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Stocks and Inflation

Posted On: 2006-12-19
Length: 15:53

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Hello this is Johannes Ernharth, you're tuned into Vigilant Investor live, it is Wednesday, December 20, or excuse me Tuesday, December 19th, the 20th here I'm jumping ahead already, and just another interesting day in the market as always. Another interesting day to do a quick little recap for you, hopefully we're providing you with some value. Probably the biggest news before we get into the markets today was the producer price index which is an indicator of wholesale prices jumped by 2 percent, which was it's biggest jump in 30 and for a single month, fairly large. Now of course it was down 1.6 percent in December, so you smooth the two out together as an average, excuse me I said December, I meant to say October, smooth the two out as an average and you're going to find that it is not all that extreme. Although it is surprising a lot of people, a lot of the consensus estimates and what's probably more notable than the news itself is that continually the consensus estimates keep getting faked, head faked here and there and you know, I think that everybody should be expecting inflation to be continuing especially in light as we discussed yesterday, the news Friday which was released by the U.S. government on the deficit that new, real deficit in the fine print when you add together generally accepted accounting principle differences and, when you add together net present value future obligations, the real deficit is not 260 billion dollars, which is what you'll hear a lot of politicians talking about, but rather 4.6 trillion dollars, which is an increase of 1.1 trillion over last year's real deficit of 3.5 trillion. And the importance of that real deficit number is that that is the number that ultimately will come home to roost. Politicians will run their elections on 260 billion dollars when in reality the tax bill that's coming due and the future that we are all facing is the 4.6 trillion dollars this year, which is going to keep building year after year, because money is not being set aside for things like Medicare, Medicaid and Social Security. And meanwhile it's important to understand that any excess money over the, you know since the creation of those programs has always been spent by the politicians, rather than setting that money aside, they have done what's called, we'll they've invested it, they've invested it in bonds and get this, you invest it in U.S. Treasuries and the politicians in turn get to spend that money and they say, oh the money's invested and it's earning interest. But think about this one folks, who is paying interest on those bonds? Same people who are paying Social Security right now, and that's you and me. So we pay our Social Security taxes and then we pay our additional taxes and that covers the interest on the bonds that are going to be used to pay back the money that supposedly our Social Security was paying. I have an investment for everybody, ready? How about this, you guys give me money, you as an adult give me money, I will invest it for you. In turn I will put a slip of paper in your account, alright? I'm going to spend that money you gave me and put a slip of paper there that is an IOU. Now each year going forward, you're going to continue to give me a chunk of money, say it's 10 thousand dollars, I'm going to turn around and spend it and put an IOU in there, that IOU on, each one of those IOU's is going to be that after so many years you're going to get your 10 thousand dollars back, but you've got to pay it, number one. And number two, that interest that it's getting, you have to pay each year as well. Well, not just you, but you and your kids. So you and your kids are responsible for paying the interest incrementally each month, each year, as well as a portion of principle each month and each year. And then, when its time for you to retire, you'll have your retirement money. Pretty good deal? I didn't think so. It's called fraud in most walks of life, but if you're a U.S. Congressperson that's what you've been doing with Social Security over the last 30, 40 years, you've basically been spending the money, putting an IOU in there that is basically covered by the same people whose money you supposedly invested. Pretty raw deal and that is why the real deficit is 4.6 trillion and not a measly comparatively 260 billion as was reported by the good friends at the U.S. government who are always here to help you. Now, moving on to today's market activity, Dow Jones Industrial was down earlier today, it ended up finishing up just a little bit by about 30 points and it closed at 10, 600, excuse me, 12, 471 looking at the wrong number, S&P 500 up about 3 points, and it closed at 1, 425, Nasdaq down 6 points, closing at 2, 429. Now we always like to take a look at the VIX, and what has the VIX done today? The VIX is the volatility index and that sucker is down about 3 percent today, and it's trading at 10.27 so it's come down off after going up a little bit yesterday, we like the fact that the VIX was indicating that you know people are maybe getting a little more concerned about volatility but trading at 10.27 it is still trading at it's 96th, 97th percentile relative to people just being indifferent about the possibility of volatility being out there. And again, as we covered in yesterdays discussion, there are lots of other indicators out there that should be concerning people, and including something that came up after the show was wrapped up we were taking a look, this is an interesting point, we posted at vigilantinvestor.com, Risk What Me Worry? Is the head of, the title we have a nice little image of good friend, Alfred E. Newman on there and basically we came across chart and Bloomberg that basically showed the forecast for the 12 largest Wall Street firms for the S&P 500 for next year, 12 for 12, all are predicting a higher S&P 500, that has not happened since 2001 and it's extremely rare, when it does happen historically there is a tendency for the market to drop the following year. So, well have to see of course no indicator is perfect, but we combine that with the indifference that we're seeing in the VIX when we look at investor intelligence, which is a survey out there, it's indicating unprecedented bullish trader sentiment. Market vein is another one, which is telling us the same thing. And we just start piling all these on other ones, there's call option indicators and S&P 500 bullish positions and so forth. And the average cash levels an equity funds and so forth, everything is telling us that from a contrarian standpoint that people are about as confident as they get in the marketplace or close to it, and historically when that can happen, the more signals you have simultaneously, the more it tells us that something is liable to break in some fashion or another. Meanwhile insider trading has been very, very, very heavy as well. And again, any one of these indicators, they can happen here and there, but when they all start locking up together and getting more and more bullish and when they all are consistently staying at well above high record averages, well then you know there's something maybe that's smelly out there that could be a skunk lurking, and when there is the smell of a skunk, it's time to start investigating. And that's one of our big criticisms is at vigilantinvestor.com is that too few people are bothering to roll over then stones and dig around to see what that smell is and it's almost as if you've gotten used to having that smell around all the time and it just doesn't bother you anymore, and you should be concerned more that you are, but that's just the environment that we live in these days. So, times they do change, maybe not always for the better. But, also moving onward, let's take a look at the dollar, U.S. dollar today was down about 55 points, which is about six tenths of a percent and it's closed basically at 83.45. So, it came down opened up at 84 today and progressively dropped on down as the trading day went on. And again when things drop below 83, that's sort of an alarm bell for a lot of currency people and of course dollar weakness is one of those things we are monitoring especially because as we were talking about that deficit earlier, that trade deficit earlier, you have and issue there where, not the trade deficit, but the federal deficit rather, you have an issue there where as foreigners begin to realize just how insurmountable a 4.6 trillion figure is, and again 4.6 trillion dollars translates into you know, how do you quantify that. I mean you can tax all U.S. personal income and you're not going to come close to 4.6 trillion. You wouldn't come close to 3.5 trillion, which was last year's real deficit. So when you put that all together and you start trying to track, you know how is the U.S. going to balance its budget going forward, I doubt very much they're going to be, you're going to find any politicians racing to tell the AARP, the American Association of Retired Persons that they're going to go cut Social Security and restructure that and cut Medicare, Medicaid and cut back on prescription drugs, just not going to happen. And whereas that's exactly what the Federal Reserve has reported is going to be necessary, its either two thirds cuts in all benefits immediately or an immediate doubling of all taxation. The second point clearly is not politically feasible either, nor is it economically feasible, I mean you double the taxation in the U.S. and you're going to set a whole chain of events out of control, and I mean even dramatically more moderate increases in taxes have other economic consequences. You're basically paring away from a productive economy and injecting it into areas that are less productive and oftentimes not natural in terms of producing future growth. And the third alternative of course, ends up being inflationary, and that is increasing the money supply in order to pay for money, pay for things you don't have and that basically dilutes the purchasing power of existing dollars already since the Federal Reserve came in to begin enabling that process way back in 1914, in less than 100 years we've seen a diminishment of about 96 percent of the U.S. dollar's purchasing power or so. People have progressively albeit slowly been losing their purchasing power year after year after year. But, you translate it this way, going from 2000 to 2006, using the Fed's own calculator, one hundred dollars of purchasing power now requires 117 dollars of purchasing power in just a mere 6 years. So, with that in mind, that's all part of the process and if the deficit is as bad as we think it is, which that's what they're reporting, it's in the Treasury report, go take a look at it, 4.6 trillion dollars of foreigners catch on to that number and start saying well hey it's a full faith in credit of the U.S. taxpayer who is behind this and the government has got to do what? Pay how much in the future and they're not putting any money aside, they're not going to do anything to cut it? Maybe it's time not to be investing in the United States with, at 50-year low interest rates. Maybe it's time to start diversifying into other things. Maybe it's time we just slow the pace at which we are accumulating U.S. Treasuries, which is obviously at a record pace, because U.S. Treasuries just remain so low that it is kind of alarming. So, moving onward, I had mentioned earlier in the year, earlier last week that I had an opportunity here, a Mr. Greenlaw, I think it's Steve Greenlaw from Morgan Stanley, excuse me if I got his first name incorrect, he is their director of bond research, economic research for their bond division, their fixed income, and one of the top three guys you'll find at their research department alongside Stephen Roach, who we often quote at vigilantinvestor.com, and use his commentaries as ways for our readers to learn. Well, he was saying one of the big tensions that they were seeing out there in helping suppress bond yields in the United States and keep those interest rates very low, was the Japanese private investor and what they were expecting in Japan was that inflation was going to get to a point where it was going to be totally under control, they were talking about the Japanese private investor, which has really been keeping, accumulating a lot of these treasuries and dollar assets, that they were expecting the Fed to be forced to lower it's interest rates because of a slowing economy. And today's news about the purchasing price index climbing by 2 percent, well that's wholesale prices, that means that those prices get into the consumer prices eventually, at least historically that's what happens, they kind of bleed through, so we shall see how right the Japanese investor was or whether the Fed will feel that it needs to raise interest rates a little more or just keep them steady for the time being. It will be interesting to see what happens there and as things go forward. But outside of that let's just move down and hit a couple more headlines here, gold futures climbed as much as 7 dollars an ounce today, oil rose nearly a dollar and that was, we can thank, and earlier we've had some warm weather which has caused some weakness in the oil, but that has definitely picked up now and it's trading at 63.15 a barrel. Gold was trading today, 622, that's up 6.4 for the day. So, gold is seeing a little bit of weakness this past couple of days, it will be interesting to see what happens there, but we think in the long run again as the dollar grows weaker, we'll see the prices of things like natural gas, crude oil, gold, any other hard asset going up at least until we see a serious slide in the growth rates of the economies around the world, as the U.S. consumer eventually gets to the point where it has to tighten up, it cannot depend indefinitely on consumption, consumption, consumption based on debt, debt, debt and especially at 50 year low interest rates, once those rates start going up, consumers are eventually going to be forced to slow down because they cannot continue to roll over and refinance their debt at record low rates, and we've already seen a dramatic slowdown in home equity withdrawals reflecting that, and of course the housing market's been sagging and so forth, consequently all these things will begin to have a chain reaction. So, well, I think we're going to wrap up for today, a lot of things we covered there, it's about 4:30 here Eastern Time and we've done our 15 minutes for today. So, tune in every day 4:15 or so for Vigilant Investor live to get an update and a little commentary and if you tune in and you go into the chat area at talkshoe.com, we're always hanging around afterwards to answer questions and engage in conversation and of course our Wednesday show, our show that used to be Wednesday evening that was an hour long, plus we would have interviews, we've interviewed John Williams from shadow stats, we've interviewed various authors and so forth, G. Edward Griffin, author of The Creature From Jekyll Island, a great expose on the Federal Reserve and central banking in the United States, that show is no longer Wednesday evenings, it's moved to 3:20 PM on Fridays. So, tune in there and there will be a lot more of an interactive conversation, so hopefully we can get some people chatting and tune on in and of course we're always available as a Podcast afterwards, which you can subscribe to at talkshoe.com, also via vigilantinvestor.com you can download us on iTunes automatically every time you start up and just plop us over onto your iPod and listen each morning. So, until tomorrow, take care, this is Johannes Ernharth and of course as always, nothing that we are talking about today should be construed as investment advice or as an offer for any type of security, always consult with a professional before you do anything.

Discuss It!

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