The Coming Inflation, An Equity Bottom, Changing of the Guard, Food Fraud and More!

by Addison Wiggin & Ian Mathias

  • Treasury plans record bond auction… John Williams on the great inflation of 2009
  • So inflation is a-comin’… is it too early to invest?
  • One chart shows a bottom may be near
  • Changing of the guard… how a U.K. bank quietly overtook control of the NYSE
  • Alan Knuckman exposes food industry fraud… why haven’t grocery bills deflated along with everything else?

 

  The U.S. Treasury will attempt to auction of a record $34 billion in 3-year notes today. Including new auctions for 10- and 30-year paper tomorrow and Thursday, the Treasury is slated to offer over $62 billion worth of government debt this week alone.

If you had a printing press that could roll out a hundred $100 bills a second — $10,000 a clip — it would take you over 39 days of 24/7 effort just to print out the money needed to finance today’s auction… another month to cover our tab for the rest of the week.

“We’re doing more in weeks than other countries do in years,” Treasury Secretary Geithner bragged yesterday. Yeah, no kidding. That’s what scares us.

  At this Web site  you can trade futures on how long you think Geithner will remain as Treasury Secretary. Heh. “Intrade’s way behind the times,” adds our colleague Dave Gonigam. “I opened the Geithner Resignation Pool last month.” Indeed he did… check out his thoughts, here.

  “The Fed is looking to debase the U.S. dollar as a cure for possible deflation,” notes John Williams. “The approach was outlined by Federal Reserve Chairman Bernanke back in 2002, when he was a Federal Reserve governor. It goes like this:
 
“As the Treasury issues new debt tied to expanded funding needs from the Obama stimulus package and declining tax revenues, the Fed can buy that debt directly, thereby monetizing the new issuance. The cash then would flow directly to the bank accounts of those receiving the government’s checks, without a drain of cash on the system caused by lending that money to the government. The action might give the money supply a more direct boost than has been seen with banks parking their excess reserves with the Fed.

“Whatever looms, both the Treasury and the Fed will keep doing whatever they have to do in order to preserve the depository system and to debase the dollar. The cost of systemic salvation ultimately remains much higher U.S. inflation and a much weaker U.S. dollar.”

  “Since a powerful new inflationary trend is very likely to occur,” comments Eric Fry, “the prudent investor should probably take steps to guard against it. “But wait a second!” some readers may be saying. “What if a powerful deflationary trend occurs first?”

“Good question. It might. But we’d begin preparing for inflation anyway. Why not prepare for the near-certain arrival of inflation, rather than the uncertain timing of it.

“If an infallible clairvoyant told you that your house would burn down in one of the next five years, would you say to yourself, ‘Gosh, maybe I should try to figure out which year it will be and not buy fire insurance during the other four years.’

“You might actually guess correctly, in which case, you would have saved yourself four years worth of insurance premiums. But you might guess incorrectly, in which case you would have lost your house.

“Your call.”

  One way to prepare early is to buy gold. After a nice pop, gold has seen some profit taking today. The spot price is down about $30 from yesterday, to $910 an ounce.

  The dollar is notably weaker today, too. Currency traders suddenly decided dump the dollar… and buy stocks? The dollar index is down a full point from yesterday, to 88.1.

  So what’s gotten into the stock pits today? Mostly hype… Citigroup CEO Vikram Pandit surprised the world by declaring that Citi had (gasp!) turned a profit in the first two months of 2009. That alone popped shares of Citi over 20% in pre-market trading, and has given traders the excuse they needed to take a break from relentless selling. The market is going absolutely gangbusters as we write… the S&P 500 was up over 5.5% by midday.

(We have to congratulate Options Hotline readers again today. After pulling in triple-digit gains on index puts last week, they’re up 51%  thus far today, thanks to the financial sector calls they picked up Monday morning. And as we promised yesterday, this is just the beginning… learn about our “600% gains in six months” guarantee, here.)

Yesterday, traders brushed off the news of the Merck/Schering-Plough merger and focused on the fundamentals, which are still lousy. The Dow and S&P 500 fell about 1%. The Nasdaq dropped 2%.

  “When the market is at 12-year lows,” US Global Investors CEO Frank Holmes points out today regarding the market’s limpidity of late, “it’s important to not let yourself be overwhelmed by pessimism, and perhaps even despair.

“As the chart below shows, the market hit 12-year lows in 1932 and again in 1974. The good news is that it came three months before the end of the bear market in 1932 and marked the low of the 1974 market, according to the report.

“In both 1932 and 1974, the market bottom came four-nine months ahead of when the U.S. economy hit bottom. That bit of historical perspective lines up with the consensus calling for recovery in the third or fourth quarter of 2009.”

Interesting. Frank will be speaking at our Investment Symposium in Vancouver at the beginning of the third quarter, July 21-24. You should join us. This year, we’re marking two auspicious occasions. It’s the 10th anniversary of the Symposium. It’s also the 10th anniversary of our flagship e-letter The Daily Reckoning. With or without a 3rd-quarter recovery, we intend to commemorate well. For details, please call Barb at (800) 926-6575 and tell her Addison sent you.

  The global economy could contract as much as 3% this year, the IMF guesses today. Just a few days after World Bank offered its cryptic forecast of economic contraction, the IMF announced today that the group “expects global growth to slow below zero this year, the worst performance in most of our lifetimes.”

  Barclays, the U.K.’s third-biggest bank, will soon be the biggest market maker on the New York Stock Exchange. Barclays quietly bought Bear Wagner, one of six remaining NYSE market makers, from JP Morgan Chase today.

Coupled with its fire sale purchase of Lehman Bros, Barclays has slowly, but surely positioned itself as the largest transaction house on the Big Board. By April, it will be tasked with conducting trades in 850 securities.
 

  Oil prices have been remarkably resistant this week. Despite the usual gloom, the front-month contract rose up to $47 a barrel yesterday and has stayed put since. We’ve been hearing buzz about more OPEC production cuts… we’ll see what pans out.

  “U.S. food manufacturers,” declares our resource man, Alan Knuckman, with a consumer protection warning, “are trying to get one over on a public that may still have visions of last year’s all-time highs for food ingredients.” We’ve already disclosed shrinking peanut butter jars and cereal boxes. Now this:
 
“Sales of Kraft Macaroni & Cheese jumped more than 20% in 2008 as families chose less-expensive meal options, even as the price increased 9% in the last 12 months. But the price increase comes as the main ingredient in macaroni, wheat, has declined 68% since Last year. Kellogg’s Corn Pops have also seen the product price rise 17%, with corn down 52% over the last year. Milk has dropped so much that farmers have poured it down the drain and gallons can be found at stores for less than $2. Yet Edy’s/Dreyer’s ice cream has raised prices 14%, with milk down 36%.

“Add to this the lower energy costs to make and distribute these products, and profit margins are on the rise. The companies are entitled to make money, but customers are making a shift to generic or house brands at such a staggering pace — it will offset the gouging by major food companies who cried wolf when raw material prices were higher.”

As always, caveat emptor.

  “You better be careful,” writes a reader with a comprehension disability in response to yesterday’s issue, “not all your readers are Rushpublicans. Most people will put Rush on mute, and the same could happen to you. A lot of your stock picks are down significantly, so you, like a lot of investment advisers, are putting the blame on Obama. Eighty-some percent of people polled says that Obama inherited this problem. Where would we be today if McCain had become president? The Dow would probably be about 500.”

The 5: If you think we’re blaming Obama… or parroting Rush… you either haven’t been reading very long or you haven’t been reading very carefully. Thanks for reading, though. By the way, citing polls about populist politicians is a pitiful way to prop up your point. Nor are we investment advisers, per se. That’s a distinction made clearly by your pals at the SEC.

  “Right now, I am hearing and meeting too many people,” writes a speculator from Canada, with the first of two countertrends we will be keeping an eye on, “that are talking about gold, and buying gold. I am also seeing a lot of signs in jewelry stores saying that they will buy gold jewelry. This is similar to 1979, when I stood in line with my father to sell some gold jewelry and dental gold (he was a dentist). We also did a similar thing when Bunker Hunt tried to corner the silver market…

“If too many people are buying gold, and too many are talking about it, and even more people are talking about the possibility of inflation, then chances are the price of gold will rise and then crash… The masses cannot be right. In the long run, Mr. Market is a cruel and unfeeling sadist. From what I can see right now, the greedy and stupid are going into gold.”

The 5: Newsweek published this article on gold investors yesterday in which we were briefly cited. If you’re a “magazine cover” contrarian, the fact that Newsweek has published this story will give you pause.

  “An increasing number of Americans are now predicting the end of the euro,” writes a third reader, with our second potential countertrend. “I think this is dangerous because they will almost certainly be wrong. The countries that have huge financial problems they speak about are mostly not in the euro area, though they are members of the EU. California is literally bankrupt, but that does not mean the USD will break apart. Just imagine what would happen if, for example, Spain decided to go out of the euro. Who would want that currency? Who would invest in that currency? It would have interest rates soaring to double-digit levels and kill their economy completely.

“In addition, they suggest that Europe has bigger problems than the USA. This is factually wrong:
 
“The USA has a huge real estate problem, resulting in a huge mortgage problem. It has a consumer credit problem, and banking problem, it has a huge state deficit problem (12% of GDP), it has a savings problem and it has a dropping economy. The euro area also has a banking problem and a dropping economy. But the euro area does not have a big mortgage problem, it does not have a consumer credit problem, it does not have a savings problem and the state deficits will go from 3% of GDP today to probably 6% of GDP in a worst-case scenario, a mile lower than in the USA.”

The 5: Hmmmm…

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Due to reader demand, we’ve asked Patrick Cox to update is special report on investing in stem cell technology. Yesterday’s announcement from the Obama administration caused a flood of interest… both in stem cell stocks and Patrick’s letter, Breakthrough Technology Alert. So Patrick has happily obliged, and you can read his report here. 
 
And if you’re at all interested in investing with Patrick’s help, we urge you to get on board soon. In order to protect the thinly traded stocks he often recommends, we’ve decided to cap his subscriber base to just 510 more readers. So if you’re curious, get the details now… right here. Don’t wait, these spaces are going fast.
 

 

rspertzel

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