Britannia Radio

May 23, 2009

Weekend Edition The Best of The S&A Digest Inflation is simple... but not too simple. Inflation is an increase in the supply of money relative to the supply of goods and services. The effect of inflation is usually rising prices of goods and services. Most people confuse the cause with the effect and say inflation is rising prices. That's not true. Today, we have massive inflation. The total amount of Federal Reserve credit has risen from less than $900 billion as of September 3, 2008, (less than nine months ago) to more than $2.1 trillion as of May 13. Since August 2007, the Federal Reserve has created 12 new lending programs. But as the Financial Times reported, prices fell faster in April than they have at any time since 1955. It's hard to make a case for inflation with prices falling faster than ever, housing prices still collapsing, and more factories going idle than at any time since record-keeping began 42 years ago. Yet, we persist in our fears that inflation is the primary risk, not deflation. Gold is above $900 an ounce for a reason, and it's not just because the world has lost its mind. There's a reason why Zhou Xiaochuan, the governor of China's central bank, asked in February of this year, "Is it time for China to consider using the reserves somewhere else, instead of concentrating too much on the United States?" And why Chinese premier Wen Jiabao said in March, "I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises, and to guarantee the safety of China's assets." And why Luo Ping, of the China Banking Regulatory Commission, said in February, "U.S. Treasuries are the... only option... Once you start issuing $1 trillion-$2 trillion... we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do." A short time ago, it was revealed China had nearly doubled its gold reserves. As John Burbank of Passport Capital put it to us recently, "From a game-theory perspective, China HAS to buy gold." China has only one best move, and buying gold is it. One of the things hardly anyone ever talks about is the risk of hyperinflation in the U.S. But right now, the U.S. is a prime candidate for it. Debt, both public and private, is at record levels, and Obama is going to raise the public debt more than all the presidents who preceded him combined. Jobs are disappearing a half-million at a time. The typical government response to the current situation isn't hard to predict. Debts this big, especially public debts, are never paid back. They're inflated away. In our case, that'll take a lot of inflation. I think this will send gold to $2,000 in a year or two, so I've recommended three mining stocks I believe will soar even more than gold. And I'll put my gold/natural resource stock picks up against anybody's, even billionaire genius John Paulson. Mine are cheaper, safer, and have many times more upside than Paulson's pick (AngloGold Ashanti). One of my gold picks has a credible, documented shot at making investors 50 times their money. It's pursuing the same business model as a previous 50-to-1 shot. And the same thing is happening right now to my pick that happened just before investors in that 50-to-1 shot got super rich. If you want to read what I told Extreme Value readers about my three unique gold/natural resource stocks, click here. Besides betting heavily on gold, John Paulson is starting a new, private-equity fund to bet on a real estate recovery. It will invest in both residential and commercial real estate. In addition to investing in existing properties, the fund's managers will work with a former D.R. Horton executive to source residential developments. Paulson's new real estate fund, like his $5 billion gold position, is likely another bet on inflation. The spread between REIT and Treasury yields is at an all-time high, around 7%. Investors are starting to buy real estate equities again, and the higher-quality companies are now refinancing their debt with ease. The inflow of capital will start inflating real estate prices. As Porter wrote in his latest PSIA... Sentiment and access to capital play a huge role in real estate prices. The more capital that's available, the higher prices will move. The higher prices move, the more capital becomes available – because there's more collateral.