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Marc Faber: 10-20% Inflation Coming to the U.S. 20 comments

by: TraderMark June 23, 2009 | about: DIA / QQQQ / SPY    
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The latest short snippet of Marc Faber - He calls 10-20% price increases Hyperinflation which is interesting, because most associate that term with Zimbabwe or the Weimar Republic. But he makes a good point; if you annualize 10-20% purchasing power losses over half a decade, it wipes out much of your buying power very quickly.

On the plus side the US deficits will be paid back to our creditors in increasingly worthless dollars and all the problems I raise about our massive debts will become inconsequential. It also means you can go out and spend like mad, and build up your own debts because by 2019, the dollar you pay them back with will be akin to toilet paper. Green shoots... green shoots.

As an aside, I have not talked about the CPI (Consumer Price Index i.e. inflation) reports in over a year, but he makes the exact same point I was making, as long-time blog readers will know. Lies, lies and more damn lies. [Dec 12, 2007: Real Inflation Showing in Reports not Called PPI/CPI] [May 10, 2008: Finally Some Mainstream Reports are Figuring Out the Spin from Government] [Apr 23, 2008: Barry Ritholtz on Disappearing Economic Indicators] [Sep 28, 2007: Barry Ritholtz on Bloomberg Finally Seeing the Truth in CPI] [Mar 16, 2008: A Picture is Worth a Thousand Words - Inflation]

I can only imagine the day real inflation is running 13.2% and we are told by government it's 3.2%. Maybe finally the non-financial folk will question these things.

The US is headed toward hyperinflation, and within five to 10 years it could have inflation rates of 10 to 20 percent, said Marc Faber, editor and publisher of the Gloom, Boom & Doom Report.

"In every society, when you have large fiscal deficits combined with easy monetary policies … the likelihood that you will have high inflation is very, very high," Faber said. "And it happens very quickly."

These numbers rise so speedily because the government "massively" understates the country's rate of inflation, Faber said. To get a true reading, he said, people need to ditch core inflation numbers and include CPI in their analysis.

"It’s a lie what they publish," said Faber. "If you underweigh education costs, and if you underweigh health care costs, then you come to a totally different result."

In such a volatile market, Faber said the safest place to invest is in equities or assets.

"I'm not very bullish about real estate prices in the U.S., but I'd rather be in real estate than in 30-year U.S. bonds."

[May 20: Jim Rogers Agrees with Marc Faber]

[May 15, 2009: This was a Central Bank Printing Press Rally]

[Mar 19, 2009: Both Marc Faber and Jim Rogers Predicting Civil War or Unrest]

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This article has 20 comments:

  •  
    ..."and within five to 10 years it could have inflation rates of 10 to 20 percent,"

    in 5-10 years anything could happen...
    see mish for the best take on this...
    globaleconomicanalysis...
    Jun 23 06:44 AM | Link | Reply
  •  
    We could all make attention-getting predictions for 10 years out -- if we are wrong we could than say the facts changed.

    What is a reasonable time period for an "investable" prediction? I respect those who say--this is going to happen in the next 30 days, or within 3 months.

    The longer the time period, the less credible the prediction.
    Jun 23 08:21 AM | Link | Reply
  •  
    Thanks for the article but I see little merit worrying about inflation when the economy is hibernating. We have a long way to go before inflation is an issue.
    Jun 23 08:53 AM | Link | Reply
  •  
    The USA, needs a" Congressional investigation "into goverment
    distortion of real data, since ,the Carter adminstration, using
    amongst others Hedonics, cpi,etc. It is unacceptable in a
    Free society, for our Goverment to practise the Accounting
    system of Zimbabwae.
    Jun 23 08:55 AM | Link | Reply
  •  
    Government numbers don't tell the whole story. Housing prices may be deflating, but how often do I buy a house ? We hear that CPI is dropping, but as I fill the tank and buy the groceries, those prices have been on the "up" escalator for a couple years now.

    The Social Security cola may be little or nothing for next year despite rapidly rising costs for what seniors buy. And with the government tinkering with virtually every part of the economy and the markets, one is hard pressed to plan ahead.

    One thing for sure - if Bernanke's head of the Fed, the printing presses will be humming. In conservative economic circles, that IS inflation.
    Jun 23 09:14 AM | Link | Reply
  •  
    Hyperinflation is defined as a 100% increase in price levels over a 3 year period, which assuming a constant, works out to roughly 26% inflation per year.
    Jun 23 09:38 AM | Link | Reply
  •  
    If stocks sell off from here you should get a rally in Treasuries that will be ripe for selling into. There is no way that investors are being compensated for their risk with yields at these levels, especially with massive global government reflationary efforts guaranteed to bring a resurgence of inflation. I think the futures contract on the long bond will collapse from 116 now to under 70 in three years, once hyperinflation hits. With the leverage offered by a futures contract, the returns will be huge. However, this is not a riskless trade. There have already been several rounds of stop loss buying by traders who jumped into this strategy too early, as unimaginable buying kicked in at 120, 125, 131, 136 and finally 141. In Japan the ten year bond eventually hit a low of 0.46%, making our ten year at 3.6% look incredibly expensive. That works out to a futures price of 200 or more. Of course we are not Japan. The Treasury has done more to repair things in 6 months than Japan did in 15 years, and Japan has still not adopted full mark to mark accounting. Some 19 years after their bubble burst, the country is still seeing subpar growth, and ten year yields have made it back up to only a measly 1.25%. There are also constant games going on in the bond futures markets like expiration plays, engineered short squeezes in the underlying, and bogus news leaks. PIMCO, the Newport Beach based Pacific Investment Management Company, the world’s largest private bond investor, plays this market like a violin. Still, I think it’s worth a shot. Take another look at the Power Shares Lehman 20 year plus ETF (TBT), which gives you a 200% short on the sector. This will be the last bubble we can short into for a long time.
    Jun 23 10:10 AM | Link | Reply
  •  
    I disagree that it is hyperinflation, but I do agree that once it gets going, it will be 10-15% until we stop it.
    Interestingly, many of us were talking about deflation (or more correctly, disinflation) during the summer of 2008, yet inflation was the popular position. It isn't surprising that now that we are seeing some serious disinflation (and we haven't seen the worst yet, I suspect) it is now hard for many to swallow the idea of inflation.
    The Economic Cycle Research Institute has an nice leading inflation index called the FIG (future inflation gauge) that is useful for monitoring the risk of inflation. It is still VERY low, but it had been falling for quite some time until recently it turned direction and is rising rapidly. It still has a long way to go before inflation is a risk, but it is definitely moving in that direction and it will only be a matter of time before it is signaling inflation.
    Jun 23 10:48 AM | Link | Reply
  •  
    Where is the serious disinflation?
    Jun 23 11:30 AM | Link | Reply
  •  
    Inflation has been an issue for over a decade. Only by lying about the real rate of inflation has the Fed been able to apply the very low rates of interest rates that has resulted in the inflationary bubble that burst last fall. Yes, nearly everything that was reported as growth was inflation. In reality, how many Americans are substantially better off than they were a two decades ago? And don't assume that the inflation has completely gone away either. The current slow down may have tempered things a little, but Americans are pretty much locked into annual raises that simply not backed by increase economic output in any meaningful sense. When the dollar collapses and input prices start driving consumer prices forward with a vengeance, do you seriously think anyone has the political will to lock down wage rises or hike interest rates to the point where the Federal Government is forced into default or raise taxes into the stratosphere. No, they will simply continue try to report inflation as growth. And I am sure when you are growing at 15% per year without getting off your backsides, you will all go to the polls and vote them in all over again.

    Frankly, I hated Thatcher, and she caused a lot of unnecessary pain, but she is probably the only real example of leader that has rid a country with a collapsing empire of its complacency and decadence to the point where it could rebuild itself and stand proud in the World once again. Obama is probably a better person, but he has not got a clue how to turn America around and make her successful again.


    On Jun 23 08:53 AM FloridaBoy2 wrote:

    > Thanks for the article but I see little merit worrying about inflation
    > when the economy is hibernating. We have a long way to go before
    > inflation is an issue.
    Jun 23 01:26 PM | Link | Reply
  •  
    tinyurl.com/n5orvo



    On Jun 23 11:30 AM John Bowman wrote:

    > Where is the serious disinflation?
    Jun 23 05:44 PM | Link | Reply
  •  
    The deflation --inflation argument will continue for the next 30 years when we finally get real inflation. This is what happened in the 1930s-1970s when real inflation finally appeared.

    Now is the time to worry about prices and wages going down.
    Jun 23 08:51 PM | Link | Reply
  •  
    As unemployment rises, wages go down, credit evaporates, home prices crash - you will get deflation not inflation.
    Jun 23 09:10 PM | Link | Reply
  •  
    The chart shows core inflation dropping a very small amount. The chart which ends May 9 does not take into account the next 6 weeks when fuel prices have accelerated dramatically and which will cause a domino effect.

    Unfortunately, the CPI does not take into effect taxes and utilities which are increasing . The cost of electricity is scheduled to rise dramaticaly here in 2010. Water and sewage rates were just raised this month.

    Cap and trade, higher interest rates due to the stimulus packages and which will be out of the Fed's control, the Feds printing money, and the eventual fall of the dollar will contribute to higher prices in the not too distant future.

    Regardless of falling wages, it will still cost more in the very near future to maintain status quo.


    On Jun 23 05:44 PM thiazole wrote:

    > tinyurl.com/n5orvo
    >
    Jun 24 12:12 AM | Link | Reply
  •  
    Well, when you consider that 2% inflation is considered normal and healthy, -1% is below that by 3% points. That would be the deflationary equivalent of 5% inflation (ie 3% points from the norm). And the pattern is still going straight down - we could see -2 or -3% before it turns. Fuel prices accelerated much MORE dramatically last year than they will this year (don't you remember the $150 a barrel oil?) which will add to the disinflation. Again, once we hit that point where oil/fuel prices crashed last year, then the chart will begin to flip toward inflation again - but that won't even start until late fall to winter.


    On Jun 24 12:12 AM John Bowman wrote:

    > The chart shows core inflation dropping a very small amount. The
    > chart which ends May 9 does not take into account the next 6 weeks
    > when fuel prices have accelerated dramatically and which will cause
    > a domino effect.
    >
    > Unfortunately, the CPI does not take into effect taxes and utilities
    > which are increasing . The cost of electricity is scheduled to rise
    > dramaticaly here in 2010. Water and sewage rates were just raised
    > this month.
    >
    > Cap and trade, higher interest rates due to the stimulus packages
    > and which will be out of the Fed's control, the Feds printing money,
    > and the eventual fall of the dollar will contribute to higher prices
    > in the not too distant future.
    >
    > Regardless of falling wages, it will still cost more in the very
    > near future to maintain status quo.
    Jun 24 10:32 AM | Link | Reply
  •  
    We already had hyperinflation followed by deflation during the run on oil and energy prices.

    The reason it was inconsequential was because nobody had the money to pay the inflated prices. Just because a dollar is worth less on some currency market doesn't mean I have more of them.

    So, prices have no choice but to go down.
    Jun 24 10:44 AM | Link | Reply
  •  


    I just looked at that chart again. It dropped "dramatically" in one day. Sorry, but one day does not constitute a trend. I want to see what the trend looks like updated to this week.

    On Jun 24 10:32 AM thiazole wrote:

    > Well, when you consider that 2% inflation is considered normal and
    > healthy, -1% is below that by 3% points. That would be the deflationary
    > equivalent of 5% inflation (ie 3% points from the norm). And the
    > pattern is still going straight down - we could see -2 or -3% before
    > it turns. Fuel prices accelerated much MORE dramatically last year
    > than they will this year (don't you remember the $150 a barrel oil?)
    > which will add to the disinflation. Again, once we hit that point
    > where oil/fuel prices crashed last year, then the chart will begin
    > to flip toward inflation again - but that won't even start until
    > late fall to winter.
    Jun 24 01:10 PM | Link | Reply
  •  
    No, that is a 16 year chart - it just looks like it happened all at once because there is so much data. The crash in inflation actually spans about 10 months ie, in going from +5.5% to -1%, it fell 6.5% points in 10 months or an average of 0.65% points per month. This pace will last 3 to 4 more months, so it will bottom out at around -3 to -4%.


    On Jun 24 01:10 PM John Bowman wrote:

    >
    >
    > I just looked at that chart again. It dropped "dramatically" in one
    > day. Sorry, but one day does not constitute a trend. I want to see
    > what the trend looks like updated to this week.
    >
    > On Jun 24 10:32 AM thiazole wrote:
    Jun 24 03:39 PM | Link | Reply
  •  
    Yes, you are right. I saw May 05 and May 07 and should have looked to the left at the earlier dates.

    Regardless, the sharp drop occured in a very short period and could travel upward also in a very short period.


    On Jun 24 03:39 PM thiazole wrote:

    > No, that is a 16 year chart - it just looks like it happened all
    > at once because there is so much data. The crash in inflation actually
    > spans about 10 months ie, in going from +5.5% to -1%, it fell 6.5%
    > points in 10 months or an average of 0.65% points per month. This
    > pace will last 3 to 4 more months, so it will bottom out at around
    > -3 to -4%.
    Jun 24 04:14 PM | Link | Reply
  •  
    I agree with you - it will turn and it will turn hard. Reread my first post in this thread: seekingalpha.com/user/...
    I see us going from wherever the bottom ends up being back to +5% in a year and then to +10% or higher within another year after that. It will take some time, but on a chart it will look insane.

    On Jun 24 04:14 PM John Bowman wrote:

    > Yes, you are right. I saw May 05 and May 07 and should have looked
    > to the left at the earlier dates.
    >
    > Regardless, the sharp drop occured in a very short period and could
    > travel upward also in a very short period.
    Jun 24 04:36 PM | Link | Reply
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