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In September alone, consumer prices jumped by a massive 1.22%, the equivalent of 14.6% inflation if the same pace continued for a year. It’s the most dangerous inflation since March of 1980 … when Jimmy Carter was in the White House … when run-away inflation gutted American markets and tore apart the fabric of American society … when a U.S. Treasury bond was selling for 55 cents on the dollar and 3-month Treasury bills were paying 16% … when the average American was To put it in perspective, I woke up early Sunday morning to chart inflation over the last decade and a half, searching for the single biggest month of inflation in each year. I found a few inflation spurts in recent years. But even the worst were in the 0.6 – 0.7% range. That was only about half what we just saw in September. Conclusion: The latest surge in consumer prices is about DOUBLE the worst single months of inflation since 1991. This means that, just to catch up with today’s inflation, interest rates will have to double and triple. It means … The Federal government will have to pay much more interest precisely when its deficit is the worst in history … American corporations are going to have to pay more for their borrowings precisely when some of the largest are already going bankrupt, and … American homeowners are going to be slapped with bigger monthly payments just when they’re already drowning in debt and lining up at the bankruptcy courts by the thousands. This Is an Emergency! And Yet Ironically, Wall Street is treating this like a joke. Even after the Bureau of Labor Statistics announced the shocking inflation news Friday morning … and even while debt-ridden Americans were queuing up to file for Chapter 7 and Chapter 13, many investors were still lining up to buy stocks. Their rationale: The inflation is concentrated mostly in energy. So the so-called “core†inflation, which conveniently excludes energy, is not nearly as bad. “What, me worry?†they said on Friday. “No core, no care.†My view: It doesn’t matter where the inflation monster is coming from or what you call it. It’s still a monster. And it could be similar to the monster that shattered the financial markets in the early 1980s, tore at the fabric of American society and drove U.S. interest rates through the roof. Does Fed Chairman Greenspan Two weeks from tomorrow, Fed Chairman Greenspan will be meeting with his 11 fellow members of the Federal Open Market Committee (FOMC) to decide their next move on interest rates. No one knows what they’re going to say. But if someone were to write a script, here’s what I think it would look like: A Fictional Script … While most other FOMC members listen intently, Fed Chairman Greenspan highlights the issues.
So our dilemma is: Do we fight the monster we can see with our naked eyes? Or do we continue looking beneath the surface, focusing only on the hidden animal that we think lies at the core? I’d love to continue making our old argument that the monster we see is just an illusion. I’d love to be able to say — to myself and to all of you gathered here today — that the surge in energy costs is a one-time event, a passing phenomenon. But suppose it’s the opposite. Suppose it’s really the milder, core inflation that will soon be a thing of the past. Suppose we’re at that pivotal juncture in the cycle when the energy costs start spreading throughout the economy, reaching deep into the core. Then what? Do we just sit back and let it happen? Or do we try to nip it in the bud? Clearly, our last and only effective weapon against sharply higher inflation is sharply higher interest rates. So here’s where we stand: If it’s true that the only thing we have to worry about now is the milder, core inflation, we can stay the course and raise rates by a meager quarter point, just as we’ve done 11 times already. But if we’re serious about combating the overall inflation monster, we must do more. We must send a signal — to the markets and to the world — that we mean business. We must jack up rates by MORE than a quarter point. Or, at the very minimum, we must send a clear signal that, if this trend continues, we have every intention of raising rates by more than a quarter point in the near future. FOMC Member #2: I have a question. You know what that could do to the bond market. The shock waves could dislodge billions of dollars in bonds in the portfolios of institutional investors in the U.S., in Japan and South Korea, in China and Taiwan. It could dislodge hundreds of millions more from the bond inventories held by government security dealers in New York and around the country. Those bonds will pour out of their portfolios like a flood. They will sell their bonds. And when they sell their bonds, bond prices will go down, driving bond yields higher. We could lose control of the bond market, just like we did under Carter in 1979. As a result, market rates could go up by a heck of a lot more than what we’re talking about today. They could surge by a full point, even two, maybe three. Greenspan: So what’s your question? FOMC Member #2: My question is: Is that a risk we can afford? Is there no way we can get a better measure of that risk before we act? Greenspan: Naturally, all of us would love to strip down the inflation monster to see the true nature of the core. We’d love to see what’s really inside it. But we can’t do that until after the fact — after the inflation has spread to the entire system. That’s the greater risk. I also have a question, a far more fundamental one: Can’t we ever learn from our past mistakes — from the mistakes of recent disasters? FOMC Member #2: If you’re talking about the tech bubble and real estate bubble, I’m not sure it’s fair to blame ourselves for those. Greenspan: No, I’m talking about Katrina and Niger. FOMC Member #3: Katrina and Niger? Greenspan: Yes. In Niger, West Africa, the cost of providing fertilizer and agricultural extension services would have been less than one one-thousandth of the cost of food and medicines to combat the resulting famine. With Katrina, the cost of upgrading the New Orleans levees prior to the storm would have been an even smaller fraction of the post-diluvium reconstruction costs. And in both cases, they had ample warnings, just as we have ample warnings right now. We have the Future Inflation Gauge from the Economic Cycle Research Institute which reports a jump from 120.7 to 122.7 in September, the highest reading in over five years. We have the Conference Board’s recent survey, showing the biggest single-month jump in inflationary expectations in 15 years! We have the survey from the Institute of Supply Management, saying its index of prices paid for raw materials has suddenly skyrocketed from 62.5 to 78, also the largest jump in fifteen years. And now we have our own September inflation number, the worst in a quarter-century. Are we going to continue ignoring all these monstrous inflation warnings — like they ignored the Niger famine warnings and the New Orleans flood warnings? If so, it’s going to wind up costing us many more shocks to Wall Street and far greater losses to investors than a single, pre-emptive, shock treatment administered right now. FOMC Member #2: Why can’t we deal with that later? Greenspan: These are the last months of my tenure, and in these last months, I’m in no mood for procrastination or obfuscation. I’m in no mood to play politics. I … want … to … get … it … done! But beyond my personal reasons, I want to do it now because it’s the right time for the economy and the right time for the markets. Yes, it will be a shock. But that’s precisely what stock investors need, what real estate investors need — a jolt to wake them up from their slumber, to shake them out of their complacency. Here we are with all these inflammatory, inflationary materials lying around in the economy, and they’re like kids playing with matches, taking the wildest investment and debt risks I’ve seen in all my 79 years. FOMC Member #2: Then let’s warn them about that. Why must we use shock treatment this early in the inflation cycle? Greenspan: Because we’ve already warned them, and they’re not listening.
Tony in Philly warned them the energy spike could be permanently disrupting the price environment. Bob in Kansas City told ‘em how multiple inflationary pressures are now coming together at the same time. I personally sent ‘em the same message over and over again. Besides, why in the world would we prefer later in the inflationary cycle, when we know that the later stage of the disease requires more radical surgery and is far more costly for all concerned? Earlier, you referred to the lessons of the tech bubble and housing bubble. But more relevant, in my view, are the lessons of Fed Chairman Miller and Fed Chairman Volcker. Miller used the milder, jawboning approach, just like you’re advocating. But it didn’t work. Volcker then applied the shock-treatment. He had no choice. To retake the reins on the run-away inflation monster of the 1980s, Volcker eventually had to jack up the Fed funds rate to 20%. He had to apply multiple rate-hike shocks and multiple, Draconian doses of anti-inflation medicine. Is that what you want to do after I’m gone? Is that the legacy you want to leave behind when you retire into the sunset? What would that do to the bond market? What would that do to the housing market? The FOMC members remain divided and undecided. And although this script may be fiction, the questions it raises are not. Moreover … The Answers Could As soon as the FOMC meeting ends two weeks from now, we will probably know which argument has prevailed: If the Fed decides to stay the course, raising its target for the Fed funds rates by another quarter point, Wall Street may breathe a sigh of relief. But it won’t last. Soon, in bond markets around the world, you’ll see growing disappointment in the Fed’s lack of resolve. “Look!†they’ll say. “The inflation monster is huge. But the Fed’s a wimp. This means the monster is going to grow even bigger. Let’s dump these bonds now while we still can.†If the Fed decides to get more aggressive, you’d think the response would be very different. Not so. Instead, the word among bond investors will be … “Look! Even the Fed now admits that the inflation monster is huge. Let’s dump these bonds now while we still can.†In either scenario, the end result is bound to be the same: Sharply higher interest rates. Five Recommendations This is urgent. It’s no time to dilly-dally. Here’s what I suggest: Recommendation #1. Keep most of your money safe or invested conservatively. No matter what we may see today, predicting the future with precision is not possible. So you must always be ready for the unexpected. My favorite places to stash keep-safe cash: American Century Capital Preservation Fund (CPFXX; 800-345-2021) Recommendation #2. Get out of the way of falling bond prices and rising interest rates. If you own any long-term bonds, get rid of them — immediately. Bonds are already beginning to fall in value. And if they enjoy a temporary rally, consider it another, even better, selling opportunity. Recommendation #3. Also get rid of stocks that are vulnerable to rising rates and higher inflation. No one can say ahead of time exactly which ones will fall the most. But if you’d like a free Weiss rating on up to three companies of your choice, visit www.weisswatchdog.com. Recommendation #4. Due in large measure to the growing inflation monster, the oil and gold investments I’ve recommended in my Safe Money Report have gone through the roof. If you’re a subscriber, follow the instructions I sent the week before last to take partial profits. Then, stick with the rest. If not, click here to subscribe and download the latest issue. Right now, oil and gold are still in a corrective phase. But the correction is temporary. The long-term uptrends are not. They’re likely to continue. Recommendation #5. If you have money you can afford to risk, I have a fifth recommendation: Use highly leveraged, limited-risk, interest-rate investments that can give you the chance to build $4,500 into $50,000. Click here for details. Good luck and God bless! Martin 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, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2005 by Weiss Research, Inc. All rights reserved. |
The Inflation Monster
I’m looking at the inflation monster, and I can tell you flatly it’s getting bigger and uglier by the minute. 
paying 15.3% — plus two points — for a 30-year, fixed-rate mortgage. 
Fed Chairman: As you all know, September’s overall inflation number was a monster. But the core inflation is far milder and more benign. 
Tom in Dallas warned them that inflation was already near the upper end of our tolerance zone. Previous post: Greenspan Rate Shock In Two Weeks!
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