-- Posted Sunday, 11 January 2009 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
“Phenomenally accurate forecasts”
We challenged readers to tell us how inflation could possibly occur with asset values, credit and business collapsing around the world. The response has been overwhelming and hugely insightful, and we promise to air your comments in the days and weeks ahead. One submission in particular, however, warrants the urgent attention of all: a recent essay by Peter Schiff, The Fed’s Bubble Trouble. A fellow gloom-and-doomer with an impressive forecasting record and the guts to tell it like it is, Schiff offers a scenario that is as persuasive as it is frightening. It also holds extremely bullish implications for gold, although we would be wary about holding onto the stuff for too long (see the essay linked below).
Schiff begins by noting that speculators started loading up on Treasury paper a few weeks ago, after the Fed explicitly committed itself to buying as much U.S. debt as it takes to hold interest rates down. For the speculators, this is practically a guarantee of riskless profits, and Schiff is most certainly correct to infer that the day is coming when the speculators will unload their inventory on the Fed with a vengeance. I won’t spoil the suspense for you concerning what is likely to happen next, since Schiff has spelled it out so lucidly in his essay. But suffice it to say, the outcome is hyperinflationary, and it would leave the financial system in smoldering ruins.
Although there do not seem to be any significant holes in Schiff’s thesis, he doesn’t tell us how an investor might protect himself as the financial system whipsaws from deflation to hyperinflation, and then back to deflation. And that is exactly the way we believe things will play out, although Schiff’s scenario goes no further than the hyperinflationary phase. He is also evidently too modest to say that he could not be wrong, so we’ll say it for him: The scenario he has described seems nearly airtight. He has left us an escape route, but judge for yourself whether he did so merely to avoid the implication of hopelessness: “To avoid this nightmare scenario,” he wrote, “the Fed should pull out of the bond market before it’s too late.” Fat chance.
Panic Into Hard Assets
If Schiff is right, there will be a panic like no other before it to convert dollars into hard assets. Gold will probably be the first such asset on every panic-stricken investor’s mind. However, having told you why we think the resulting price spike would be unsustainable (If Gold Hits $5k, Would You Sell?), we are obliged to come up with some alternatives. To that end, we would ask that you take a short survey. Our goal is to find out how readers would react in an all-out financial panic. There are just two questions in the survey, the results of which we promise to share with you. To access the questions any time after 1 a.m. Sunday (EST), click here.
The emphasis of Rick’s Picks will skew heavily toward the inflation/deflation question in the weeks ahead, because it’s crucial that we get it right We don’t expect a repeat of the Weimar hyperinflation of the early 1920s, though. That episode grew out of a period, not of deflation, but of relatively mild inflation from 1915–1919; and, reparation payments aside, there was a strong incentive – fear of unemployment -- for Germany to inject money directly into the consumer economy.
Home Prices Won’t Soar
We also believe that home prices will not soar even if Schiff’s monetization scenario comes to pass. And there are two variables that make the process, if not the disastrous outcome, somewhat unpredictable: 1) the speed of the political response (i.e., how quickly the government expands its hyperinflationary efforts to encompass not merely the bond markets, but credit default swaps and other derivatives; and, 2) how quickly the earliest beneficiaries of hyperinflation deploy their vaporous cash into real assets.
Also, we’ll need to consider the fact that a perceived hyperinflation would destroy the long end of the yield curve, creating losses for holders of long-term bonds that would more than negate windfall profits on the short end. Under the circumstances, the scramble to shift collapsing currency into hard assets could be over in a matter of days; and then, the inevitable detumescence. The end result could be that neither inflationists nor deflationists would avoid ruin.
We’ll be exploring this conundrum in the weeks ahead, so stay tuned!
***
Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2007, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Sunday, 11 January 2009 | Digg This Article | Source: GoldSeek.com
