The White Elephant That Could Destroy Your Portfolio - Part II

Do you see the white elephant?

The Fed says US inflation is currently 4%. But anybody who goes to the grocery store or the gas station knows that the cost of living in this country has increased much more than that in the last year.

And now they’re starting to voice their concerns.

A recent Bloomberg survey revealed that 76% of Americans want the Fed to strengthen the dollar. It’s striking to see that the average American— who couldn’t tell you what the consumer price index was if his life depended on it— has a better understanding of economics than a bunch of Ivy-leagued bankers.

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Americans Look Abroad for Real "Stimulus" Checks

The US government thinks $600 is going to solve our troubles.

They’re wrong. And we know it.

That’s why a small group of smart Americans has begun seeking alternate forms of income to protect their homes and retirement savings. They’re called “STIMULUS DIVIDENDS” and they pay out 70-80 more than the US’s Stimulus Package.

To read more, click here.

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However, it’s not so much a condemnation of the schools the Fed bankers attended as it is a scathing criticism of the Fed’s policies. Bill Gross, chief investment officer of PIMCO, the world’s largest bond investor, recently noted that over the last ten years, the average rate of inflation for 24 foreign countries was 7%.

	Belgium Brazil Chile Colombia Ecuador Estonia	Germany Indonesia Iceland Ireland Italy Japan (Tk)	Spain Switzerland Thailand Turkey Taiwan Vietnam
Source: ISI Group

Gross notes that over the same time period, the average official rate of inflation in the US was 2.6%. The discrepancy is difficult to swallow, particularly when you consider that the dollar lost 30% of its value against a basket of foreign currencies during this time. One can only deduce that the US has a history of understating its “real” inflation.One would be right.

The Fed has altered its measure of inflation twice in the last 30 years; both times it chose to become more lenient. Based on its pre-1983 measure— the measure the Fed used before it started altering everything—“real” inflation today is around 11%.

However, for the Fed to now announce what everyone already knows— that its inflationary measures are not accurate— would mean admitting that it’s been manipulating economic data for at least a decade. Doing so might not cause a full-blown financial crisis, but hearing a country’s central bank admit that it cooks the books wouldn’t exactly engender a sense of confidence in its financial system.

Fortunately, we can use this to our advantage. We know that “real” inflation is much higher than the Fed admits. We also know that sooner or later the Fed will have to begin combating inflation if the dollar isn’t going to be toast— they've already announced there will be no more rate cuts. We can profit from both of these facts by buying investments that perform well during periods of high inflation.

The most obvious investment is gold, which has renewed its uptrend— the precious metal fell from $1,000 to $850, but has since risen back to $920. In light of gold’s massive rally earlier this year, I would have expected a longer period of consolidation after it cooled. To see gold moving up so soon is an extremely bullish sign.

Aside from gold, commodities in general do well during times of high inflation. Personally, I’m somewhat wary of base metals since an economic slowdown could put some pressure there. I am, however, bullish on agricultural commodities and energy. Anyone buying these sectors will have to stomach some wide price swings. But all of them should do well in an inflationary environment.

Best of all, there is a defined timeline for this trend. Unlike the end of the credit crisis, which is impossible to time, calling the end of high inflation is relatively easy. Whenever the Fed hikes interest rates dramatically to be more in line with the current “real” rate of inflation, the trend is over.

And that, my friends, is a long ways away.

If you haven’t taken steps to protect your portfolio from inflation, do so now. The mainstream financial media and most pundits still don’t understand the severity of the situation. By the time they do, gold will be over $1,200 and agricultural commodities will be breaking records.

Comments

[whidbey:]

Too bad they put up with promoters on this site.

2008 May 27 12:01 PM

[mark van:]

this guy is a snake oil salesman...hit the link to "stmulus dividends" and it reads like a used car salesman's spiel...his article reads well and sounds accurate but hit that link and you are in the never-never land of a big sales pitch...

2008 May 27 01:31 PM

[moonbat1775:]

Well, he does make a good point. Inflation will end as soon as the Fed wills it. So when we hear the Fed says it is fighting inflation what they are really saying is that they wish to continue creating fiat money without causing rising prices. The purpose of this will be to try to prevent the collapse of the house of cards they enabled via fractional reserve banking.

It should be interesting to watch the tangled web they (the central bankers) weave trying to pull that off.

2008 May 27 10:01 PM

[moonbat1775:]

oops, a correction. If foreign central banks start dumping the dollar this will cause inflation whether the Fed likes it or not unless the Fed has enough assets to sell to buy up those dollars.

2008 May 27 10:07 PM

[ironist15:]

There's another reason the Feds can't admit they've lied about inflation: that means that Social Security annuitants have been systematically underpaid for the last decade. Big political problem!

2008 May 28 09:46 AM

[notsosmart:]

inflation for 5 everyday needs is 15.68%.

2008 May 28 10:25 PM

[hrant:]

would reit's be a good place to invest in such inflationary times ? please serious comments only. thanks

2008 May 29 01:06 PM