Is the U.S. heading for Zimbabwe Style Hyperinflation?
Stock-Markets / Financial Markets 2010 Oct 30, 2010 - 03:55 AM GMTBy: PhilStockWorld
Is bad news going to be good news?
Last quarter, after several adjustments, it has been decided that our GDP grew at a 1.7% rate. The general consensus is that this quarter we should be up around 2% but the whisper number is a big miss, down to 1.3%. Slower GDP growth will be GOOD for the stock market as it gives Ben and Tim the excuse they need to crank up the printing presses for some real Zimbabwe-style inflation.
It's easy to pay off $15Tn in fixed rate 2-year to 30-year notes when your country is cranking out $1Tn bank notes, right? Can this really be the path our nation is following? The markets are certainly betting on it but we have been betting against it with longs on UUP at $22.50 (still there) and a short play on the QID weekly $13 calls at .46 yesterday along with other bearish trade ideas we've entered ahead of the GDP as well as the elections and next week's Fed meeting.
Why can't we just give up and go with the flow? Well, first of all, you can read my last few weeks of posts or you can read our last few Newsletters so I won't rehash the great global macros here but I will make the point that (and this may shock you) we are not alone in the World and the things we do, or try to do in our economy, affect the economies of other nations. Perhaps when the US was 40% of Global GDP, we could have gotten away with it but now we are 20% and falling fast yet we still attempt to run our foreign and economic policies as if we are large and in charge.
This is not the way the rest of the World sees us anymore. To the rest of the World we are unrealistic children with dangerous spending habits who happen to owe them A LOT of money. We borrowed $15Tn and our "plan" is to pay them back with hyper-inflated dollars that are already discounted 33% from where we began cranking up the borrowing in 2002 (to pay for wars and tax cuts).
Already, other nations are refusing to lend us more money so we have begun to engage in what Bill Gross, the world's biggest bond buyer, calls "a brazen Ponzi scheme" in which the Federal Reserve of the United States "buys" whatever notes the Treasury Department of the United States chooses to print to pay for their continual borrowing (currently $100Bn per month) and the joke of it is that the Federal Reserve doesn't actually have ANY money. In fact, they themselves are $2.5Bn in debt as every check they write is technically just another IOU, backed by whatever assets they purchase AFTER they write the check.
While this exercise may seem painless and fun at the expense of our creditors, sadly only about $4Tn of our debt is owed to China, Japan and our other foreign creditors. While we may be stealing $1Tn from them, at least they get to sell us stuff. The rest of the debt, $11Tn, is owed to ourselves - to all the widows and orphans and pension funds that bought US bonds as "safe" investments as well as the poor suckers who worked their whole lives socking away 12.5% of their wages into a Social Security program whose "lock box" was raided by simply forcing retirees to lend their money to the government at unreasonably low rates and will now be paid back in dollars that are worth less than 25% of what they were worth when the retirees began working.
Would things have been different if we had gone the other way? It's difficult to tell (but here's one possibility). Still, we went down the path we did and now we are the World's clear leading --- debtor nation. All attempts do devalue our currency are simply cutting off our collective noses to spite the face of just 1/3 of our debt. This is beyond ridiculous as household wealth in the US is $40Tn and devaluing the dollar costs us $8Tn - why can't the government just be honest and tax us the $4Tn they need?
Oh yeah, right - silly me...
Note on the bank note above, it's one of those Conservative things that calls Obama a Socialist because "Government spending is the greatest evil in the World." Meanwhile, what is it when the Federal Reserve creates money and devalues ALL of the dollar-denominated assets you have worked your entire life for? Even Conservative pundit Karl Denninger can call that spade a spade as it's TAXATION WITHOUT REPRESENTATION.
Why do we allow the Fed to take $8Tn through devaluation rather than let the Government raise the $4Tn it needs legitimately? Because the legitimate way to do it is through representative taxation and even the top 1% can't run away from that obligation in total but they sure can hedge against inflation that wipes out the lower classes! Also, something I've pointed out this week already so I won't get back into it but it's easy for the top 1% (and yes, that's us too) to hedge against inflation by buying commodities and leveraging stocks and buying real estate (the stuff that is being confiscated from the poor people is nice and cheap for those of us who have lines of credit at the bank).
The top 1% will be fine and that, my friend, is you if you are one of the people hoarding gold and buying commodity futures and long-term options on blue-chip companies to hedge against future inflation. Heck, you might even come out way ahead in the game, especially if we keep unemployment high and stop those poor working slobs from getting wage increases. Inflated revenues from inflation plus controlled wages equals big profits for corporations - especially the ones that export like GE (NBC) or rely on foreign tourist dollars like DIS (ABC) or use their vast international wealth to buy up distressed US assets for pennies on the dollar like NWS (Fox).
So don't expect to hear a word against this nonsense from the MSM, not only do the on-camera "talent" know where their bread is buttered but the on-air "personalities" are paid just enough to fall into that top 5% or better, where they feel like one of "us" well-disconnected from the pathetic, huddled masses that are falling deeper and deeper into debt, along with our once-great nation, every day. Interestingly, the one TV network that doesn't fit in well with that group is VIA. Although run by a Billionaire, Redstone has divested most of his holdings and the company is the owner of Comedy Central, about the only place you'll hear any real dissent via the Daily Show and the Colbert Report.
8::30 Update: 2% on the GDP! That is NOT good for the market because it's right in-line with expectations and way above the whisper number that was meant to lock-in the Fed's determination to flood the economy with another $1.2Tn (rumors were getting up to $2Tn) and knock another 10% off the Dollar. Japan has already told us they will strike when you least expect it (I know, they need to work on their ninja skills) with another Yentervention and I expect it next week. Since I am not you, I can expect it at the right time - see how that works? Anyway, this would be the sensible time for Japan to intervene and the Yen touching 80 to the Dollar this morning sent the Nikkei down 1.7% and that will put pressure on the government to act over the weekend and their fear of what the Fed may do on Wednesday will likely have them ready to pounce next week.
As I was saying above - we are not trying to inflate our way out of debt in a vacuum. The BOJ is already used to companies with Trillions in sales, another zero added to their currency isn't going to bother them one bit and they've been waiting patiently for 20 years to ease their way out of recession, why should they let the US beat them to it?
We got a small pop off the GDP report but the Futures were already down despite the dollar diving back to 77.4 ahead of the number and now we could be in for some real fireworks if the dollar heads up into the weekend. Cash is still king as it's going to be a wild, wild ride next week with Tuesday's elections and Wednesday's Fed meeting. I still like XLF ($14.57) and FAS ($22.13) as the upside hedges (check Member chat for leveraged trade ideas to keep us ahead of inflation) into QE2 because the banks are where the money is going but, on the whole, I still think there is way too much already baked in the cake and this party is in danger of a major crash very soon.
Be careful out there and have a great weekend,
By Phil
Philip R. Davis is a founder of Phil's Stock World (www.philstockworld.com), a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a real estate title insurance software solution, and is also the President of the Delphi Consulting Corp., an M&A consulting firm that helps large and small companies obtain funding and close deals. He was also the founder of Accu-Search, a property data corporation that was sold to DataTrace in 2004 and Personality Plus, a precursor to eHarmony.com. Phil was a former editor of a UMass/Amherst humor magazine and it shows in his writing -- which is filled with colorful commentary along with very specific ideas on stock option purchases (Phil rarely holds actual stocks). Visit: Phil's Stock World (www.philstockworld.com)
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