousness.
US 30-yr bonds fell in recent wks from 115.20 to 107.24. That's
a big fall! Yields rose from 4.37 to 4.85. Most now watch the
10-yr Notes for clues & trading; they fell from 112.16 to
108.20. Volatility is acute, but the trend is not cute if U are
a bond bull. ••Copper futures hit a record price recently
on London mkt, in devalued US$ terms. Not real terms. But still
inflationary. Up 11% in '05. But mining/copper shares up much
more. Eg, Antofagasta +19%, BHP Billiton +21%.
•Zinc hit a 7 1/2-yr high. ••LME aluminum touched
10-yr high. ••Platinum at 11-mo high. ••Silver
strong.
••Although China is seen as the main driver of metals
demand, Japan & the US are bigger buyers, followed by China
& EU. ••I forgot to measure oil in this
list of straws. Ha! As U have just seen, inflation is rising
for a lot of reasons besides oil, yet that's how the press &
public tend to view it. Oil is in a steady uptrend, will be strong
for years. Oil dependency will remain & even increase as
R&D reveals we need/use more energy than ever. Eg, air conditioning;
ever more homes have it & house size increases. •OPEC
doesn't control price anymore.
Oil is also political, poses constant disruption threat. Don't
put a ceiling on the price! ••Inflation is boosted
by the competition between the big nations for all
the commodities. Eg, the US is locked out of some oil mkts by
bids from India & China. ••Gold, of course, is
considered the world's thermometer for monetary stability as
well as an inflation reflector. Gold has been rising for several
years with the pace escalating. Efforts by govts & Central
Banks to restrain the price (as they did with London Gold Pool
in 1970's - which failed) have been unable to do more recently
than slow the pace, thus revealing the power of this inflation
wave, as well as the weakness of the US$ & the inherent value
of gold.
HSL provides an ongoing Inflation Meteorite Shelter.
My advice over the past few years has increasingly emphasized
commodities, metals, energy of several sorts, all of which have
moved up impressively. If U haven't moved out of interest-sensitive
investments & into investments that benefit from inflation,
this is probably the last chance to buy them at relatively reasonable
prices. We list many in today's HSL.
Lots & LOTS more follows
for subscribers,
Harry Schultz
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©Copyright
1964-2005 F.E.R.C.
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