 |
For several years now I, and other traders I respect, have been warning of a day of reckoning that would eventually come to pass for the global economy.
We pointed feverishly to a time in the future when hyperinflation would destroy the very fabric of the planet’s financial system.
We warned that the reckless printing of fiat currency, enormous sovereign debt, overpriced real estate markets, and banks gone wild were a disaster in the making.
We stated over and over again that it was only a matter of time before the economic devastation, widespread unemployment, downgraded ratings, foreclosure madness, and political upheaval, would rule the day.
Some of us even said municipalities and entire countries would eventually have to default on their debt.
We repeatedly pointed to the year-after-year increase in gold prices, as well as most other commodities, that are a clear indicator of forthcoming hyperinflation.
Sadly, our warnings almost always fell on deaf ears. And now, it’s become plain as day that …
We Haven’t Seen Anything Yet!
Inflation has been creeping in on us as energy and food prices have climbed dramatically in the last seven years. Meanwhile precious metals like gold and silver have exploded in value, and still have much further to go in my opinion.
The U.S. dollar and the euro are simply in a race to the bottom. Who gets there first is anyone’s guess. And it’s not even clear if the currencies will survive in their current form.
The violent unrest in 2011, has mainly been in the Middle East, and has primarily been driven by surging food and energy costs.
Governments across the region, for instance in Saudi Arabia, are rapidly responding to the rise in commodity prices with hikes in fuel and food subsidies, civil service wage and pension increases, additional cash transfers, tax reductions, and other spending increases. These measures are an attempt to help poor households maintain their purchasing power.
In other areas, such as in Libya, the leadership has taken military action and used violence to try and quell the protestors. It’s a veritable powder keg.
The EU Isn’t Immune Either …
As default continually looms for countries — such as Greece, Portugal, Ireland, and potentially Spain — that got in way over their heads, the very survival of the European Union is at stake.
 |
| Amid protests, German and French leaders continually ask citizens to prop up their free-spending neighbors. |
The Germans and the French are getting tired of repeatedly picking up the tab for these nations who spent like drunken sailors and now can’t pay the bill.
Meanwhile there are smaller euro-zone members, like here in Estonia where I live, who acted responsibly and took huge cuts in order to qualify for the “privilege” to use the euro. Now they feel as though they were invited to a wedding, and it turned out to be a funeral.
Since taking on the euro, inflation has surged, up as much as 20 percent in some cases.
Meanwhile in the U.S. the pain is also becoming very evident …
Printing While Washington Burns
Ben Bernanke has been busy wildly printing more fiat currency, and the dollar has continued to plunge, both in real value as well as perceived value. Things that may have seemed unfathomable five years ago are now probable …
For example, the U.S. dollar could very likely lose its reserve currency status on the global market. In addition, OPEC may decide it simply can no longer afford to price oil in U.S. dollars, and pull the plug. They will likely opt to price oil in a gold-backed dinar to avoid all the currency risk. China may also decide to further diversify out of U.S. dollars.
American consumers are absolutely devastated by a falling U.S. dollar, rising commodity prices, and some of the worst unemployment since FDR was in the White House.
Unfortunately there will be no soft landing for the U.S. That’s because the debt hole that has been dug all of these years is simply too big! And as the debt ceiling debacle continues, it only serves to fan the flames of an already blazing fire.
But rather than try to get some water and put it out, the government is likely just to throw more paper dollars on top of it, until eventually even that won’t work.
Meanwhile the Chinese, our co-dependent partner in this dysfunctional economic relationship, are having troubles of their own.
And try as they might to control inflation and sky-high real estate prices …
The Fortune Cookie Is Crumbling
China’s inflation has accelerated to the fastest pace in three years! The inflation rate touched 6.4 percent in June, according to the country’s National Bureau of Statistics. Some economists have reported that China’s inflation was likely to peak at 7.8 percent later this year. Meanwhile China’s central bank has already raised interest rates three times this year, most recently just a week or so ago.
According to a June 6 Forbes article, investors are worrying about the wrong problem …
“Rising inflation in China has investors running scared, fearing that Chinese central bank tightening will end global growth. They are worrying about the wrong problem. China’s inflation problem is transitory and will not interrupt China’s growth. But it is a canary in the coal mine that should warn us of a serious, long-term, inflation problem building up in the U.S.”
I agree.
 |
| Make no mistake; Ben Bernanke’s helicopter can fly a long way. |
One of the biggest factors behind China’s inflation is because its currency is, effectively, pegged to the dollar, which is used to price food, oil and commodities. Therefore a falling dollar = soaring prices.
The ongoing weak U.S. dollar policy, and the Fed’s folly that increased bank reserves by 17x since 2008 is the main driver behind global energy and industrial commodity inflation.
On top of that throw in the absurd and misguided U.S. ethanol policy that has diverted 40 percent of U.S. corn production into ethanol, and has more than doubled corn prices in the past year, and you have a recipe for food inflation.
Unlike in the U.S. though, many experts believe that the impact of inflation on China will be short term.
The belief is that increased productivity and excess capacity will return inflation to lower numbers. Unlike in the U.S., growth in China is largely driven by small, private companies that do not get their working capital from banks. That is good news for them, and bad news for the U.S.
So what are we as consumers to do about fiat currencies that are falling almost daily, and commodity prices that are rising even faster?
Don’t Ignore It …
Embrace It
The simple truth is we have to accept the fact that inflation is here to stay and likely going to get a lot worse before it gets better.
Sure some things will fall in price, that’s inevitable. But the primary staple commodities like energy and food will increase exponentially. In addition, as more and more consumers feel the pinch, they will look for ways to avoid using dollars, such as switching to gold and hard assets, as well as bartering and using any form of trade they can to avoid the paper currency.
To best avoid the negative effects of inflation consider investing in durable goods or commodities rather than in paper money. I am a long-term commodities bull. And while there will always be opportunities on the short side of commodities from time to time, the long-term trend is much, much higher.
Buying actual physical commodities can be too daunting for most investors; after all how many of us can really store 42,000 gallons of heating oil, or 50,000 pounds of cotton. And futures and options on futures can present opportunities but also carry unlimited risk.
However, commodity exchange traded funds (ETFs) offer a way for the average investor to take advantage of the inflation in commodities. A few of my favorite ETFs include: The PowerShares DB Agriculture DBA, the Van Eck Market Vectors Global Agribusiness MOO, and iPath DJ AIG Agriculture JJA.
Yours for resource profits,
Kevin
Kevin Kerr has successfully traded commodities professionally for the last 22+ years. His unparalleled expertise in commodity and resource futures, options, and equity trading, has made him a regular contributor to news outlets like CNBC, CNN, FOX News, CBS Evening News, Nightly Business Report and many others.
{ 1 comment }
Well written article.