2011’s Wrecking Ball

by Addison Wiggin – January 18, 2011

  • “Like a wrecking ball”… Chris Mayer on what inflation will do in 2011, and how to prepare

  • “Widespread complacency”… Dan Amoss’ on the biggest Black Swan looming this year

  • The sham behind the latest Goldman-Facebook announcement…

  • And an Internet IPO that could make a lot more sense, LOL

  • Readers wonder about gold’s future when the reserve currency vaporizes… come face-to-face with reality on the dealer lot… and tell us how to stick it to Starbucks…

This morning, we see Britain’s consumer price index grew in December to an annualized 3.7%. Fuel prices are growing at their fastest pace since July, and food prices are zooming at a rate last seen in May 2009.

Like the U.S. Federal Reserve, the Bank of England has an inflation “sweet spot” of 2%. But Britain’s CPI has been above 3% for 13 months now. Unlike in the United States, even the “core” rate of inflation in the U.K. is rising at an alarming 2.9%.

”If history is any guide,” Chris Mayer contends, “inflation will likely get much worse. Everyone seems to know the U.S. inflationary story of the 1970s. The official inflation rate hit nearly 14% by 1980.

“In other countries, it was worse. In the U.K., inflation topped out at 27%; in Japan, 30%.”

“The year 2011 is the year when inflation will play the role of wrecking ball,” Chris declares.

“Emerging markets have been a vital part of the investment story of the last decade, for sure. Yet rising food and energy prices pose a big risk to them.

“In India, food prices are at their highest levels in more than a year, rising 18%. The dabbawalla, when he is done delivering lunchboxes, trots off to the market and finds that the price of onions has doubled in only a few months. Even the basics, like potatoes, have become expensive to the average Indian.

“In China, the typical Chinese also faces rising prices for nearly everything. The official inflation rate recently hit a 28-month high. But it’s the surging price of coal that may prove to be China’s Achilles’ heel, at least in the short term. Coal is what powers the great boom in China. And coal is at two-year highs.

“The basics like food and energy are like brakes on these economies.”

But that’s not all they will put the brakes on… here’s an old video of Jim Rogers, Vancouver keynote, saying that given the current reckless spending and printing strategy in Washington, we’ll eventually experience “an inflationary holocaust.” In 4:33 or so is the mark that he gets into the holocaust theme.

Here’s another one from our friend Ron Paul laying into Ben Bernanke a while back. In the 3:43 mark he “goes off” on the Fed chairman explaining how money printing is already hurting retirees.

And for good measure here’s video of another Vancouver veteran, Nassim Taleb, saying he feels more jittery about a currency crisis now than he did when he left his native Lebanon during a meltdown.

Fact is, once it gets started, inflation is hard to stop. Not that Wall Street bankers or your friendly Washington representatives give a hoot. They’re not the ones who get walloped when money stops buying necessities… and interest rates spiral upward out of control.

Our managing editor, Chris Mayer, has been investigating the harsh realities of the impending inflationary environment and the impact it will likely have on you… check out his report here.

On the trading floor today, the Dow is up, the S&P is flat and the Nasdaq is down. Among the nuggets traders are digesting…

  • Apple is off 4% on yesterday’s news that CEO Steve Jobs is taking an indefinite leave of absence to deal with a health issue he’s not disclosing

  • Citi is off 5.5% after an earnings report best described with a word rhyming with “Citi”: Net income of 4 cents a share was just a wee bit off the Street’s expectation of 7 cents.

“I don’t recall such widespread complacency about risk assets in the face of obvious macroeconomic risks,” says our stock market vigilante Dan Amoss, “not even in spring 2008 when our research on Lehman Bros. pointed to massive insolvency in the U.S. financial system.

“In the wake of the March 2008 Bear Stearns bailout, an aggressive Federal Reserve was captivating the market (as it is now). Meanwhile, the stock market was ignoring both rising pressure on the CPI and intensifying pressure on asset values at banks (as it is now).”

Just what could blow up this time? A sudden slowdown in China is a good candidate… or maybe a run-up in oil prices to $120 a barrel.

“The most likely catalyst for a return to stress in credit markets will be elections in Ireland,” Dan bets. “These elections, expected sometime in early 2011, could result in a government that repudiates the deal that the current government made with the EU for a bailout of Irish banks last December — which was really a temporary bailout for the rest of the European banking system.”

In short order, the government bonds of the PIIGS countries “could play the same role in the European banking system that toxic mortgages played in the 2008 U.S. banking crisis.”

Into this volatile Irish stew, a new combustible ingredient just got thrown…

The Central Bank of Ireland is financing a fresh €51 billion bank bailout — er, emergency loan program — by “printing its own money,” according to the Irish Independent.

“A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks,” the paper explains, “not borrowing cash from the ECB to fund the payments.”

One of the underlying notions of the euro — that its member states would outsource monetary policy to the European Central Bank — just came undone. Hmmn… this will be fun to watch.

Dollar weakness is putting a little air back in gold’s sails today. The yellow metal has firmed to $1,369 as the dollar index has slipped below 79.

Silver’s move up today is even stronger, to $28.87.

China’s President Hu meets tomorrow with President Obama in Washington. “It is likely that this will be a positive dollar event,” says our currency trading expert Abe Cofnas, “as neither side wants to rock the markets with bad news.”

With that in mind, Abe’s small circle of readers laid on a play just this morning that could deliver gains of 455% by Friday… trading a market followed by no other U.S.-based publisher.

Similar recommendations last year delivered gains of 162%… 369%… even 1,329%… all in five days or less. For over six months now, access to Abe’s recommendations came only with membership in the Agora Financial Reserve. Watch this space for details on their general release.

And what’s this? Now U.S. investors are going to get shut out of the world’s greatest private placement ever?

All of a sudden, Goldman Sachs won’t allow its U.S. customers to take part in the $500 billion investment it’s making in Facebook.

As the story goes, Goldman got skittish because the SEC says once you have more than 500 shareholders, U.S. companies have to start publishing more detailed financial information, which Facebook would rather not do.

“The offer will still be open to investors elsewhere,” says the Financial Times, “but the bank said that the high level of publicity the plan had generated threatened to put it in breach of U.S. securities laws.”

The scheme is as transparent as Facebook’s business model is opaque. Foreign investors, beware.

In the meantime, American money can be used wisely for ventures like this…

The Cheezburger Network, which started with two websites and has now exploded to 50, just snagged $30 million in venture capital to expand its staff and go international. Its business model is pretty ingenious: User-generated content that has the ability to “go viral,” so both content creation and distribution are darn near free.

Founder Ben Huh says the sites have been profitable from the start, which is pretty remarkable for anything launched in the maw of the worst postwar recession. That or just plain stupid. Moar powr to yuh, Huh.

“What are the history lessons surrounding the gold (and other commodities) spot price when the reserve currency disappears?

“If the U.S. currency is on a path of elimination (at least in terms of it being the reserve), it is obvious that the value of those commodities will rise in relation to that weakened piece of paper, but what happens (and how) to the ‘value’ of these commodities when a new globally accepted currency reserve is implemented?

“Wouldn’t the ‘real’ value of these commodities be restored? And if so, the advantage of investing in physical gold is therefore ‘limited’ to maintaining a hedge against the devaluation of the current reserve currency (as opposed to real investment appreciation)?”

The 5: We don’t have any real “history lessons” helping us understand what happens to the gold price when the reserve currency goes away. There are no precedents. As the Spanish, and later the Dutch and finally the British ceded their global economic primacy, the new top dog had a gold-backed currency to take its place.

Today, there is no such thing. One thing we do know… the change doesn’t happen easily. War and political intrigue will play a role. In the meantime, check out this special report on the subject.

“I just had an interesting experience I thought I would share with you and your readers. I have had the misfortune of looking to buy a new car and going to various dealerships. On visits to dealers that were selling EU cars (Audi, BMW, VW, etc.), I noticed that there was almost no inventory and a wait of almost four months for any car that I would order.

“I asked why and the response was stunning. I was told that the U.S. is no longer a decent percentage of the market for these carmakers. They get higher margins with significantly more volume in the Asian countries.

“That is the first direct example I have seen from the reordering of the world economy. I used to be able to walk into any of the dealerships and have a choice among lots of cars. No longer.”

“Here’s how you beat Starbucks at their own game,” a reader writes in reply to our item about the new super-sized ice drinks for which you pay a whole lot more and get just a little more. “I love Starbucks’ large, iced lattes, and have for a long time, but I hated paying $4.50 for them. Now it looks like I’ll have to pay even more for their new super-size scam.

“To get around it, order two shots over ice in a large cup. This drink costs $1.95 (recently went up around here to $2.10). Next, take your drink over to the bar and add your sweetener, flavorings…vanilla powder, hazelnut, chocolate, etc. and the fill it up with half-and-half from the container on the bar.

“Voila!…you now have a large, flavored iced latte for around $2.00… enjoy!… (and you save around $900/year too!)”

The 5: Or… don’t go to Starbucks. Their coffee is bad at any price.

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S.: “I appreciate Chris Mayer’s commentary in Monday’s 5 on what to expect in food prices,” writes a Reserve member, “but he, obviously, doesn’t do the grocery shopping in his household. He may have cited Wells Fargo forecast of 4% increase in food prices, but between packaging size reductions and slight price increases, we’re currently running between a 10-15% increase on core grocery items.

“Add that with the upward trend in energy prices, you’re slowly barking up a tree that’s 15-20% higher than what we started with a year ago. I realize the government knows more than me, but my checkbook balance is markedly lower at the end of the month than it was a year ago. So f…k the government.

“We have much bigger problems than the hoi polloi imagines. This is just the beginning of the inflation onslaught, and we’re already at 15% on just two life necessity categories. Look out: When TSHTF here soon, it’ll be a mess that won’t be able to be cleaned up.

“Thanks for keeping everyone on our toes.”

What to do about it? Read The Great Retirement Holocaust, right here.

rspertzel

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