Get Ready For A “Fed Induced” Period Of Inflation!

Well, 2008 has been a period of deflation. The U.S. and global economy has slowed dramatically and thus corporate expansion has come to a halt as consumer spending dried up.

So the Fed didn’t sit idly by. No, they do what they feel they do best which is print money. It’s a great tactic short term to get things going…normally (but usually a bad mistake longer term for the economy).

I say, normally, because when the Fed pumps money into the economy and gives banks access to more money and lower interest rates…they normally pass along the money and the low rates to the public and to corporations which need the money to expand and grow.

However, the banks have been beaten up “black and blue” this year in the real estate melt down and the credit crunch. Therefore the banks have gone from being “overly generous” with the handing out of money now to “overly tight” with the money.

Just as the markets have gone through extreme swings, so have the banks in their lending habits. Since they perceive more risk now, they keep rates higher to compensate for that risk even though the Fed has reduced interest rates to a range of 0% to 0.25% (effectively zero).

The Banks are Clogging the Fed’s Pipes for now!

The Fed has given the banks more money but they are hoarding the cash to repair their beaten up balance sheets and to act defensively against tough economic times.

All of this has brought on a bout of deflation that we’ve not seen in a while. Deflation is the worst. Oh, it seems fine when you see the costs of things going down. But you also have to realize that the unemployment rate goes up and there are less jobs and less money to even buy those cheaper goods. So, in the end, people aren’t better off in a deflationary environment. They are actually better off in a mildly inflationary environment.

So this is where the Fed is attempting to get the economy back to. However, with the extreme amounts of money that they’ve had to pump into the country and with effectively zero interest rates, once the banks do start to loosen their grip on the money, it’s going to unleash an inflationary wave.

When this happens, the “bond bubble” in Treasuries will pop, as money floods out of there back into stocks and commodities. So the cost of goods will go back up, stocks will finally recover and so will the economy.

However, the excessive amounts of money pumped into the economy will produce the next “bubble type” environment. It takes a while for this to normally take effect. And since we’re in an unusual period, it could take longer than in times past.

So I would think that we’d start to see this take effect in the 1^st or 2^nd quarter of next year (2009). But there is a slight possibility that it could lag until 2010.

Savvy investors are positioning themselves like the surfer ready for the next massive wave!

However, savvy investors will shortly start to position themselves for this wave like a surfer anticipating a wave coming.

Because since they have at least 5 year holding periods as their minimal time horizons, they are almost certain to not be disappointed as this massive tidal wave of money causes the economy to expand and re-inflate. A “re-inflation” is good but a “hyper-inflationary” period could be bad. We do run the risk of the latter in light of the stimulus that the Fed has already put into play.

If you will remember, Alan Greenspan took interest rates to 1% and held them there for a while. Many economists blame the latest bubbles on that “super cheap money” type environment.

Well, if you thought 1% produced an eventual bubble, wait until you see the eventual effects of a 0% policy that we currently have. On top of that, consider the trillions of dollars being pumped into the economy and the Fed’s purchase of Treasuries that will only exasperate the Treasury bubble and thus further exaggerate the stock and commodity bubble to follow.

Buy Stock & Commodity ETFs BEFORE the next wave hits (all cash, no margin)

So in times like these, it’s important to position yourself for the next wave. Buy stock and commodity ETFs with cash, no margin…and be patient and hold on once the massive wave hits. Take a look at the transportation and technology sectors which normally head the economy out of a recession. Take a look at the infrastructure stocks that the “Obama directed money” will push up. Also, take a look at oil, gold and the agriculture ETFs for your commodity plays.

This all won’t likely go up starting tomorrow morning but you want to get into these before prices of both asset classes are “bought up” and the deeply discounted values are gone. For if you wait until it’s obvious that an economic recovery is under way, the values will already be gone.

This is why the stock market cycle precedes the economic cycle by 3-6 months. Because these money managers are paid to make money that’s better than average. Well the “average Joe” will realize things when the actual economic recovery is underway. That’s when they will buy.

However, the savvy investor will have bought stocks up so much lower, that their returns will once again, outshine that of the individual, retail investor that refuses to be “forward looking” or that doesn’t seem to know how to be forward looking.

This doesn’t have to be you. Consider yourself forewarned and informed ahead of the crowd as you got to creep into the mind of a professional for a moment.

The Fed’s actions have been the earthquake that will cause the delayed tsunami to come that you can get in on and “surf” your account balances back to new “all time highs”.

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Comment by jlounsbury59

2008-12-28 18:56:31

Because of the housing market overhang, the decreased U.S. consumption affecting China and the next wave of residential and commercial mortgage defaults, I’ll cast my vote for 2010 (and hope it is mot later) for the reflation to turn to inflation.

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Comment by Sean Hyman

2008-12-29 09:31:24

Keep in mind that the home builders are already starting to see some bounces off of their lows even in light of worse data pouring in.

This is a prime example of stocks leading the actual economic cycle. See symbol XHB as an example of what I’m referring to.

The bad data is already largely priced into these stocks as traders have sold them off to levels that account for almost everything but “nuclear war”.

Therefore, about 3-6 months before these investors feel the economy will turn, they buy up these stocks while they are still low and the average retail investor (and the media) has not yet grabbed onto the fact yet.

The pro can usually see this. The average “man on the street” usually does not because all they know is what CNBC tells them. However, fear and “gloom and doom” sells…and these media outlets know it. So they are going to soak it for as long as they can.

I love CNBC, but I don’t use them for my analysis or view of the markets.

Thank you for taking the time to read my post and to comment on it. I appreciate that.

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