When the tech bubble burst in 2000, Greenspan tried
to ďfixĒ the problem by cutting rates and printing money. Fix the problem he
did Ö well sort of! What Greenspan did was create two new bubbles in the
credit and real estate markets to replace the tech bubble that had burst.
Millions of jobs were created in these two industries. Much needed jobs to
replace the ones lost as the tech boom came to an end.
I think we will all admit it was one heck of a party,
but like all good parties thereís a price to pay. The Hangover!
The truth is the economic boom of the mid 2000ís was
built on a lie. Instead of a foundation of productivity the last bull market was
founded on an ocean of liquidity. That ocean of liquidity fostered risky
investments and massive speculation. It was only a matter of time before the
house of cards came crashing down. And crash it did. The world suffered through
the second worst bear market in history almost taking down the global financial
system in the process.
Apparently the powers that be have learned nothing
from this near death experience because they are back at it again, printing,
printing, printing in another vain effort to create prosperity with the printing
press. I dare say the average 6th grader can understand that the act of putting
ink on paper does not create wealth. Itís too bad our elected officials canít
So here we are, weíve survived the credit crisis and
all appears to be well in the world. Iím here to say that all is not well. We
now have a cancer growing under the surface of the economy many times bigger
than the one Greenspan created. This cancer isnít going to show up in real
estate or credit markets, that bubble has already burst, never to be inflated
again. No, this time I expect the cancer is going to flare up as inflation in
the commodity markets.
Witness the strange resilience of oil at $80 despite a
very strong dollar the past 3 months. Gold has been holding over $1100. Sugar is
at multi-year highs. Copper is less than 15% from all-time highs.
The commodity markets are now poised to unleash a
massive inflationary storm. I think thereís a very good chance that storm will
strike this spring.
The dollar is now deep into a counter trend rally and in jeopardy of putting in
an intermediate term top at any time. When it does the flood gates could break
and we will have to deal with the unintended consequences of Bernankeís actions.
Unfortunately, there are no painless cures for spiking
inflation, especially in an ongoing recession. The cure is to let the market
clean out the excesses. The cure is to raise rates and drain liquidity, to
induce a recession. That course leads to 20%+ unemployment and a deflationary
depression. Does anyone really believe our elected officials will choose the
that course of action?
On the other hand, doing nothing leads to higher and
higher inflation and running the presses faster and faster to stay ahead of
rising prices, eventually culminating in a hyperinflationary event if government
debt is allowed to spiral beyond the point of no return.
Unfortunately, I think itís probably too late to stop
the storm. Letís face it, you donít start turning the Titanic when itís 100
yards from the iceberg. By then itís too late and the ship is doomed.
The same principle applies with our economy. If the
Fed waits until inflation starts to pop up it is too late. The damage is already
done and thereís no going back. If the inflation Genie gets out of the bottle
thereís no easy way to get him back in. I would argue that the commodity markets
are already trying to tell us thereís trouble coming.
History has been crystal clear - every time oil spikes
100% or more within a yearís time, it has pushed the our economy into a
recession. We already have a spike from $32 to over $80 and this is against a
backdrop of high unemployment. The last thing we need in an economic environment
thatís already under stress is surging energy prices again.
The question investors have to ask themselves is
whether itís more likely the powers that be will do the right thing, raise
rates, drain liquidity and force the world into a deeper recession before
inflation gets out of control or will they continue to kick the can down the
road making the problem bigger and bigger?
Knowing human nature, my bet is that our elected
officials will do whatever they have to do to avoid short term pain - even if it
means compromising our future.
The storm is brewing. Itís time to batten down the
That means gold and silver!
The Smart Money Tracker