No Laughing Matter

November 29, 2012

The Weekly Standard reports that Senate Minority Leader Mitch McConnell burst into laughter while he was attending a briefing by Treasury Secretary Timothy Geithner on the administration’s plan to avert the impending “fiscal cliff” that threatens the US economy and financial markets.

It’s disheartening for investors to hear that the two political parties are so far apart with this unprecedented set of circumstances set to converge in just one month’s time.

This is certainly no laughing matter for investors. Not only might large amounts of our wealth be taken away by higher tax rates and closures of so-called tax “loopholes,” but we are also threatened by fiscal policies that could continue the devaluation of the US dollar and even accelerate what many see as inevitable high inflation. What may be even worse is that the impact could send the US economy into another recession in the process.

That combination of recession and high inflation is called “stagflation,” a phenomenon that we have written about from time to time. The last time the US was inflicted with serious stagflation in the mid-1970s, the stock market fell 45% in 21 months, the price of gold tripled and a broad index of rare coins appreciated by some 1,000%


REPORT: Nuclear Iran would ‘double’ oil prices, cost millions of U.S. jobs…

October 10, 2012

Part of what we try to do at Coin Trader and on the Mind Your Money blog is to provide advance warning of external factors that may not seem to be investment-related at first glance, but which are in fact absolutely vital for investors.

One of the issues that we are following closely is the simmering conflict over Iran’s nuclear program.

We do not examine this conflict from a political standpoint, but rather strictly from an economic and investment standpoint. No matter what your view of Iran, its nuclear program, Israel or a possible US response, you MUST NOT ignore the possibility that a crisis could erupt over Iran’s uranium enrichment activity.

That means you must prepare ahead of time by diversifying into gold investments, something we deal with regularly.

But what types of conditions are likely to result from a crisis involving Iran?

Obviously, no one has a crystal ball, but a new report issued by a bipartisan association of national security and economic experts predicts extremely chaotic conditions. Here are a few of the highlights:

• The price of a gallon of gasoline in the USA could climb by an additional $2.75 per gallon

Inflation would increase to 5%, far above current levels.

• The US would be plunged into a recession, with 5 million jobs being lost.

In other words, an Iran armed with nuclear weapons would touch off a bout of 1970s-style stagflation.

Investors must be aware that in the 197os stagflation, the price of gold tripled and the stock market plunged by 45%.

Inflation Takes Surprise Jump in Europe

September 28, 2012

The chickens may already be coming home to roost in Europe.

For some time Europe has had a very loose, inflationary monetary policy, so it should come as no surprise perhaps that inflation rates are already higher than expected.

Europe may very well be the “canary in the mineshaft.” Other regions of the world, including the USA, have adopted very similar monetary policies. Investors should take notice and invest in assets that not only protect them from high inflation, but actually benefit from high inflation.

Gold investments, rare gold coins in particular, are ideally suited for just such a purpose. They have historically outperformed paper investments during periods of high inflation. But the time to buy is now–before inflation shows up in earnest in US inflation gauges.

Note that in the article linked below, several of the European Union nations are in recession at the same time that these inflation numbers have surfaced. The combination of inflation with recession is known as stagflation, an economic affliction that is particularly damaging to paper assets and positive for gold investments.

Inflation in the 17 countries that use the euro rose unexpectedly to a six-month high in September…

No reasons for the increase were provided by Eurostat, as the figure was only a preliminary estimate, though higher energy costs are likely to blame.

Wall Street Journal Market Watch: Stagflation is back, ready or not

August 16, 2012

One topic that we cover on Mind Your Money frequently is stagflation, simply because stagflation is the perfect storm for investors.

It is terribly damaging to stocks and equally toxic for bonds. Gold investments, on the other hand, have historically performed very well during periods of stagflation.

That’s why when a mainstream financial news outlet like The Wall Street Journal covers stagflation, we draw attention to it. When someone tells you that stagflation is coming, what they’re really telling you is to prepare for a bear market in stocks and bonds and a bull market in gold investments…

Stagflation is back, ready or not

Commentary: U.S. revisiting economic woes of 1970s

PORT WASHINGTON, N.Y. (MarketWatch) — The dreaded combination of stagnation and inflation has returned, bringing with it new challenges for policy makers, investors, business people and consumers.

As far as policy goes, it is tough enough to reduce unemployment. It is also no picnic to keep inflation at bay.

But it is a real challenge to deal with both at the same time, which is what policy makers must do when confronted with stagflation. This is because fighting one problem risks exacerbating the other.

While neither unemployment nor inflation is uncommon, every so often, both rise together to alarmingly high levels. Take the period from 1973 through 1975, for example.

The economy entered into a recession in November 1973 and did not stop falling until March 1975 — a period of 16 months, which at that time was the longest downturn since the 1930s.

Meanwhile, inflation, which had risen from 3.6% at the beginning of 1973, to 8.3% when the recession began, continued to rise throughout 1974, peaking at an annual rate of 12.3% in December of that year.

This double-digit inflation was caused by rapid money growth in the wake of the quadrupling of oil prices in late 1973, which led to a sharp rise in inflation expectations, especially through cost-of-living-clauses in private and public contracts.

However, the combination of sharply rising prices and interest rates depleted buying power, causing business to cut back. Layoffs rose, sending the unemployment rate from 4.9% in the fourth quarter of 1973 to a high of 8.7% by the second quarter of 1975.

President Ford’s WIN (Whip Inflation Now) policy was futile; so were President Carter’s wage-price guidelines.

It took Paul Volcker to vanquish inflation. The Fed chief’s policy of tight money and record-high interest rates produced a double-dip recession from 1980-82 — but sent inflation tumbling from an annual rate of 15% in early 1980 to only 2.5% by the middle of 1983.

On the surface, today’s economy looks like just a case of stagnation. After all, it’s the unemployment rate that’s high at 8.3%; the reported rate of inflation has been below 2% for the past few months.

But here is the rub: While some prices, such as fuel, are up noticeably, today’s inflation seems to be very low, probably a result of giving less for the same price.

For example, in the supermarket, you now find 10 mini-bagels for the price of 12, and 21 garbage bags for the price of 25.

Summer camps are now giving your children seven weeks away for the price of eight. And how many of you have noticed new menus at your favorite restaurant with new (higher) prices?

Now the government’s surveyors are supposed to pick this up, but they are usually late to the party until it’s called to their attention, as we are doing here.

More (visible) inflation lies ahead. The drought has already sent grain prices soaring. Cattle will soon follow. Besides food, prices are already rising across the board for such staples as cars, clothing, and shelter — and, of course, medical care.

If the Fed eases further, reported inflation is bound to rise. If fiscal policy tightens, the economy will probably slide back into recession.

Since both seem likely to happen, you might as well add stagflation to your list of concerns.

More Evidence of Stagflation

August 9, 2012

There have been several significant news stories in the financial world during the first week or so of August which are worth taking note of.

Despite the fact that gold has traded mostly sideways for some time now, there is a great deal of evidence to indicate that conditions are percolating below the surface that could lead to conditions that would be decidedly negative for the US dollar and financial assets and thus positive for gold investments.

For instance, the CEO of PIMCO, which is the parent of America’s largest bond fund, has warned that the world is headed for a severe recession not unlike the one that ended in 2009:

Readers will recall that the recession that ended in 2009 came about after a financial crisis which almost saw the meltdown of the US financial system. Readers should also recall that in the beginning of that episode gold languished as investors liquidated gold positions to cover losses elsewhere. Nevertheless, gold rebounded sharply and ended higher in both 2008 and 2009. Meanwhile, the stock market experienced its worst bear market in almost a decade.

Do not assume that gold investments only rise during periods of high inflation. That is one of the most common misconceptions surrounding gold investing. Historically, gold has provided financial insurance and profits during a variety of economic conditions, such as the severe recession of 2008-2009.

Speaking of inflation, it is true that gold tends to react favorably to high inflation. One of the chief components of wholesale and retail inflation is food. We are seeing more and more reports in the news that indicate that drought conditions will lead to higher food prices going forward:

Couple these two reports–the threat of recession and the threat of inflation–and you get something called stagflation, a condition we have covered on Mind Your Money to a great extent.

The last time the US economy experienced stagflation was in the 1973-75 time frame. During that period the price of gold tripled and the stock market fell 45%.

This creates a potential scenario in which investors should accumulate gold investments to protect their wealth from any of 3 possible threats:

1. Recession

2. Inflation

3. Both Recession and Inflation–Stagflation

Unemployment: America in Denial

August 3, 2012

The US economy is in trouble, though many Americans, and much of the mainstream media are in denial.

The latest unemployment numbers are out and they show another slight increase, to 8.3%. The trend has been headed in the wrong direction for a few weeks now.

The economy is NOT improving and sooner or later this is bound to be reflected in the financial markets. There is just no scenario in which the stock market and real estate market can be healthy while the overall economy is sick.

Government statisticians tried to put a good face on the unemployment news by coupling it with the tid bit that the economy added 163,000 jobs in July, the highest number in some time. But that figure has to be taken with a grain of salt because in each and every month so far in 2012 that jobs report has had to be revised downward in the following month.

In other words, someone, somewhere in the halls of government has their finger on the scale. It is just not reasonable to believe that it is just a coincidence that the employment figures can possibly be wrong in the same direction 8 months in a row.

Yesterday CNBC ran a story that reinforces the contention that the US economy is actually already in a recession and we are just are in denial about it. The unemployment picture is actually much worse than it appears…

Investors may be bewildered by this news, but they need to shake off the cobwebs and realize that this all adds up to eventual very bad news for the financial markets, the stock market in particular. Meanwhile, inflation is making a comeback. Fuel prices made a surprise jump in July and drought is putting upward pressure on food prices across America.

This is building a picture that looks very much like STAGFLATION. Wise investors need to protect themselves against stagflation and the way to do so is to look to history.

The last time stagflation was a serious issue in the US economy was back in the 1973-75 time period, when the stock market fell 45% and the price of gold tripled…


Europe, Drought, Poverty, Recession All Weigh on Wall Street

July 23, 2012

The US stock market fell sharply today, mostly because of renewed worries coming out of Europe.

It now looks as if the $100 billion bank bailout package the European Union granted to Spain isn’t going to be enough and the fear is that a much larger, broader bailout of the country’s financial system will be required. Spain is not Greece. Spain has a much larger economy and a much larger banking system. Scraping together the money to fix Spain’s debt woes is a lot easier said than done. In fact, no one is certain that a bailout can or should be accomplished at all.

Speaking of Greece, the old problem that was supposed to have been fixed is still very much of a problem. The bailout program that the European Union put together for Greece worked so well that now their Prime Minister is saying their economy is in a “Great Depression:”

For now, the Dollar has been the beneficiary of the European trouble, but there are other indications that the dollar’s strength can’t last:

For example, the drought that we have reported on here twice before is getting worse, which means higher commodity prices ahead, pushing inflation fears higher, even as the economy stagnates:

And despite all the government spending over the past few years, all designed to stimulate the economy, the poverty rate in America is soaring, reaching levels not seen since LBJ originally launched the so-called “war on poverty:”–finance.html?_esi=1

Meanwhile, disappointing earnings are pointing to a fast-aproaching recession in the US to go along with those higher food prices. STAGFLATION anyone?

Experts expect that recession any time now. Nouriel Roubini says the US economy is going from bad to worse:

Anyone who expects good things from the US dollar and stock market in these conditions is whistling past the graveyard. Diversification is the best defense and hard assets provide the best form of diversification.