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Is Inflation a Fact… Or Just an Opinion, Part2?

Economics / Inflation Jul 06, 2009 - 10:53 AM GMT

By: Graham_Summers

Economics

Best Financial Markets Analysis ArticleYesterday I outlined the basic arguments for why inflation is believed to have hit the market or will be soon. In a nutshell, inflationists look at the Fed’s money printing as shown by the US Monetary Base and claim that inflation must be just around the corner.


But the facts do not support this… at least not just yet.

Inflation ultimately boils down to a debasement of currency. The US (and the world’s) reserve currency is the dollar. And the dollar, despite all of the Fed’s debasing efforts, is currently trading higher than it was BEFORE Bear Stearns.

Indeed when the dollar index bottomed at 72in July 2008, the Fed had committed less than $500 billion in bailout funds/ intervention. Since then, the Fed has:

• Spent $400 billion on Fannie/ Freddie (Sept ’08).
• Taken over insurance company AIG (Sept ’08) for $85 billion.
• Doled out $25 billion for the auto makers (Sept ’08)
• Kicked off the $700 billion Troubled Assets Relief Program (TARP) (Oct ’08)
• Backstopped $540 billion in money market funds (Oct ’08)
• Backed up to $280 billion of Citigroup’s liabilities (Oct ’08).
• Given $40 billion more to AIG (Nov ’08)
• Backed up $140 billion of Bank of America’s liabilities (Jan ’09)
• Spent another $787 billion in the Stimulus Plan (Jan ’09)
• Announced plans to buy $500 billion worth of mortgages (Jan ’09)
• Announced plans to buy $300 billion of Treasuries (Mar ’09)
• Announced plans to buy another $750 billion worth of mortgages (Mar ’09)

This is a staggering, and I mean STAGGERING amount of money being thrown around. And yet, the dollar today is actually a full 11% HIGHER than it was in July 2008.

Meanwhile, commodities across the board (even gold) have failed to re-test their 2008 highs:

This is beyond bizarre. The world is currently operating under a fiat currency discipline: meaning no major currency is backed by anything of real value. Under this discipline, the Fed (and central banks around the world) are pumping TRILLIONS into the world’s financial system… and yet commodities and other traditional inflation hedges have FAILED to best their July 2008 highs (a time when Central Banks had yet to commit substantial funds to battling the crisis).

They’ve also failed to best their July 2008 highs despite the fact that EVERYONE (even the coffee shop crowd) is worried about inflation.

To be blunt, either the market has lost any ability to discount the future what-so-ever, or the inflation story is not actually as simple as inflationists have claimed (money printing= inflation). I’m inclined to believe the latter, as indeed, nothing is ever quite what it seems or as simple as people make out.

Indeed, the dollar chart and commodity charts paint a very different picture from the common opinion that “the Feds is printing dollars ad infinitum and inflation is exploding higher.” Clearly, the market is trying to tell us something different. What is it?

I’ll detail exactly what in tomorrow’s essay. Until then…

Good Investing!

Graham Summers

http://gainspainscapital.com

PS. I’ve prepared a FREE Special Report detailing three investments that will soar when the Second Round of the Financial Crisis hits. I call it the Financial Crisis Round Two Survival Kit. Swing by www.gainspainscapital.com/roundtwo.html to pick up your free copy today.

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

    © 2009 Copyright Graham Summers - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Graham Summers Archive

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