Inflation? "The Obvious is Obviously Wrong"

The word on the street today came out that there is no need to worry about inflation and the market shot up over 100 points, while gold dropped over $25 intraday points in two days. Was all this the result of removing the word accommodative? Bull S_it! As a matter of fact I will be betting that the market will sell off tomorrow morning.

With my limited knowledge of the English language, it's my interpretation that Greenspan did not change a thing. He just twisted the words around, like only he can do, and ended up saying exactly the same thing as he said before while still allowing everyone to take out from his speech exactly what they want to see.

It has always been my opinion that Greenspan has always realized full well the corner he was forced to paint himself, the FED and the economy into, due to the 2000 recession and Bursting Stock Market Bubble, followed shortly thereafter by 9/11. And for the last 13 months, he has been trying desperately to right the wrongs he has caused without plunging the economy into a recession: A recession that he has nightmares about, that he's afraid could quickly turn into a depression entailing major worldwide financial dislocations. So far, he and the world have been lucky and just maybe he may be able stall the crash until as much as 6 months after he has left office, so that the blame will fall squarely on Bernenke's shoulders. I can puke listening to one tout after another tell the world how undervalued this market is and how inflation is under control at 2.5%. First of all, 2.5% inflation is not under control in my books. Just plug in the numbers and see what 2.5% compounded inflation comes to in 10 or 20 years. Secondly, who in their right mind believes that inflation is only 2.5%? Maybe if you count only rentals to calculate housing costs, but when 70 % of the population own their own homes and those costs are skyrocketing, then who is kidding who?

Are 18% annual increases in health care costs not considered inflationary?

If transportation prices are held constant, but you then have to ad a 25% fuel surcharge, is that considered price stability and non-inflationary because the posted price didn't change? What will the rising energy costs do to your heating bill this winter as well as to your food bill, since energy is a significant cost in growing and shipping food to your local supermarket? But then again, we leave out food and energy.

Every single thing we buy involves fuel, if for no other reason that it has to be shipped to us, let alone the amount of oil needed to produce almost everything we buy.

Of course the 2% of your losses due to hurricanes and tornados not covered by insurance, that we all must absorb, is not accounted for in our inflation calculations either. BUT who cares, 2% or 10%, it's all a bunch of B.S. anyway. If the governments say that inflation is 2.5%, then that's what it is. The economy is doing great and nothing else matters. LIVE FOR TODAY, FOR TOMORROW MAY NOT COME.

OK let's take a look at the economy itself.

The best thing that you can say is the economy has been growing at above 3.5% a year which is above trend, going on 12 quarters. That's the best performance in our history and yet the media and democrats still keep trying to talk it down, just like they are doing to our progress in Iraq. Don't think for one moment that we will not be paying a severe price for that. But the major problem is that all good things must come to an end and the more the economy is allowed to overheat, as we are now doing, the more severe the ensuing recession will be. Do you realize that even with 13 rate increases, interest rates at 4.25% are still negative (below inflation rate)? Exceedingly low interest rates for a prolonged period of time may be good for the stock and bond markets short term, but it will eventually be devastating to the Recession that must eventually follow. How long can we continue to ignore $700 billion plus trade deficits, representing more than 7% of our GDP as well as our $600 billion budget deficit?

How much longer can the consumer continue to spend more than he earns? We, as a country, have been in Negative savings for more than three years now. How much longer can the world ship 80% of their savings to us to cover our deficits?

Believe or not, we are in a period similar to the early 70's; the last time we were in a Guns and Butter economy and you all remember what happened then both to the economy and especially to GOLD. We are, however, in much worse shape this time around, as the baby boomers approach retirement and both Social Security and Medicare/Medicaid rapidly approach bankruptcy. Something must be done immediately or it will be too late, if it's not already too late.

CONCLUSION

There is more, much more, but I think you all get my point and it serves no purpose to beat a dead horse. Bull Markets and economies always peak during the best of times, amidst the best of news. A successful Iraqi election followed by some clear signs that the war against the terrorists could be the spark that blows the DJII into new all time highs. All markets (stocks, bonds, and real estate) will then be more over owned and overbought than they ever were in history; more so than they were in 1929 or 1989 in Japan, only this time we have no gold and no savings. The Markets should peak sometime between NOW and February 2006. Sell into all spike rallies of 150 points or more and check for the sentiment indicators: When they spike to new all time high bullish readings, start looking to go short. Start with the stocks that have already started their down trends by having broken below their 50 day moving averages. But whatever you do, get out of the market and pay off your short term debt.

GOLD

All of you who have been reading my letters over the last four years know that my advice concerning Gold has been very consistent. BUY BUY and BUY some more. Don't sell into rallies; just add to your positions on pull backs. Gold is going to prices that none of you can not even imagine. Try $5,000 plus…and not because of inflation. Gold may run to $1,000 because of inflation, but the real move will come because of abject fear as one currency after another begins to collapse.

The nice part about my forecast is that you don't have to believe me completely now. Just continue to play your games, but also continue to accumulate gold. Also, continue to watch for the signs that I have warned you about. The first will be either Gold hitting $1,000 or the stock market crashing. The economy falling into recession should be your final sign. If by then you still don't believe, then GOOD LUCK to you.

Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
[email protected]
561-840-9767

13 December 2005