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Monday, 18 May 2009 Runaway inflation...or deflation... A New York Times financial reporter's confession... Quick up-move in inflation? Or, is it a long way off? The Mogambo Guru on the BLS's unreliable numbers... ----------------------- Special Offer ------------------------- All Those People Laughed at You When You Bought Gold... Wouldn't you love to throw it back in their face? Drive past their house in your Lamborghini on the way to your private jet? So you can fly to your private island? Now's your chance. One simple move that can turn $10,000 into $1,509,000. But I warn you... Only 1 in 100 people can probably handle this. Are you one of them? You must decide before May 29th... --------------------------------------------------------------- Inflation Targeting Perils by Bill Bonner Boston, Massachusetts Inflation or deflation Tell me if you can Will we become Zimbabwe Or will we be Japan? - Merle Hazard Ol' Merle Hazard has the key question figured out. Which will it be? Zimbabwe or Japan? Will it be runaway inflation...or deflation that refuses to run anywhere? Long suffering Daily Reckoning readers already have our answer. We gave it even before the bubble burst in '07/'08. "Yes!" we said...it will be Zimbabwe AND Japan. But not in that order. Japan first. Then, after the feds have got the hang of Quantitative Easing, it's Zimbabwe here we come! But there's gotta be a surprise, right? It can't be that simple, can it? Markets rarely make it easy for you. And for a very good reason. If it were easy to see what was coming, it would be easy to avoid trouble and take advantage of opportunities. You can see where that would lead. Investors would race ahead and ruin the whole thing. If they saw the market going up, they'd buy stocks. This would cause prices to rise before they were supposed to. And if they were going to crash, investors would sell off their stocks...and drive prices so low, the market couldn't crash - it would already be at bottom. Do you see where we're going with this? If investors - or anyone - could see what was coming, they'd short-circuit the process. Take the run-up in stocks on Wall Street today, for example. On Friday the Dow fell 62 points. If you knew it was going to fall for the next 2 months, you'd sell now? Why wait? And look at gold. It hit $931 on Friday. If investors knew it would be at $1,000 by the end of the year, it'd be at $1,000 now. If people could read next year's fashion magazines, they'd buy tomorrow's fashions today. Then, some wiseacre would buy the day after tomorrow's fashions...just to be ahead of everyone else. And then, nobody would want to be stuck with tomorrow's hairdo - it would already be out-of-style. And nobody would want to hold the stocks that were supposed to go up either. Other investors would have already bought them...and be on to the next thing. The stocks that were supposed to go up tomorrow would go down. Tarnation! All of history would move forward...faster and faster...as people tried to race ahead of trends before they even began...and in a flash...history would come to a blinding stop. We'd all anticipate everything that was going to happen. Why bother reading this book, we'd say to ourselves; we know how it will turn out. Imagine what would have become of Napoleon's march on Moscow. "Nah...count us out," his troops would have said. And what about Tojo's attack on Pearl Harbor? How did that turn out? "I think I'll go into the auto business instead," he might have said to himself. And what about all those homeowners who were speculating on higher house prices? Forget it...the whole bubble never would have happened...and so the whole credit crunch never would have happened either. And then where would we be? A New York Times financial reporter revealed how easy it was to fall into the housing debt pit in a confessional piece in this weekend's International Herald Tribune. Here was a smart fellow... His beat was covering the international monetary system and the central banks. He knew all about the credit bubble - he reported it to NYT readers. But while he was reporting on the world's bubble economy, his own finances bubbled up on him. A second marriage...a second house...pretty soon he had a mortgage that he couldn't pay - and that was before the bottom fell out. Now, he's months overdue in his payments and calls the mortgage company to see when they're going to kick him out. "Take a number," they say. "We've got hundreds of people to process." He's still waiting. Even when you think you know what is going on...you can be blindsided. The NYT reporter says he got into his mess with his "eyes wide open." Alas, that's the way it works. Even when you have your eyes open and your thinkin' cap on...still, things happen that you didn't expect. One way to protect yourself from these unexpected threats is by applying the seven "super shields" detailed in this report. "Gap between Boomers, young minorities grows," says a headline in USA Today. The report tells us that the Hispanic population is growing 16 times faster than the population of non-Hispanic whites. Not only does this gradually change the racial makeup of United States of America, it also highlights another gap: the old white people have the money. For that insight we thank the International Herald Tribune. Older people typically had already paid off their mortgages, so were less often caught up in the sub-prime crisis. The over-65 crowd reports only a quarter of the problems paying rent or mortgages as those 18-29. They also tell surveyors half as often that they're having trouble paying their bills. And get this; while the 18-29 crowd has lost millions of jobs during the last 18 months, employment among 65 and older Americans has actually gone up. Older people also report fewer investment losses. Their investments were relatively safer than those of younger people...and less affected - though still hit hard - by the downturn. But thank god for all the Hispanics. The feds are running up trillions in debts - much of which will be passed on to the next generation. At least the Hispanics are filling out the population - bringing millions of new debt slaves into the Land of the Free, so that old, white people can continue to live beyond their means. But wait a minute...aren't these same babies the ones who expect to receive free day care, welfare, unemployment compensation, free public schooling, food stamps, health care, government jobs and all the other benefits of a bread-and-circuses government? Hmmm...sounds like something's gotta give. Now over to Ian, who has the scoop on today's news out of India... "History's in the making this morning, on the other side of the world," notes Ian Mathias in today's 5 Min. Forecast. "Check this out... "That's the biggest one-day gain in the history of the Indian stock exchange. Buyers were so ravenous this morning that the guardians of the exchange had to halt trading - twice. Once the buyers broke the circuit breakers a second time - seconds after trading resumed - regulators shut the whole exchange down for the rest of the day. So what's gotten into traders in Mumbai? Or not what... but who? This guy... "Dr. Manmohan Singh was elected India's prime minister over the weekend. As finance minister in the early '90s, he was largely credited for breaking India out of its statist funk and introducing modern capitalist principles (which, for better and for worse, caused the Indian economy to quadruple over the following 20 years). Suffice to say, traders are betting he'll do it again. "'We don't want to sound like party poopers,' warn our Indian partners at Equitymaster.com, 'but the fact remains that the changes that investors and corporations are yearning for will not happen overnight. Although the re-election of the UPA government with Dr. Manmohan Singh at the helm, and most importantly without the baggage of the left parties, does set the ball rolling in the right direction, investors are advised to go overboard at their own peril. "'The problems that India Inc. is facing - like demand slowdown, leveraged balance sheets and a poor exports scenario, to name a few - do not get washed away with the election results. Hence, we urge investors to do a thorough bottom-up analysis and invest only in those stocks that boast of strong fundamentals from a long-term perspective.'" The 5 Min Forecast is a free service available only to subscribers to Agora Financial's paid publications. One such investment letter, called Capital & Crisis, does exactly the kind of fundamental analysis described above on the companies in its India portfolio. You can learn more about the newsletter and Chris Mayer's investing strategy here. And back to Bill, writing from Beantown... Poor Dermot Gleeson. The Irish economy is sinking...led by its banking sector. This makes bankers the most despised of all the Irish...and made Gleeson the target of egg-tossing shareholders at the annual meeting last week. The chairman of Allied Irish Bank had to dodge eggs while getting his message across - whatever it was. Warning to America's bankers: get ready to duck. So where's the surprise for us? What'll it be? Japan or Zimbabwe? We've already said we're expecting both Japan and Zimbabwe. What else could it be? And we're ready for them both. Well, needless to say, we'll be surprised like everyone else. And needless to say, we don't know what will surprise us. But we have an idea. Almost everyone we know is expecting a fairly quick up-move in inflation. Our guess is that that up-move might be a long way off. "It's a very funny and troublesome situation," said a fund manager in Boston last night. "The world's central bankers are committed to a policy of monetary inflation...which they call 'Quantitative Easing.' And they believe that inflation targeting is the way they can tell if their policy is working. That is, they believe they will know when to stop inflating the currency by looking at consumer prices. When consumer prices begin to rise, they'll be ready to stop adding to the money supply. In fact, they say they'll then turn the machine to reverse to take out the extra cash they've added. "So, they'll keep at it until the CPI goes up. But by the time they see consumer prices rise, it will be too late. By then, people will be eager to spend...to get rid of dollars. And once they begin to spend again, the velocity of money will go up. And with it, inflation rates will go up higher...and then dollar holders will want to get out of bonds quickly...because they'll see the next move too - a drop in bond prices. "Well, how could the Fed combat this rising inflation? And prices could be rising very, very fast. It would have to go back into the market and sell those bonds that it bought from the Treasury. Selling the bonds would have the opposite effect as buying them. Instead of creating money with which to buy bonds, it would re-absorb money when it sold them. People would pay money for the bonds...and the cash would be sequestered by the Fed. "So, you'd have the Fed trying to sell bonds just when everyone else was selling them. At that point, with the biggest bond buyer in the world turning into a seller, the Treasury market would collapse. This would paralyze the Fed. It might want to sell Treasuries. But, under the circumstances...with yields soaring and prices crashing...it wouldn't be able. So all the inflation that it put in the system would have to stay there...and inflation would have to run its course. "It's very hard to know what to do as an investor. I guess in theory you should stay long treasuries...buy them as long as the Fed is buying. And then you should go short...sell them, just before the inflation numbers turn positive...and just before the Fed tries to sell. But that is going to be very, very difficult timing. "I began buying gold for the first time ever last week." Until tomorrow, Bill Bonner The Daily Reckoning P.S. Selling the Dow and buying gold is the Trade of the Decade here at The Daily Reckoning. Like the Boston fund manager above we recommend you give gold a hard look now even if you haven't considered it in the past. You can learn exactly how to profit when gold heads to $2,000 by reading the special report here. ----------------------- Special Offer ------------------------- New: Pros and Beginners Love My "Bread-and-Butter Easy" Options Plays On Sept. 16, the Dow rose 1.4%. My readers booked a 150% gain that same day. On Oct. 6, the Dow fell 3.6%. And my readers booked a 168.75% gain. Up markets - down markets - it doesn't matter. I tell you what to do. I tell you when to do it. Huge, fast gains with options have never been this easy...read more. --------------------------------------------------------------- The Daily Reckoning PRESENTS: This week, the Mighty Mogambo takes on the job market, and the skewed numbers coming from the Bureau of Labor Statistics (BLS). As it turns out, some of the numbers just don't add up. Unless, of course, you look a little closer at where the numbers or coming from. But then it just seems like a load of... Well you get the idea. Read on... BLS Has One Letter Too Many by The Mogambo Guru Tampa Bay, Florida The big news, of course, is that the Bureau of Labor Statistics at the Department of Labor reported that non-farm payroll employment continued to fall in April, and 539,000 jobs were lost, which probably explains why they later note that "Overall, private-sector employment fell by 611,000" and that "the unemployment rate rose from 8.5 to 8.9 percent." Nevertheless, since December 2007 (when the recession began), they figure that 5.7 million jobs have been lost, and "since September 2008, manufacturing has lost 1.2 million jobs," which is Very, Very Bad (VVB), because manufacturing is how economies work; you make something that somebody wants at a price that gives you a profit. The really ugly news is that all of these job losses were are all private-sector jobs, since government hiring still goes up and up, every month, helping to make things worse and worse. Later on we get the surprising news that "The civilian labor force participation rate rose in April to 65.8 percent, and the employment- population ratio was unchanged at 59.9 percent." I don't know what "civilian labor force participation rate" means, actually, but judging from my own experience and watching other people at work over the years, we are a lazy bunch of whiners, and we seem to participate in actually working about two-thirds of the time, so this 65.8% thing looks about right to me! Hahaha! But it was the "employment-population ratio" being unchanged that got me, as it seems that, mathematically, the only way that it can stay unchanged when employment is falling is if the population went down! I was also surprised to see that the BLS reported that "Average weekly earnings, total private" is $614.53, whereas the average workweek is 33.2 hours. “...in the category of ‘professional and business services,’ that industry lost 122,000 jobs in April. The report notes that ‘Half of the April decline occurred in temporary help services,’ which is a particularly bad omen.” Now, I look at this and I scratch my head in puzzlement, and after grabbing a calculator and beating it into submission by repeatedly punching in $614.53 a week times 52 weeks to find the "average" annual income, I see that the average income is $31,955.56 a year. And yet when you look at the salaries of those who get paid through taxation or self-imposed fees on customers and/or taxpayers, they make at least twice that! And sometimes it is whole multiples of that, as it is not uncommon for some agency or college or city manager butthead to pull down a quarter million bucks a year! Sometimes more! Hahaha! My disrespect for "public servants" who make more than their employers (the taxpayers) while doing an obviously poor job aside, in the category of "professional and business services", that industry lost 122,000 jobs in April. The report notes that "Half of the April decline occurred in temporary help services," which is a particularly bad omen. To make sure that you understand that inflation in healthcare will continue at its staggering pace, the report also notes, "Health care employment grew by 17,000 in April. Job gains in health care have averaged 17,000 per month thus far in 2009, down from an average of 30,000 per month during 2008." Of course, employment in federal government jobs "rose by 66,000 over the month largely due to the hiring of temporary workers for Census 2010 preparatory work," which means that these people will be on the payroll in 2009, 2010, and probably 2011 as they fan out to identify where everybody lives and force them to answer a lot of embarrassing questions, like, "Would you describe your house as a 'pigsty' or an 'eye-sore?" and the wife and kids are yelling out over your shoulder, "It's a hell-hole! An ugly hellhole!" The Really, Really Bad News (RRBN) is when you look at the U-6 estimate of unemployment, which includes "Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian population plus all marginally attached workers," and which was 15.8%! No wonder, then, that John Williams at shadowstats.com figures that unemployment is actually running closer to 20%! There were also some big downward revisions for prior months, and the laughable Birth/Death Model assumed, for no particular reason that anybody can actually discern, that another 226,000 "hypothetical jobs" were created in April, including 76,000 jobs in leisure & hospitality, 65,000 on professional & business and 38,000 in construction! Hahaha! Things are looking bad for everything except gold, silver and oil, which is good because they are all cheap as hell right now! Whee! This investing stuff is easy! Until next time, The Mogambo Guru for The Daily Reckoning Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page. ----------------------- Special Offer ------------------------- You could have turned $5,000 into $1 million... Make one buy each week...because since 2006 not a one has lost value! Before you could've turned $5,000 into $1 million in just over five years... Now, we're closing on $2 million!   The Daily Reckoning - Special Reports: Fiat Currency: Using the Past to See into the Future History of Financial Disasters: Will you be Wiped Out?