Double-Digit Inflation!

Early Friday morning, as a bitterly cold wind blew into lower Manhattan
from the Northwest, bond traders commuting to Wall Street were expecting
to see an equally cold report on the nation’s producer price
inflation.

They figured that, excluding energy and food, last month’s
rise in core producer prices would be contained to a meager 0.2%.
They assumed that investors in U.S. bonds would rejoice, as usual.
And they counted on many more months of low, soothing interest rates.

Instead, soon after they arrived at their bond trading desks, they
were greeted by a short burst of pandemonium.

Reason: The U.S. Bureau of Labor Statistics announced a shocking
0.8% surge in core producer prices.

It was FOUR times what they expected, the worst since December
1998 …

It was running at an annual rate of 9.6% …

And it was raising the ugly specter of double-digit inflation!

The news hit the markets like a ton of bricks … injecting a megadose
of fear into the hearts and minds of investors … sending bond
prices into a tailspin … driving interest rates skyward … and
raising a series of urgent questions for all investors, including
you:

• If price indexes are beginning
  to rise at nearly double-digit rates, will long-term interest
  rates start heading toward double-digit levels as well?
• If so, how soon will home mortgage
  rates start surging? And if mortgage rates surge, what will they
  do to the value of your real estate properties?
• Crude oil is already creeping
  back up toward $50 per barrel. If it goes to $60 or $70 per barrel,
  like many experts expect, what will THAT do to U.S. inflation,
  bonds, mortgage rates … and your real estate? And what will
  it do for your energy stocks?
• Three weeks ago, Martin on Monday warned that the ethnic and
  political conflicts in Iraq would spread to neighboring countries.
  Since then, we’ve seen outbreaks of new troubles in Lebanon,
  Syria and Iran. If this pattern continues, THEN what?

I can’t answer all these questions in full this morning.
But I WILL give you a thumbnail response to each, plus some pointers
on where to go for more information and decision-making tools.

Long-Term Interest Rates Finally About To Turn Up

Strangely, for the past few months, even though short-term rates
have been going up, long-term rates had been going down.

Why? One reason was because so many people were duped by assurances
that inflation was tame and under control. But now, that’s
changing — and fast. Bond investors, bankers, and even members
of the Federal Reserve Board are finally beginning to admit that
U.S. inflation, which had been incubating for many months, is now
threatening to blast off.

They can’t ignore the fact that cigarette prices jumped 3.4%
in January and auto costs surged 1.2%. Nor can they pooh-pooh the
fact that, even WITHOUT these two items, core producer prices STILL
jumped by 0.7%.

Bottom line: We’re now seeing across-the-board
producer price surges in almost every single sector.

Result: The Fed cannot and probably WILL not
maintain its so-called “measured pace” of interest-rate
hikes.

Instead, the Fed must begin to jack up interest rates at a faster
clip … raising its Fed Funds rate by a half point at a shot …
sending a new round of shock waves into the financial markets …
and, this time, truly driving long-term interest rates higher.

Real Estate Boom … and BUST!

The specter of double-digit inflation and rising interest rates
couldn’t have emerged at a worse time for America’s
real estate.

I’m not predicting that America’s real estate bubble
is going to pop tomorrow. But it’s clearly time to add a strong
element of caution to any real estate decisions you may be making.
Indeed, warning signs are beginning to surface from various sources:

Warning #1. Mortgage demand, including refinancings,
has plunged dramatically — down 24% in a year, 65% from its peak.
And even excluding refinancings, it’s off sharply. This is
critical: Without mortgages, consumers rarely buy homes. And without
the critical demand from American households, the primary demand
for housing could break down.

Warning #2. There are more new homes for sale
now than at any time in history. This abundant supply is not yet
being dumped on the market. But an avalanche of unwanted, difficult-to-sell
supplies could be in the making.

Warning #3. Although home values have been unusually
strong, home rental rates have been unusually weak. As a result,
the price-to-rent ratio for existing homes is at a record high.
If rental rates don’t begin to rise soon, real estate investors
will lose their incentive to buy rental properties.

What will be the outcome? What should you do about it?

For investments that are designed to PROTECT your real estate and
your investment portfolio, check out my Safe
Money Report. This month’s issue is a 12-page gala
report with four protective steps you can take right now.

And for high-powered, leveraged vehicles to PROFIT from rising
interest rates, see our Interest Rate and Currency Trader.

Oil Prices Surging — AGAIN!

Crude oil prices rebounded past $48 per barrel on Friday.

And as you can see from this chart, since the beginning of this
year, they’ve been building up for a new blast-off — first
to challenge the $50 level … and then to challenge the all-time
high of $55 per barrel reached last November.

But even if oil prices fail to surge at this juncture, the very
fact that they have been HOLDING above $40 per barrel since last
summer has been a boon for virtually every company in the energy
sector, even those that use little or no leverage and aim mostly
for income.

Last October, for example, in my Safe
Money Report, I recommended an energy trust, primarily
for its near-double-digit dividend. Plus, I figured that, with some
luck, we could pick up another 20% or so in price appreciation in
about 12 months.

But last week, I got an urgent communication from Safe Money
analysts Marc Lichtenfeld and Marie Albin. They reminded me that,
instead of rising 20% in twelve months, the stock is up about 50%
in four months! And they urged me to send out a flash to subscribers
to take profits. I agreed.

If you’re a Safe Money subscriber, I assume you
received the email last Thursday. But if you missed it, check your
inbox again. If you’re searching by sender name, look for
“Martin D. Weiss, Ph.D.,” and if you want to search
by subject, check for “Urgent Safe Money Flash Alert:
Grab profits NOW!”

Or you can read the Safe
Money flash alert on the web. Also make sure you continue
to hold the other energy recos, which are — or should soon be —
doing even better!

In any case, rest assured there is no change in my view about these
energy trusts. I still like them — which is why I am recommending
subscribers hold the balance of their positions.

Remember: These stocks are relatively CONSERVATIVE — primarily
for income, and still, they are surging like high-flyers. So you
can imagine what can be accomplished with investments that are DESIGNED
to aim for high-flying returns. (See, for example, the recommendations
in Larry Edelson’s Real
Wealth Report or his Energy
Windfall Trader.)

Naturally, the more aggressive you get, the more risk you incur.
But the energy sector is not just for investment and speculation.
It’s also something you may want to consider as a hedge —
a protection against the damage rising oil prices can do to the
economy, to the stock market, and to your personal assets.

Here’s how it works: If we don’t see a sharp rise in
energy prices and inflation, your other investments should do well.
If we do see the sharp rise, your energy investments should do well.
In either scenario, you’re likely to be covered.

My advice: If you don’t own the energy trusts
we’ve been recommending, allocate some of your liquid assets
to them right now, buying half at the market and the balance on
the next correction. In addition to powerful supply and demand forces,
one key reason is this …

The Ethnic Conflicts I Warned You About
Three Weeks Ago Are Already Spreading

As you may recall, three Mondays ago, on the morning after the
Iraqi elections, I wrote:

I hoped it would be the more peaceful scenario and, God willing,
it still can be. But right now, the conflict has already begun to
spread in ways that no one, myself included, could have predicted
three weeks ago. Instead of spreading into the Persian Gulf, new
troubles have first struck the neighboring countries of Syria and
Lebanon:

• One week ago, on Monday, February
  15, a car bomb in Beirut killed former Prime Minister Rafik Hariri
  of Lebanon. This is a country that had finally recovered nicely
  from a long civil war among Sunnis, Shiites, and other ethnic
  groups. Now, according to the New York Times, the assassination
  was “the most serious blow to the stability of Lebanon in
  more than a decade.” And according to the Bush administration,
  it was a “terrible reminder” of the need for Lebanon
  to break loose from Syria.
• U.S. tensions with Syria, already
  near the boiling point, literally went off the charts — with
  the U.S. withdrawing its ambassador, with Defense Secretary Rice
  launching a verbal attack, and with Iran and Syria threatening
  an unholy alliance to defend themselves against any future U.S.
  aggression.
• In Iran, meanwhile, unexplained explosions in the same province
  as Iran’s major nuclear facilities rocked not only the region
  but the world’s financial markets.

And ironically, all this happened soon after elections in Palestine,
Iraq, and even in autocratic Saudi Arabia.

So again, recent events beg the question: Which will prevail —
democracy or chaos?

I hope and pray it will be the former. But at the same time, there’s
little doubt about this fact of life: Democracy alone — whether
legitimate or feigned — does not preclude chaos in the short term.

Nor can any reasonable observer question the fact that the spreading
chaos is a growing threat to oil in the region. Take a look, for
example, at this chart of Iraqi oil production in the last four
years.

After a natural bounce-back following the Iraqi war last year,
little additional progress has been made in boosting output. And
in the most recent month for which we have data, oil production
fell again, matching the lowest level in over a year — largely
due to insurgent attacks.

What’s most distressing to all of us who are closely watching
the Iraqi situation is that the insurgency is not dwindling, let
alone ending. Despite the capture of Saddam Hussein … despite
the hand-over of power to the Iraqi interim government … despite
the elections last month, the threat to oil production
in the region is not receding.

Forbes puts it this way:

Prognosis: A continuing trend toward double-digit inflation and,
in its wake, double-digit interest rates. Don’t get caught
off guard. Be ready!

Good luck and God bless!

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com

Martin Weiss
and “Martin on Monday” are non-partisan. Third-party ads do not necessarily
represent their opinion and should not be interpreted as an endorsement.