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In fact, if anything, the politicians are sending the signal that they actually prefer more inflation over the alternatives. Two prime examples:
Norris points out that this is precisely the opposite of the situation of the early 1980s when the world’s leading politicians were focused on conquering inflation — not bringing it on. Back then, America’s lead inflation fighter, Fed Chairman Paul Volcker, had the full support of the politicians. Ditto for the German Bundesbank. That helped bring about falling oil prices, a productivity boom from improved information technology, the emergence of cheap exports from China and India, and LOW inflation for many years. No more! “Now,†writes Norris, “oil prices are rising and fiscal discipline has vanished. The productivity boom is fading and resistance to the China effect is rising. … “So why is there not a general belief that inflation is coming back? In part it is because a lot of attention is put on the so-called core rate of inflation, which excludes changes in volatile food and energy prices. Ignoring energy prices now is a bit ridiculous.†How Did We Wind Up In This Situation?
(Click above for full article.) Since the turn of the millennium, the U.S. government has made four major wrong turns. Wrong turn #1. Recklessly easy money I can understand why Fed Chairman Greenspan cut the Fed Funds rate back in the early 2000s. In the wake of the tech bust and 9/11, he wanted to save the economy. But there’s a big difference between (a) easy money for a short period of time and (b) the easiest money in 45 years consistently and persistently maintained for years. The former would have been an acceptable emergency measure. The latter has turned out to be recklessly easy money, with dangerous consequences. And even with the Fed’s latest rate hike on June 30 to 3.25%, rates are still far too low. Wrong turn #2. Reckless government spending Under the previous Bush administration, Congress established pay-as-you-go rules (“Pay-Goâ€) which exercised at least some constraint on government spending. The basic concept: If you add a new expense to the federal budget, you’ve got to find a comparable cut — or revenue boost — somewhere else in the budget. In other words, you must at least have a plan for where the money’s going to come from. But under the current administration, those rules have been dropped and replaced by a new philosophy: “Spend now and find the money later.” It doesn’t work, and as a nation, we’re NOT going to get away with it. Wrong turn #3. Reckless foreign trade policy The number one reason Greenspan dropped interest rates so low in the early 2000s was his fear of deflation — falling prices. But lower prices, despite the near-term pain they can bring, were precisely what the doctor ordered for America to compete more effectively overseas. Fast forward a few years — to the present. Suddenly, we have the biggest oil-import bill in the world and some of the highest wages on the planet. End result: A trade deficit that is far bigger than the greatest federal budget deficit in our history. Wrong turn #4. Turning a blind eye to the spreading inflationary fires Today, the signs of inflation are glaring, and still Mr. Greenspan is turning a blind eye. He’s greatly underestimating not just ONE danger sign, but FOUR — $60-plus oil, out-of-control federal spending, record-smashing trade deficits and the wildest housing bubble of all time. In this environment, your first priority is to keep your money safe. For your cash assets, favor short-term Treasury securities. You can buy these through the U.S. Treasury Direct program or with a Treasury-only money fund. Your second priority is to boost your yield and income. That’s tougher nowadays with long-term fixed yields still low. But there are a select few investments that are providing VERY attractive yields PLUS relative safety at the same time. One company, for example, Enerplus (ERF), is throwing off nearly double-digit yields AND capital gains of more than 30% in a year. (For more details, see my special report, “Yield Plus Potential for Large Capital Gains.”) And, if you have some extra money to play with … or you need a hedge against the coming financial crunch … I recommend put options on interest rates or on interest-sensitive stocks. The more the stocks fall, the more money you make. Profit Meltdown In S&P 500 We’re on the brink of a profit meltdown in most S&P stocks. Right now, even if you accept Wall Street’s optimistic projections, the growth in S&P company profits is plunging by half or more: Instead of 20% to 30% profit gains, you’re going to be seeing second-quarter gains of no more than 7% to 9%. On the surface, that may not seem too bad. But put it in perspective: FIRST, bear in mind that stock investors have gotten used to expecting the double-digit profit increases. Anything less will be a disappointment. SECOND, recognize that corporate profits are just beginning to get clocked by surging energy costs and rising borrowing costs. THIRD, remove the energy sector from the S&P index. Then calculate the first-quarter profit growth of the remaining sectors. It was only 4.6%! FOURTH, look at the big picture. In 2003 and 2004, the government pumped up the economy with some of the most aggressive tax reductions and one of the deepest cuts in borrowing costs of all time. Result: Profit growth was strong. Now, more tax cuts are financially impossible. And the Fed is pushing borrowing costs up — not down. Result: Profit growth is already weakening. The one bright spot in the S&P … Profits Surge in Energy Sector If you’re looking for solid, double-digit earnings growth, virtually the only place to go right now is the energy sector. In the second quarter, their earnings should be up by an average of 26%. And that’s BEFORE the latest round of oil price surges. Among the ten major sectors in the S&P, there is no other sector that comes even close to this performance. Another positive sign: Among all ten sectors, energy stocks have had the most upward revisions in profit estimates since the second quarter started. Chalk that up to higher crude oil prices, which boost profitability for nearly all of the firms. Case in point is one of Larry’s recent picks in his Energy Windfall Trader: XTO Energy (XTO). The company, based in Fort Worth, Texas, has built a solid reputation as a highly efficient oil & gas operator with outstanding growth prospects. Sales soared nearly 60% in the first quarter, while bottom-line profits jumped an impressive 77% year over year. And similarly robust results are expected for the second quarter, which XTO will be reporting on the morning of July 20. $70 Oil Coming Quickly! Then $100! A series of powerful forces are converging in one time and place to drive oil prices ever higher: Supply shortages. Rising demand. And now, another, unusually severe hurricane season in the Gulf of Mexico that could disrupt production. That’s why oil continued to surge this week. That’s why it rallied back yesterday afternoon, despite the London attack. And that’s why I have little doubt we’ll soon see oil at $70, and even higher. Keep in mind that when you allow for the decline in the purchasing power of the dollar over the last 25 years, the inflation-adjusted high price of oil should actually be near $100 a barrel. So $60 oil, even $70 oil, is cheap by comparison. There’s much more upside coming. Based on reserves, my latest review shows 5 major oil and gas companies that should be on the prowl for acquisitions … or could become targets themselves.
In the far right column, you’ll see that the oil reserves of Anadarko, Devon and Talisman are valued between $6.57 and $8.71 per barrel. All three of these companies are likely takeover candidates. Meanwhile, ExxonMobil and Suncor’s reserves are valued at substantially higher prices, but still cheap compared to the price of oil once extracted. My view: With oil solidly in its next phase up and headed toward $70 a barrel — and with CNOOC kicking off a wave of mergers and acquisitions in oil — the oil markets are going to be hotter than ever. Best wishes, Martin About MONEY AND MARKETS MONEY AND MARKETS is written by the editors and financial analysts at Weiss Research. To avoid any conflict of interest, our editors and research staff do not hold positions in companies recommended in MAM. Nor does MAM and its staff accept any compensation whatsoever for such recommendations. Unless otherwise stated, the graphs, forecasts, and indices published in MAM are originally developed and researched by the staff of MAM based upon data whose accuracy is deemed reliable but not guaranteed. Any and all performance returns cited must be considered hypothetical. Contributors: Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, David Dutkewych, Larry Edelson, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Anthony Sagami, Julie Trudeau, Martin Weiss. © 2005 by Weiss Research, Inc. All rights reserved. |
Politicians: Let There Be MORE Inflation!
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