When will inflation hit the U.S.? 2013?

When we’re going to see the serious inflation – and perhaps even hyperinflation – that economists have been predicting?

The price of gold, oil, energy and other hard commodities has risen steadily for more than a decade, and that can only mean one thing: global currencies are weakening and inflation has settled in. The real question, though, is when we’re going to see the serious inflation that economists have been predicting?

To answer that, we’ve got to do some data mining. First: what’s the current inflation rate? According to the U.S. government, it’s a paltry 1.7 percent. Ask anyone who goes grocery shopping or pays household energy bills and they’ll probably shake their heads at that number.

In fact, if we calculate inflation the way the government did in 1989, we’d see inflation’s actually hovering at an annualized rate of 5 percent (per ShadowStats). If we calculated inflation the way our own government did in 1980, we’d see it’s even worse at somewhere north of 8 percent (again per ShadowStats).

Those are scary numbers. And they’re indicative of just how fragile our so-called recovery has been. And yet, most investors – and particularly the media – are happy to get spoon-fed the more palatable modified inflation numbers that get announced every month. It’s just a matter of time before that changes.

When will inflation get worse?

Inflation’s already bad, but it’s probably just a glimmer of how bad it will ultimately get in the U.S. Unfortunately, we don’t have a roadmap that spells out exactly when the bottom will drop out, but we can take educated guesses.

Right now, the U.S. dollar is artificially propped up thanks to the fact that it’s in better shape than some of its neighbors. The EU is worse off than the US, China’s yuan is pegged to the dollar, India’s got official inflation numbers north of 7 percent and inflation’s ravaging South America. Since the U.S. is printing money at will, that gives central banks around the world little incentive not to do the same. In fact, other economies get penalized if their currency stays strong relative to the dollar and Euro because their exports effectively cost more.

That’s created a race among central banks, with each of them trying to devalue their currencies faster than their neighbors.

The U.S. is doing particularly well at devaluing the dollar. Yes, the government can say that unemployment is under 8 percent, and that our budget will be balanced in a decade, but the facts just don’t support those claims. We think we’re insulated from riots, draconian budget cuts and hyperinflation, but I would argue we’re just a black swan away from a bout of hyperinflation in the U.S.

And that black swan would be a sudden rise in interest rates that the government is forced to pay on bonds. At the moment, interest rates on bonds are unnaturally low. That’s thanks to investor uncertainty and the Federal Reserve’s bond buying spree (known as quantitative easing). Yields on bonds are so low they’ve crumpled 50 percent over the past decade and more than 70 percent over the past 20 years.

We truly are at a pivot point. The U.S. debt load threatens to collapse the economy, and if investors lose faith in the U.S. government’s ability to pay back it’s bonds, the U.S. national debt could transform itself from a heavy burden into a crippling death blow. That’s no exaggeration, either. The same thing, in fact, happened in Ireland, Greece and Spain. How? Investors stopped buying bonds and the rates those governments had to pay to borrow cash skyrocketed.

It can’t happen here

Surely Greece is in worse shape than the U.S., right? In fact, the U.S. has surpassed Greece’s debt-to-GDP ratio (per GlobalFinance), and Italy’s debt-to-GDP is only about 16 percent higher than the U.S. government’s. Should investors stop buying bonds, the U.S. would have to sell them at ever higher interest rates with each tick up in rates further burdening the ability for our economy to “grow it’s way out” of debt.

Since most of Europe shares a currency in the Euro, countries in the EU don’t have the luxury of cranking up the printing presses at will. The U.S. on the other hand, does, and when investors stop dumping money into U.S. treasuries (which they eventually will), the U.S. will be forced to print money even faster than they are right now.

When that comes, we’ll finally see the rampant inflation that everyone’s afraid.

Will it happen in 2013?

The short answer is, I’m not sure. The long answer is, it’ll probably happen when conditions start improving in Europe. The Euro is in bad shape right now, but the fact that it’s tied together a diverse group of countries means the EU can exert pressure on troubled countries, forcing them to cut their budgets and get on a more sustainable fiscal path.

We can’t say the same thing about the dollar, and that means our government’s going to be reluctant to make the hard cuts it has to make. Without those cuts, the only choice the Fed will have is to print even more than the $85 billion a month that it’s already printing. Once that happens, we’ll really understand what it’s like to live in an economy rampant with inflation – no matter what numbers the government throws at us.


How to short bonds with ETFs before the collapse

Betting against bonds and the dollar could be one of the few prudent investments we have left. Here’s a list of the best short bond ETFs that will help you do just that.

The chairs on the Titanic will soon be rearranged. On June 30, the Federal Reserve is slated to end QE2. No longer will it be the primary buyer of U.S. debt. If foreign investors, mutual funds and banks don’t step in to fill the void, bond prices could fall quickly and yields could skyrocket in the face of rising inflation and record debt levels at the Treasury.

Just last week, we learned that Bill Gross, the founder of Pacific Investment Management Co. (better known as PIMCO), bet against the U.S. Treasurys market with short positions taken up in February. That’s a big vote of no confidence in U.S. debt as PIMCO manages world’s biggest bond fund.

You can do the same with a variety of short bond ETFs. Here’s a list of the most popular short bond ETFs. Keep in mind that long-term bonds (20+ years) are generally the most sensitive to inflation, and therefore will likely perform the best in the event of a bond market crash. All of the ETFs listed below are leveraged except for TBF. Direxion’s Treasury Bear ETFs are leveraged 300 percent:

ProShares UltraShort 7-10 Year Treasury ETF (NYSE:PST)
Volume: 158,000

ProShares UltraShort 20+ Year Treasury ETF (NYSE:TBT)
Volume: 15.7 million

ProShares Short 20+ Year Treasury ETF (NYSE:TBF)
Volume: 490,000

Direxion Daily 10-Year Treasury Bear 3X Shares (NYSE:TYO)
Volume: 39,000

Direxion Daily 30-Yr Treasury Bear 3X Shares (NYSE:TMV)
Volume: 1.1 million

In Bill Gross’ words, government debt and entitlements will undermine the dollar in the years to come. “Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates,” he writes at Pimco.com. Until we see change in Washington, betting against bonds and the dollar could be one of the few prudent investments we have left.



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Why has the media gotten silver price forecasts so wrong?

Silver’s up more than 40 percent since the start of 2011 and that has me wondering why have the media and financial analysts have gotten their silver price forecasts so wrong?

It’s easy to look back on the past and see investing ideas that should have been no-brainers. I suspect that will be case for investors sitting on the sidelines while silver prices continue to surge. The white metal rose more than 80 percent last year and is already up more than 40 percent since the start of 2011. It begs the question, though: why have the media and financial analysts gotten their silver price forecasts so wrong?

According to GuruFocus.com, silver “experts” came into the year with an average silver price forecast of $29.50 an ounce in 2011. It’s April, and silver prices are already approaching $46 an ounce. Something’s seriously out of whack, and here are a few ideas why silver price predictions have fallen woefully short of the mark:

Metals as the new reserve currency. The tight interrelationships in the global financial system exported the mortgage derivatives crisis around the world. When the U.S. economy tanked in 2008, so too did economies in Europe and Asia. That means bailouts haven’t been limited to the U.S, and the net effect is its not just the dollar that’s declining in value; it’s most of the world’s major currencies. That’s turned finite commodities like oil and precious metals like gold and silver into de facto reserve currencies. When there are questions about the stability of fiat money around the world, precious metals provide one of the few safe havens left. The media and silver analysts may have under-estimated the U.S.’s inflation exportation.

Bond backlash. Standard & Poor’s warning earlier this week that the U.S. government’s AAA debt rating could be lowered in the next two years came as a surprise to no one. What did come as a big surprise is the backlash from financial titans and foreign governments.

Just last week, the world’s largest bond investor Pimco completely exited its position in U.S. treasuries. It’s not just Americans who are becoming disillusioned by U.S. debt, either. China, in particular, has been vocal in the international media in its calls for stronger fiscal policies in the U.S. When no one wants to hold bonds, other asset classes – commodities and precious metals, in particular – are bound to rise. The extremely rapid pace of the rise points to growing uncertainties about how the U.S. government will respond to the mounting debt crisis.

Under-reporting inflation. If you listen to the official line, it seems like there’s not much to worry about when it comes to inflation. The U.S. Bureau of Labor Statistics is reporting that the Consumer Price Index is rising at a mere 2.7 percent a year. In reality, though, that number’s actually higher than 10 percent. Since the year 2000, the Bureau has stripped out energy and food prices from its model in an attempt to more accurately portray inflation (what they term “core CPI”). Shadowstats.com tracks CPI according to the old inflation calculation model, and per that “outdated” scale, we just broke into the double digits again. Heavyweight investors are well aware of that fact, and they’ve sought out gold and silver as a means to protect their assets.

A correction in the gold:silver ratio. With most of the emphasis on gold bullion over the past decade, it appears the pendulum is finally shifting toward silver. Many analysts had been calling for a correction in the gold:silver ratio in the face of rising industrial demand and a desire to invest in precious metals without shelling out for gold. Silver stands in as a great alternative.

According to GuruFocus.com, the gold:silver ratio has stood at a rough average of 13:1 over the past 1,000 years. Its only been in the past 100 years that the ratio has been heavily skewed. At one point in the 1990s, the gold:silver ratio approached 100:1. Today, it’s closer to 35:1, and Eric Sprott at Sprott Asset Management expects it to go as low as 16:1. It’s hard to blame analysts for expecting the ratio to change more gradually than it has over the past 18 months. The question now is, just how low will that ratio go? No one knows the answer, but if they did, their silver price forecasts would certainly be more accurate.



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What happens when QE2 ends in June?

No one knows for sure what will happen when QE2 ends on June 30, but here’s my best bet: it won’t be pretty.

Call it D-Day; “D” for decline. On June 30, the Federal Reserve is expected to close the door on its enormous quantitative easing program QE2. No one knows for sure what will happen, but there seems to be a general consensus that markets are going to get volatile. Here’s my take:

Look for a sell-off in stocks. With the Fed pumping as much as $2.5 billion into the economy every day since November, it makes sense that equities have been on the rise – particularly as short-term bond yields flirt with near-negative rates (when adjusted for inflation). Once the cash spigot shuts off, a big support for the markets will be kicked free. Runaway oil prices have already started digging a rut in economies around the world. That prompted analysts at Goldman Sachs last week to urge clients to go underweight commodities in the near-term.

Inflation’s not over yet. Keep in mind that the Fed’s goal with QE2 was to stave off deflation. With inflation near 10 percent (per ShadowStats), they’ve clearly achieved what they set out to do. However, ending QE2 won’t immediately lead to a wave of deflation. Inflation spiked in Japan for more than five months after the government officially ended its QE experiment in March of 2006. Stocks, however, collapsed, and the Nikkei took more than a year to recover.

Bond yields will shoot for the sky. Without a rigged auction system, bond buyers could be in short supply come July. If that’s the case, prices will fall and the yields on U.S. treasuries will likely spike. Japan experienced something similar during its VaR Shock in July of 2003. At the first sign of weakness in the bond market, risk models triggered heavy bond selling by banks and other financial institutions in the country. The net effect was a tripling of bond yields in three months. A similar sell-off in the U.S. could potentially trigger sovereign debt fears of the sort we’ve seen in Europe.

Precious metals cool. I’m definitely bullish on gold and silver for the long haul, but I’m still haunted by 2008’s 28 percent sell-off in gold during the height of the financial crisis. If we do see an all-out panic, investors could lose faith in just about every investment vehicle on the planet – including precious metals. Still, I’d look at any metals sell-off this summer as a buying opportunity – not an opportunity to go short. The volatility in the metals markets could be enough to crush even the most steadfast investor.

VIX ETF funds could make you money. If there is blood in the streets come June 30, the best place to park your cash might be in a volatility-based ETF. The iPath S&P 500 VIX Short-Term Futures ETN (Public, NYSE:VXX), for instance, tracks the Fear Index by investing in futures. When markets get choppy, VXX outperforms. Rather than churn and burn your way through cash, invest in fear and uncertainty itself. After all, uncertainty about the future is about the only thing investors can agree on right now.



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Top 5 recession proof stocks

Five stocks you should own when recession strikes.

Now that Alan Greenspan is warning that the U.S. could be headed for a double-dip recession, investors should be looking to hedge or reverse their positions in equities. If we are, indeed, headed for negative GDP, it’s hard to know what stocks may thrive, but if history can give us any clues, we might want to look in unexpected places. Here are five tickers to do more research on if you want to protect your money with stocks during a recession:

1) SPDR Barclays Capital 1-3 Month T-Bill ETF (NYSE:BIL).

When the economy really hits the fan, treasuries have time and again proved the ultimate safe haven. People keep buying them even when their returns goes negative! That happened late in 2008 when investors were more comfortable with negative returns than they were with the volatile markets. The Barclays 1-3 Month T-Bill ETF provides somewhere to park your money when you’ve lost faith in just about everything else.

2) iPath S&P 500 VIX Short Term Futures ETN (Public, NYSE:VXX).

When the markets turn sour, equities get volatile. That means one place to look for a return is on the volatility itself! Strange concept, but it works. The VIX Short-Term Futures ETN from iPath offers exposure to a daily rolling long position in the first and second month VIX futures contracts. It’s essentially mirroring back volatility in S&P 500 Index. That means the more volatile the markets, the better off you do. VXX is down 25 percent over the past six months.

3) Altria Group, Inc. (NYSE:MO).

According to at least one writer, you can’t do much better than booze and tobacco during recessions. What better time to drink and smoke away your woes away then when the economy looks blackest? “Alcoholic beverage makers not only beat the market in 80 percent of recessions prior to this one, they actually rose an average of 6 percent,” Nilus Mattive writes. “Household products manufacturers posted a gain of 1.8 percent and outperformed in every single instance… And tobacco companies rose 9.6 percent and beat the market every time.” Throughout 2009, Altria – the maker of Malboro cigarettes – paid dividends of $1.29 and rose from $15 to $19. Still, that’s off the stock’s pre-recession highs of $24. There could be something more at work here, though: changing U.S. sentiment towards tobacco. Explore booze stocks for potential recession beaters.

4) Wal-Mart Stores, Inc. (NYSE:WMT).

Everyone likes to save money. During a recession, though, pinching pennies goes from a past-time to an absolute necessity. People who might otherwise eschew shopping at Wal-Mart suddenly find themselves in line with everyone else. That’s one of the reasons Wal-Mart has beaten the S&P by more than 30 percent since the start of 2008.

5) ProShares UltraShort Real Estate ETF (NYSE:SRS).

The most straightforward way to profit off a falling market is to pinpoint where the problems are going to be and find an inverse ETF that covers that sector or commodity. One of the triggers of the Great Recession was, of course, the real estate and mortgage-backed derivatives collapse. At one point late in 2008, the ProShares UltraShort Real Estate ETF was trading for more than $1,000 a share! It closed at $23.58 Friday (factoring in a 1:5 split in April).

If you really crave risk, you might take a peek at Direxion Funds Direxion Daily 30-Year Treasury Bull 3X Shares (NYSE:TMF). This Direxion fund seeks 300 percent of the price performance of the NYSE Current 30 Year U.S. Treasury Index. It’s up 34 percent over the past six months.