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Harry Schultz Life Strategies
~ For THINKING humanoids ~ (in 80 nations)

Hot Inflation Meteorites

Harry Schultz
extracted from HSL #646 March 27, 2005 - DJIA 10,443
posted April 17, 2005

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Big Picture As our cartoonist shows, below, planet earth is about to be bombarded by hot inflation meteorites. It's coming as a surprise/shock to mkts (especially bonds). But page 1 HSL cartoon on May 9, 2004, showed inflation was quietly launched in 2004 (unseen by outmoded & govt "adjusted" indices, like the CPI's in various nations). We forecast it would evolve into high-pitched inflation in 2005-06. Then, move into stagflation in perhaps 2006-7, then into recession -- perhaps in 2008-09. Precise dating isn't possible, but this is a long-range guided Biggy Big Picture as I see it. And the heating-up inflation stage is now becoming apparent in the US, UK, China, Oz, NZ & a few other places. It'll be broader & more extreme as we move into Q2.

As friend, author, online daily market advisor Chick Goslin (chickgos@adnc.com) recently put it: "Stocks & bonds finally woke up to the new reality, ie, inflation increasing rapidly, & sold off sharply, accordingly. We knew markets would eventually catch on to this, but did not expect this to happen so soon, since these markets have been slow to notice what's happening in commodities." Indeed, commodities are a vital part to understanding the WHY of inflation's upcoming tidal wave. Most commodities were in a 20-year bear mkt, wherein production infrastructure shrank. It will take years to increase production.

Meantime, Asian demand can't wait; appetite must be met NOW. So prices rise, since supply can't meet demand. The soft commodities (eg, grains) are still at decade lows; their best days are ahead. Oil appears to be high but, in fact, is not even back to where it was in the 70's oil crisis days, in inflation-adjusted US$s. OPEC is not getting fat, because the $ has been falling for years & very sharply in the last 2yrs. Oil is not high, but psychologically it feels high -- as we don't mentally adjust for paper currency weakness - so it adds to the rush to raise prices in everything else.

Dan Norcini (dnorcini@earthlink.net), an off-floor commodity trader tells us: "From where I sit, in one recent week, the status quo has all changed. It now appears, at long last, the bond vigilantes have finally awakened from their long winter hibernation, have come out growling in a surly mood. Perhaps it was the CRB index making daily 25-year highs they could no longer ignore. Perhaps it was the hints the big buyers of Treasuries, Asian Central Banks, can no longer be automatically & mindlessly counted on to do their magic & bid up the bonds. Perhaps it was the sinking $ heading back down to the increasingly critical support region near the .80 level. Whatever the reason, the flattening trade appears to have reached an end for now." Floor traders have the best nose.

Inflation is growing worldwide, but among 1st world nations, the US will have the highest rate, due partly to its fastest falling currency & fastest rising deficits. What goes around comes around. The world's biggest currency-polluter will pay the highest price, via higher prices! As ye sow, so shall ye reap. ••As U know, inflation is akin to a tax. It will squeeze retirees hardest & shock babyboomers. ••US interest rates will increase beyond the benign 4-4.5% predicted by some who think that's being wise & generous. ••At first this won't crack the housing mkt, but will only gradually let air out of the bubble. Housing will hold up partly because, as most currencies become bad places to hold assets, people put their money in anything solid - from art to land to commodities, including metals -- precious & base.

Likewise with stocks. Some companies thrive on inflation, passing on increases to customers. Other companies choke on inflation, where their costs are fixed &/or can't hike prices due to Asian competition. So, again, the stock mkt can rise with growing inflation, but fewer stocks benefit over time & the air goes out of the stocks bubble & all bubbles. The bond mkt can't handle inflation & its multi-year bubble will implode far more quickly than the others. Here the pain will be greatest. •••On the other hand, gold is seen as a measuring stick, & will benefit richly, as people first walk, then run, then panic into gold as the safest & most liquid of havens. Paper money is faith-based, & faith in the US$, already sagging badly, will move toward collapse if inflation approaches double digits.

We may then go from inflation to stagflation. That would happen if rising prices put huge strain on some businesses, causing stagnation while prices remain high - but not rising much. If govts don't reform at that stage &/or utilize a gold standard, &/or slash govt spending & taxes (which is unlikely), we move on to recession. Whether that leads to depression depends again on whether wise heads are able to make the changes needed by govt. Forecasting beyond this point is even more hazardous. Sadly, govts are full of men who understand little about mkts or monetary structure, & nothing about the gold standard. Yet, hope springs eternal that at some point this repeating cycle will be broken. But don't plan your retirement funds on it. If U haven't already, erect firewalls against the ravages of inflation. Indeed, take advantage of it. Bet your chips on continuance.

As said, stocks don't dislike inflation, in moderation. Many love it (it covers up business mistakes). But big inflation is not expected; I can safely assume this based on a chart of combined world stk mkts, the DowJones World Index (*DJW). It shows an incredibly bullish pattern, thus optimism, via a breakout from a downwedge from a 1999 peak. Chart implication: world stks, on average, may return to the 1999 high. The big upswing from the 2002 low shows, right or wrong, that biz is anticipating an inflation upturn, but not extreme. If biz changes its mind due to already slipping earnings, the uptrend will break. It already has a potential upwedge, which conflicts with the downwedge. We have a bull/bear battle here. Our in-house Spinner index is shorterm negative on DJW chart. I'll keep U posted on this from now on in every HSL & in our FMU & in Gold Charts R Us. Our economic future depends on it.

The Myth of Price Stability by Economics Professor Antony Mueller (www.mises.org), was printed in full in latest HSL Mkt Update. It reveals the public knows the price of almost everything important is sharply higher, but the myth of low inflation is fomented by govt indexes that factor in "computer storage capacity" (what trickery) & imported gadgets, which introduces deflationary factors, thus cancelling out much of the inflation in the index - but not in reality! Govt has deliberately conned the public with this contrived shell game. Prof M. calls it "a cheat." He adds that in addition "Central banks easy money policies become visible only when inflation begins running wild & can only be stopped by a deflation contraction." "When the game slips out of hand, hyper-inflation & depression loom."

Inflationary straws in the wind: Oz raises cash interest rates to 5.5%. Govt says productive capacity surplus has been eroded. Predicts higher inflation. ••NZ raises interest rates to 6.75%. ••Thailand raises benchmark interest rate by 1/4% to highest level in 3yrs "to curb inflation." ••US airlines raise fares on 1-way tickets, the 2nd rise in a month! ••Iron ore prices, after a 20-yr bear mkt, are rising by 70-80%. Iron prices impact steel prices. ••China growing faster than ever, despite earlier rubbish talk re slowdown, which I debunked in HSL, grew 9.5% in 2004, is keeping up the pace in 2005 thus far. Industrial production +17% in 1st 2mos of '05. Inflation also rising.

•US feeble Fed raised rates for 6th time in Feb, will do so again shortly. One day soon it will be 1/2% not the usual 1/4 pt. If they don't, they'll be further behind the curve. Fed has more than doubled overnight lending rates from their 46-yr low of 1%, 9mos ago. Present rate is below the official inflation rate (which in turn is below the truth). ••US manufacturing prices rising after years being flat. ••Russian inflation was 11.7% in '04. Economists predict much higher in 2005. Bag of groceries are up 20-30% on yr ago, reports NYT. ••US house prices are not included in the CPI (to avoid honesty & higher pension payouts). US avg home prices rose 11% in 2005 over 2004 in latest qtr. Rose 32% in LasVegas, 20% in Hawaii, Calif & DC in '04. ••House prices in France, Spain, Ireland & UK rose 15.5, 15 & 12 & 12% in '04. ••Insiders predict int/rate rises in UK & Eurozone soon. ••People aren't totally stupid (just 85%). They realize every interest rate hike is done to fight inflation - which govts say is not a problem. If it's not a problem, why raise rates?

FT reports "UK Jan manufacturing input prices were terrifying, shot up 9.5%, yr on yr. Is inflation slipping out of control? The pressure cooker is quietly heating up." ••China steelmakers accept 71% price rise in iron ore. ••Bond mkts causing much nervousness. US 30-yr bonds fell in recent wks from 115.20 to 107.24. That's a big fall! Yields rose from 4.37 to 4.85. Most now watch the 10-yr Notes for clues & trading; they fell from 112.16 to 108.20. Volatility is acute, but the trend is not cute if U are a bond bull. ••Copper futures hit a record price recently on London mkt, in devalued US$ terms. Not real terms. But still inflationary. Up 11% in '05. But mining/copper shares up much more. Eg, Antofagasta +19%, BHP Billiton +21%.

•Zinc hit a 7 1/2-yr high. ••LME aluminum touched 10-yr high. ••Platinum at 11-mo high. ••Silver strong.

••Although China is seen as the main driver of metals demand, Japan & the US are bigger buyers, followed by China & EU. ••I forgot to measure oil in this list of straws. Ha! As U have just seen, inflation is rising for a lot of reasons besides oil, yet that's how the press & public tend to view it. Oil is in a steady uptrend, will be strong for years. Oil dependency will remain & even increase as R&D reveals we need/use more energy than ever. Eg, air conditioning; ever more homes have it & house size increases. •OPEC doesn't control price anymore.

Oil is also political, poses constant disruption threat. Don't put a ceiling on the price! ••Inflation is boosted by the competition between the big nations for all the commodities. Eg, the US is locked out of some oil mkts by bids from India & China. ••Gold, of course, is considered the world's thermometer for monetary stability as well as an inflation reflector. Gold has been rising for several years with the pace escalating. Efforts by govts & Central Banks to restrain the price (as they did with London Gold Pool in 1970's - which failed) have been unable to do more recently than slow the pace, thus revealing the power of this inflation wave, as well as the weakness of the US$ & the inherent value of gold.

HSL provides an ongoing Inflation Meteorite Shelter. My advice over the past few years has increasingly emphasized commodities, metals, energy of several sorts, all of which have moved up impressively. If U haven't moved out of interest-sensitive investments & into investments that benefit from inflation, this is probably the last chance to buy them at relatively reasonable prices. We list many in today's HSL.

Lots & LOTS more follows for subscribers,

Harry Schultz
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