U.S. Inflation: The Road To Zimbabwe

Includes: DIA, QQQ, SPY, UDN, UUP
by: Kofi Bofah

Welcome to Zimbabwe.

Beneath the surface, the United States of America is transitioning into a third-world country. Class warfare is the order of the day - as a ruling class consolidates power at the top and lords over a mass caste of generational paupers. Once proud Rust Belt cities, such as Buffalo, Cleveland, Cincinnati, Detroit, and St. Louis, have been reduced to rubble as their manufacturing jobs and productive citizenry have fled for greener pastures. The American inner city mirrors a modern-day battleground - that is on par with some of the worst atrocities typically associated with Afghanistan, Sudan, and Beirut. The ghetto has long degenerated into a Police State of Martial Law - where Big Daddy Government battles against entrenched gangster - warlords and poverty pimps to claim fresh territory.

The smug, not-in-my-backyard middle class, of course, remain convinced that economic and social collapse will be contained within our inner cities and Appalachian backwaters. I would argue, however, that the middle class is already under siege and is one "shock" away from queuing up alongside its destitute brethren for bread and gruel. The U.S. economy is being propped up by its very own form of welfare, which goes by the politically correct name of quantitative easing.

Neither of us can afford to throw stones - because we are all living within the same glass house.

Cheap Money as Welfare

In 1913, The Federal Reserve System was created as an apolitical entity that would function to regulate our nation's banks, allow for maximum employment, and stabilize price levels. The Federal Reserve Board can influence interest rates and therefore liquidity - by setting reserve requirements, specifying a discount rate for banks that borrow directly from The Fed, and through open market transactions - where it trades U.S. Treasuries. In response to recession, The Federal Reserve Board will purchase U.S. Treasuries on the open market, while also lowering its own discount window rate and reserve requirements. These transactions are designed to inject liquidity into the financial system and drive down prevailing interest rates, which may be considered the costs of money. Over time, lower interest rates should encourage individuals to take out loans and invest capital into private businesses, real estate, and stocks. As the economy recovers, The Fed is likely to reverse course and favor a tighter monetary supply, in order to curb inflation.

The Federal Reserve System has ridden to the rescue - in the aftermath of Black Monday 1987, the dot-com bust, September 11th, and the 2008 housing / credit / Lehman Brothers / AIG / Bear Stearns debacle. Today, the sum-total of the damage has left us with a $15 trillion national debt that overlaps a Federal Reserve balance sheet that has ballooned from $869 billion in August 2007 - to well over $2 trillion as of March 2012. Ironically, member banks are literally holding The Federal Reserve System hostage and demanding ransom. The sick mental patients must run the asylum - because our banking, insurance, and real estate sectors make up more than 20 percent of our overall gross domestic product within this service economy. Financials, of course, flourish amid a regime of low interest rates, as they leverage cheap debt and deposits into supposedly winning investments.

We are therefore trapped within an irreversible moral-hazard Loop of banks consolidating power, driving asset prices into the stratosphere, creating bubbles that inevitably collapse, and then demanding that The Fed and U.S. taxpayer foot the bill in order to prevent Armageddon - before the cycle starts anew.

Frankly, we are degenerating into the leading Welfare State within the G-7 Ghetto.

Inflation Cannot Be Contained

Every other week, Washington is bludgeoning us over the head with a Bureau of Labor Statistics Consumer Price Index reading of benign core inflation. Never mind the fact that core inflation does not account for "volatile" food and gas prices. (The BLS obviously defines "volatility" as anything that shoots straight up in price!) Furthermore, conveniently tucked within inflation data algorithms are real estate / housing costs and wages that have flat-lined over the past decade. Any court jester - fool can surmise that he has been forced to tighten up his belt and budget to account for $4.50 / gallon gasoline, $200 per week in groceries to feed his family, and one $150,000 check to send Johnny-Boy to State U. for four years. Joe Six-Pack, of course, is trapped within his own middle class ghetto because he cannot sell his home at a profit, nor can he demand a raise at work without facing ridicule and getting fired.

Basic Economics 101 tells us that our middle class brethren will get slammed for years to come. Again, The Fed must literally flood the financial system with dollars in order to support a low interest rate regime that is favorable to banks. A higher monetary supply devalues the dollar, which effectively drives costs higher for all imported goods, including oil and gas. Meanwhile, China, Brazil, India, and the Eastern Bloc workers are aggressively integrating themselves within the global marketplace and landing body blows to blue-collar American manufacturing. Consequently, wide-eyed teenagers will flood college admissions rolls, drive up tuition costs, and walk into the real world strapped with $100,000 in student loan debt.

There is nowhere to hide.

Out of Zimbabwe: Get Rich or Die Trying

We are left with no other choice, but to join the 1-percent club or die trying. Indeed, our current 1-percent class, which rails against government handouts for the inner city, has created its very own Welfare State of crony capitalism, bailouts, and cheap money at the top. In order to storm the 1-percent gate, we must also recognize that inflation is the modus operandi and plan accordingly. Expect negative real returns in cash deposits, money market securities, bonds, and real estate for some time to come.

This is a stock picker's market, where I would recommend heavy exposure into energy / materials companies over the long-term. For yield, it is critical that we target corporations that demonstrate a long history of dividend increases in order to collect income amid the inevitable market correction. Over time, regular dividend increases upon our original investment will far exceed comparable bond yields. The Fed has forced the thinking man's hand and wallet into conservative, dividend-paying stocks that are our only defense against a totalitarian regime of negative real returns, lost industry, unaffordable real estate, and outrageous tuition costs.

Out of Zimbabwe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.