Sometimes the Wizards of Washington and Wall Street remind me of the characters in the great classic movie "The Wizard of Oz". I watch the movie every few years because it keeps the child within alive and well.
The dialogue that most caught my attention the last time I watched, and that seemed most relevant to the world we live in, included the words spoken by the wizard into his microphone after being discovered by Dorothy…
Pay no attention to the man behind the curtain! The great, er... Oz... has spoken!!
And, a few moments later, when the full extent of the wizard's deceit had been revealed…
Dorothy: Oh, you're a very bad man!
The Wizard: Oh, no, my dear, I... I'm a very good man – I'm just a very bad wizard.
Now I'd like to wax eloquent on this colorful comparison between a fairy-tale and the witches brew that the politicians and pundits are trying to get the public to believe, but I like the way the people at Casey Research recently described it:
What better phrases could one concoct to describe the meddling political class that make it a part of their daily regime to deceive, coerce and cajole the public into pacific cooperation with their many poorly conceived and incompetently executed policies.
It is thus that we have begun to hear President Bush, Treasury Secretary Paulson and Fed Chairman Bernanke clear their throats and warble a harmonious tune, the lyrics of which tell us that it is in the interest of the U.S. to have a strong dollar.
In response, the mental Munchkins that largely populate investment markets comically opened their eyes wide and, scampering around waving their hands and bumping into each other, began shouting "The dollar is rising, the dollar is rising… the wizards said so!
As with the movie, outside of some entertainment value, these antics don't add up to anything worth paying real attention to. That's because no matter how many impressive-looking levers the wizards pull, or how many buttons they push, the U.S. dollar is doomed. And so, in time – and probably in concert – is the euro and all the other fiat currencies of the world.
The evidence for this coming true, and probably in our lifetimes, continues to mount. And that evidence suggests the monetary crisis is still in the early part of opening scenes."
The Shocking Inflation Numbers
The inflation numbers around the globe, even the suspect sort foisted on an increasingly skeptical public by government officials, paint a dim picture for anyone who hasn't taken steps to protect themselves and profit.
A quick flipping through the pages reveals both the seriousness and extent of the rising inflation: China, up 8.5% (though probably over 10%); India up 7.6%; Russia, up 14%; the Ukraine, up 30%, the UAR, up 11%; Egypt, up 16%; Qatar, up 17%; Venezuela, up 29%; Pakistan, up 17%; Indonesia, up 9%, Saudi Arabia, up 9.6%; Vietnam, up 25%, Bulgaria, up 15%, etc., etc.
Closer to home, Canada's central bank, expected to lower rates, has held them steady, naming inflation concerns as the reason. The European Central Bank is threatening to lift them for the same reason.
The implications for the U.S. wizards are that they are increasingly under pressure to do more than just talk about inflation. Especially with the latest CPI numbers, reported today, showing inflation in the U.S. running at 4.2%. Using the older formulation, ShadowStats has the real number now running at 11.8%. (Based on how much more we pay these days for, well, everything, we have to go with the ShadowStats number.)
Of course, the prescribed way to deal with inflation is to raise interest rates – which are now well below the inflation rate. Failing to do so risks an epic dollar crisis, not the merely serious one that has knocked the dollar back by about 11% over the past year.
Absent higher rates, foreign investors will increasingly find reasons to look elsewhere for higher yields on offer and/or dump their depreciating green bits of paper for things more tangible. Gold and silver, to name two. But it could just as well be a big resource deposit… or buildings… or farmland or… or… pretty much anything with real value that the government can't make more of with the flip of a ready-to-hand switch.
So, the pressure is building for the U.S. wizards to reach for the interest rate lever. But not quite so fast; as I don't need to tell you, the U.S. economy isn't exactly skipping down Good Times Boulevard.
While it is becoming somewhat tedious to report, once again this week we heard bad news on the housing front that year-over-year foreclosure rates rose by 48% last month. And that bank repossessions nearly doubled.
Also this week we had word, as reported by the Daily Banking News, that the Bank of International Settlements (think, central bank to the central bankers) is warning we could see another depression due to "loose monetarist policy." A quote:
The Bank for International Settlements [BIS], the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.
In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.
According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.
Meanwhile, hard-pressed U.S. consumers of food products have been glued to CNN reporting that large swaths of the fertile farmland of the Midwest are, thanks to nearly biblical levels of flooding, suitable only for providing food to fish.
As bad as the outlook for food prices was up until a week ago, it is now much worse. And if energy prices continue to defy gravity, well, the aspects of runaway inflation that are the most painful are in the near future.
The bottom line remains that the U.S. is in the grips of a serious inflation but also caught in the vise grip of a potentially severe recession, putting the wizards squarely on the horns of a dilemma.
ETFs like GLD and SLV should be big winners in the years ahead, and the price of gold and silver, which today look high at $880 and $16.50, may someday make those prices seem so low that we will look back and pine for the day when we could have bought in at those prices.
Gasoline at $7 a gallon and a loaf of bread for $10? Yes, they are a definite possibility in the next few years. Oh yes, and how about the cost per-square foot of building a home in North America? Would you believe $500 a square foot will someday seem like the norm?
Here's another insight from the Money Rumor Mill. Oil and natural gas might be taking a big dip downward in the next couple of months. Some surprise announcements and carefully timed manipulations may open the supply floodgates and thus an unexpected price correction.
This may afford some nice short-term buying opportunities for such gems as ConoccoPhillips (NYSE:COP), Chesapeake Energy (NYSE:CHK) and one that I hope to write an article about soon called Sandridge Energy (NYSE:SD), started by former Chesapeake President Tom Ward. He is one of the biggest shareholders and he seems to be on a tear buying up larger and larger blocks of SD on pullbacks.
I smell a coming, delicious opportunity for inflation-weary investors. Expect the unexpected, and beware of the man behind the curtain.
