The Ben Bernanke Inflation

Surging demand from Asia isn’t the only big reason gold and oil are headed higher.

Another, equally powerful, force is incubating right here in the United States: Ben Bernanke’s Federal Reserve Board.

And it’s revving up right now to boost my favorite investments to the next level. I’ll give you my latest rundown on those in just a moment. But first, let me tell you about Bernanke.

Last week was his first Congressional testimony as the new chairman of the Fed. So I set my glasses down, leaned back, and just listened … while flashing back to his writings and speeches of recent years. My conclusion:

Ben Bernanke Is Fixated
On the Great Depression

He’s a big, die-hard believer in the theory that, after the Crash of ’29 and during the Depression, the Fed messed up – big time.

He’s utterly convinced that the Fed failed in its primary mission to prevent deflation, its greatest blunder in history … that the great suffering of that era could and should have been prevented.

Think about that for a moment. If you hate deflation, on what side of the fence are you going to fall when it comes to making critical decisions about our nation’s money supply?

Answer: You’re going to consistently err on the side of pushing out more money to chase scarcer resources. In other words, more inflation – probably much more.

Of course, no one knows what Bernanke’s plans are. He himself may not know at this early juncture. But with the circumstances I foresee in the months ahead, here are the kinds of Bernanke tactics you can expect.

Bernanke Tactic #1
Given the Slightest Slowdown,
Pump Money into the Economy
Like There’s No Tomorrow

Bernanke’s own words:

“The U.S. government has a technology, called a printing press – or today, its electronic equivalent – that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

“Under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

To me, that sounds like a siren call for inflation. It implies that Bernanke is ready and willing to guarantee the flow of easy money – by simply running the printing presses!

Inflationary? You bet!

Add that to his intense fear of deflation, and you have a powerful combination.

Bernanke Tactic #2
To Help Guarantee NO Deflation,
Actually Set an Inflation TARGET

For the longest time, Bernanke has urged the Fed to set a target for inflation, or at least a target range. His words:

“To ensure that monetary policy stays on track after Mr. Greenspan … the best bet lies in a framework known as inflation targeting … ”

What’s his target? The exact number is uncertain. But if you dig into Bernanke’s papers and speeches, you’ll find evidence indicating he probably would like to see 2% “core” inflation (minus food and energy).

But there are three big problems with this inflation targeting.

First, if the inflation rate drops below Bernanke’s target, it means the Fed may be too hasty in flooding the economy with paper money.

Second, too much focus on the “core” inflation could be a big mistake. Indeed, who ever said it’s OK to permanently exclude food and energy from our analysis of the true inflation? Ben Bernanke may not have a problem with his food and gas bills. But most Americans do.

Third, even when you include food and gas, the Consumer Price Index (CPI) is still a lousy gauge of inflation.

The CPI excludes most major costs that affect all of us: state and local taxes, federal taxes, social security, Medicare, even property taxes. Its housing component is rigged to use rental-equivalent costs instead of the actual cost of home ownership. Overall, it’s a fudged index that understates inflation by a mile.

So running the economy based on the CPI is like trying to navigate a battleship without a compass or a rudder. And basing monetary policy on the so-called “core” CPI could be even more dangerous.

Bernanke Tactic #3
Look the Other Way While
The Federal Budget Deficit
Spirals out of Control

Bernanke admits the massive federal deficits are a problem – “a looming issue that needs to be addressed sooner rather than later.”

He’s also expressed concern that the budget deficit is going to soar as baby boomers begin to collect soaring retirement and health benefits.

But he seems to have no intention of applying pressure on lawmakers to fix the problem. He won’t press for tax changes. He won’t press for spending cuts. From what I can see, he won’t lift a finger to help bring the federal deficit under control.

That’s a big change from his predecessor. Greenspan was at least willing to speak out on fiscal responsibility and use the Fed as a bully pulpit.

Bernanke Tactic #4
Do Nothing to Control the Housing Bubble.
Do Everything to Stop a Housing Bust!

According to Ben Bernanke, the housing boom is not a bubble about to burst.

Sure, he admits that housing prices have skyrocketed. But it seems that, in his view, that’s just more of a good thing. The staggering jump in housing over the past two years – about 25% – “largely reflects strong economic fundamentals,” says Bernanke.

In other words, he sees the nose-bleed run-up in homes as just a normal cycle. Nothing to worry about. Everything A-OK!

This, too, is a change from Greenspan. Sure, back in the rah-rah stock market days of the 1990s, Greenspan said it was unrealistic to expect the Fed to identify an asset bubble when it’s inflating. But in his last days at the helm, Greenspan seemed to be losing sleep about the bubble.

Not Bernanke! At least not until housing starts going the other way (down!).

My view: Ignoring real dangers is, in itself, very dangerous. It implies deep-set complacency. And complacency means the Fed will again be caught off guard, fighting “the last battle.” It also means that …

As the housing bubble bursts, Bernanke could overreact, flooding the economy with even more money, fanning even further the fires of inflation.

That’s what Alan Greenspan did in the wake of the stock market crash of 2000 and 2001. It’s certainly what Ben Bernanke is likely to do if the real estate market gives way.

Result: Tangible assets – such as gold and oil – will soar like crazy.

Bernanke Tactic #5
Let the Dollar Get Crushed

There’s no love lost between Ben Bernanke and the U.S. dollar.

He believes that, after the 1929 crash, a major aspect of the Fed’s big blunder was overly preoccupied with the dollar, to the detriment of economy.

“By raising interest rates to protect the dollar,” Bernanke says, “policymakers contributed to soaring unemployment and severe price deflation. The U.S. central bank only compounded its mistake by failing to counter the collapse of the country’s banking system in the early 1930s.

“Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity.”

This is not a novel theory. But this is the first Fed Chairman to be so obsessed with advocating its underlying thesis.

Bottom line: Ben Bernanke Will Set Off
The Next Huge Wave of Inflation

I fear Bernanke is going to pour money into the system at the drop of a hat. It could be a slight downturn in the economy. Or it could be the housing slump that’s now getting underway.

But what truly frightens me the most is Ben Bernanke’s likely knee-jerk reaction to the threat of a bird flu pandemic.

This is not a far-away situation. Heck, even if a human pandemic is still months away, just the FEAR of a pandemic could prompt Bernanke to run the money printing presses like a madman.

Gold and Oil Preparing
For Next Leg Up

There’s no such thing as a crystal ball. I have none. And I can guarantee no one else does either. But there are two windows you can look through to evaluate what may be coming:

One is to try to divine the upcoming tactics of key decision-makers, like the Fed Chairman’s. That’s what I’ve just done.
Another is to look at what the market itself is telling us right now. And I can tell you flatly: The gold and oil markets confirm and double-confirm my suspicions regarding Bernanke and his likely inflationary policies.

First, gold …

In the chart, notice how gold is holding well above two major trends:

The first, dating back to July of last year, the second, the more recent, sharper uptrend from last November. Both point solidly to higher prices for gold.

Also notice how gold has held firmly above its 50-day moving average.
Although the yellow metal has slipped below that line at times, looking back, you can see that this is an indicator that has helped define a series of great buying opportunities.

Now, to oil. If you’re among those who think it’s going to fall back to $50 a barrel or lower, the oil chart below should help dissuade you of that notion.

Oil has been bouncing around between $60 and $65.

But throughout this period, it has still held firmly above its uptrend; and that uptrend is solid, steady and sustainable.

Moreover, the two indicators I’ve added to the chart also suggest the next move up could come any time.

The first, called Bollinger bands, is essentially a 20-week moving average (middle grey line), with an upper and lower band that are calculated from that average.

The bands essentially tell you how much room the price has to rise above, or below, the moving average without significantly changing the trend.

On this chart, the Bollinger bands are telling us that some more sideways chop in the oil market is possible.

But with the uptrend line very close to the current price, I would expect the choppy pattern to be very limited and would not be surprised to see oil soon start moving substantially higher.

The second indicator, at the bottom of the oil chart, is called Relative Strength (RSI). It gives you an indication of the strength of the buying or selling in the market. Right now, the RSI is not yet oversold, but it has reached a level where price bottoms have formed in the past for oil.

My Recommendations

The Bernanke Fed is one more powerful reason to invest in natural resources – not just right now but also for the next several years. That’s where you will find real assets and real value. And it’s also the number one focus of my Real Wealth Report. So …

Recommendation #1. Keep a solid portion of your money in cash, using a money market fund – ideally one dedicated to short-term Treasuries or equivalent.

Recommendation #2. Invest in a diversified gold mutual fund such as the DWS Fund (SGLDX). And stick with my favorite gold stocks. (The complete list and model portfolio are in the latest issue of my Real Wealth Report.)

Recommendation #3. Hold select natural resource conglomerates in energy, food, and other natural resource stocks, including alternative energy companies. (Also detailed in my Real Wealth Report.)

Recommendation #4. Move quickly into companies set to profit handsomely by helping to protect society from the bird flu pandemic.

My special report “Follow The Money – 5 Companies That Will Get the Lion’s Share of The $10 Billion Avian Flu Defense Budget” – will show you how.

One of the pharmaceutical companies you’ll read about in my report has already signed a $100 million contract with the U.S. government to develop a bird flu vaccine as soon as a contagious strain appears. And that’s just to develop it – not to manufacture or distribute it. The rights could be worth staggering amounts of money.

Another drug company I name is an even bigger opportunity. Its stock has been beaten up because its new flu drug failed phase III testing. But now, subsequent tests are showing that a single injection of this drug may be comparable to five days of Tamiflu treatments, greatly lowering the risk of death from bird flu.

A third company named in my report is working on a new cell-based technology to grow viruses without using chicken eggs. The U.S. government and the FDA are already helping this company set up shop with a multi-million dollar contract. We estimate that when there’s a contagious-among-humans form of the virus, a contract to supply the vaccine could be worth $120 million in the U.S. alone.

But that’s just the tip of the iceberg! In addition to vaccines and drugs, there’s also a whole second tier of flu-related products that will be desperately needed: Disposable face masks and latex gloves … hospital-strength disinfectants … and much more will have to be stockpiled immediately.

And experts estimate that some supplies will need to be 10,000 times greater than the inventories that hospitals maintain in normal times.

One company in particular dominates this sector. It’s the major supplier to hospitals, clinics, nursing homes and emergency triage centers that local governments will be forced to establish in a pandemic.

You’ll find all the details in my soon-to-be-published report, “Follow the Money – 5 Companies That Will Get the Lion’s Share of the $10 Billion Avian Flu Defense Budget.”

Last week, I mailed an offer for the report to hundreds of thousands of investors. And when it’s released, the report will sell for $145.

But right now, the full report is yours absolutely free simply by starting or renewing your subscription to my Real Wealth Report for one year ($99). For more information call 800-604-3649 or go to my web page.

Best wishes,

Larry Edelson
Editor, Real Wealth Report

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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