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Wednesday, February 20, 2008

Common Sense that is DEAD WRONG

Many financial wags -- the ones I read at 2 in the a.m. when the rest of you are peacefully sleeping-- claim that recession and inflation are incompatible. These are the people who are looking for easy interest rates to eventually overcome the problems in a soft economy. They are betting that the cost of living simply DOES NOT GO UP if the economy is shedding jobs and growing at a slow rate, or actually contracting. This is going to be a costly delusion, in my opinion.

Historical measures show inflation has risen dramatically for the last half century EVERY SINGLE TIME WE HAVE HAD A RECESSION. In the wonderful Carter years, consumer prices went up by a half, while the economy contracted. Then, interestingly enough, when the recession of 1980 hit (interest rates were so high they were choking out all economic activity) consumer prices continued to rise even as the economy tanked. We simply had to wash all the "bad money" out of the system, and even stagnant growth doesn't magically erase that.

Most gurus (who know far far more than I do) make their predictions based on an idea that sounds right, but simply does not match the facts. The data simply does not support the idea that inflation is correlated with the health of the economy. Rather, the data shows that inflation tracks almost perfectly with money supply. If what I am saying is true, the DOW can continue to sell off and the housing market can tank and we will STILL have very uncomfortable price rises in the foreseeable future.

The US no longer publishes the most reliable index of money supply, the M3. Best guesses, though, is that our supply of money is growing at an eye-popping FIFTEEN PER CENT a year. If you want to do the dumb man's estimate of coming inflation, subtract our rate of GDP growth (estimates are maybe 2-3 per cent) from the rate of money supply and you will get "Eddie's Index" or my prediction of the real rate of inflation for the upcoming year, which is about 13 per cent. (I should note that no representatives from Stockholm have contacted me about a potential Nobel prize for this staggering breakthrough in economic theory..... yet).

The only good news is that most of the rest of the world is doing the same thing...., if you wanna call that "good."

China has been inflating their currency at rates approaching 18 per cent. Of course, an economy that is growing at 13 per cent a year can swallow most of this, but not all. Food staples are on a rocket ride upwards there.

India has a 20 per cent rise in money supply annually

England has an 10 per cent plus rise in the number of pounds circulating

Europe prints new Euros at a rate of 11 per cent more per year.

Australia and New Zealand have money supply increases of 12 per cent and up.

Yet the fiscal gurus of the world seem slack jawed and confused by the recent explosion in the price of gold and silver, wheat and copper (yeah, copper is back), corn and lumber. These markets are GREAT prescients of inflation, yet all you hear about is our fedsec droning on about how the printing press is the final solution to recession. This is madness.

One of the advantages of being 52 years old is that I can see clearly that leaders are not wise by virtue of their positions of leadership. In fact, they are often utter fools, and lead those following them into ruin.

My advice, for anyone listening, is do NOT count on the bromide that "the interest rates will right the economy and we have inflation under control." Easy money MAY provide an adrenalin shock which will revive our comatose economy. My bet is that it will simply delay the recovery which would have occurred anyway. Of course, if you get politicians in there jacking around with home interest rates and demanding "justice" for poor people who never should have been floated loans in the first place, maybe the housing sector will NEVER recover. Politicians can screw up a steel ball with a rubber hammer. However, best case anticipated, and the economy does right itself, we are STILL going to have a real mess with rising prices, and that is going to wreak havoc with the economy trying to right itself in the first place.

My own portfolio consists of Hecla(HL), Couer D'Alene(CDE), Yamana(AUY), Stillwater Mining (SWC), North American Palladium (PAL), XTO Energy (XTO), and some other smaller stocks. These are all mining stocks except for XTO, and I expect all of these to be my "core," except for PAL and SWC, which I have only had for about 4 weeks, and are short term plays on the current South African Platinum crisis. The financial "gurus" will tell you that these are "too volatile" to be core holdings. That is true, if you have a model of our economy predicated on a sound dollar and steady growth. I disagree. I believe we are entering a period of time where the wisest course is to protect yourself from, and seek to exploit, the devaluation of our currency. Investing in "hard" assets is the only way to do this.

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