The coming inflation

Why I sometimes don’t do what I suggest

I always chuckle inside when someone comes to me 6 months later to tell me that they’ve finally sold everything. I know that I shouldn’t laugh, but these people seems to have missed my point… and the timing. Granted maybe I shouldn’t have thrown them off by stating that I am going to play through this turmoil for experience, giving them the impression that I am trying to rip them off of their profit. No, when I say something, I seriously mean it and it’s their fault for not believing that I state truths (with possibility of exaggerating by 1.5 times). I wanted to know how to invest in a depression like crash. Trial by fire, is the only effective way I know of learning something (and the most adrenaline filled one, feeding my addiction).

How I see things

Forecasting the market for me is a matter of seeing all the possible routes as parallel probabilities and honing my skills at timing when the effects actually reflects in the real world. Simple time lags for example is the 6 month delay of Canadian economy vs that of a US economy and the 2 minute delay in the reaction of TSX S&P vs S&P 500. Over time, the delay should shorten as information gets passed along faster, but you can always count on new groups of people joining the stock market that has slower access to information.

There is one characteristic of my personality that I believe is key to my being able to see the possible outcomes. The fact that I do not judge any event as good or evil tuned my mind to the point that they are today. Take for example the view on God. Since I do not believe that God is the absolute good and that my way is that of seeing both side, I force myself to see the point of view of Satan. This is especially turned on when reality is weighed heavily towards one side. (Some people accused me of being cruel because of this).

All this to show you how I arrive at my conclusions and that I am serious in what I am about to say.

The message

Inflation is coming.

There are $900 billion US dollars in circulation. US GDP is approximately $14.2 trillion. So far, all the agency combined have spent $12.8 trillion to combat this crisis where around $350 billion is what we call Quantitative Easing (printing money) with others that are close, but can’t be categorized as such. Recently, the US PPIP pledged $1 Trillion to buy toxic assets and the IMF pledged $1 Trillion to stimpack the world economy. Finally, interest rate is at or near 0%.

And this inflation is good for you…. Well, some of you.

From the reaction I get when I speak to people, I understand that nobody believes me. I agree. I don’t want to believe it either. BUT! I am at least sure that there won’t be deflation. Which really forces my hand in the strategy department.

At the moment, the economy is completely dictated by the US government and to preserve your capital, you have to be aware of what they are doing.

What does 0% interest mean?

When the interest rate is reduced to 0% or close to 0% it gives the FED and other entities certain power that it does not have before. When interest rate is a non zero value, the FED has to service and pay people who buys their debt issues. However, when it reaches zero, there is no consequence of borrowing anymore. You can literally make money out of thin air for as much as you want. The same thing can be said for other entities that have access to this interest rate. I am pretty sure that they will have some creative ways to take advantage of this and print their own money disguised as something else.

Which leads to…

Inflation

Definition of which means the decrease in the buying power of your cash or increase in the price of anything you buy. Which led ME to…

Fully invest in the stock market

Why am I not trying out how to hold cash over inflation like the way I am investing through depression? Because I already know the outcome of that and there is absolutely nothing I need to learn from it. So I am warning people and also leading by my own action.

Probabilities

There is a possibility that the US government will be able to manage it properly and reduce the amount of money in circulation as the economy recovers. There’s also the possibility that this won’t arrive for some time  and that another severe 50% downturn in stock prices could happen. Still, taking all these cases into account, the benefit of being fully invested severely out weights holding cash or any GIC less than 3% when it does happen. Since I don’t know the time span till it happens, I opt to do it when I see it.

The administration

The US administration seems to want to make a stand at this level. If it falls more, it will be 30 years of pain. They are getting a second chance at managing the depression and they are dead set on doing it the other way around this time. You only have to read the fed chairman Ben Bernanke’s doctorate thesis to know what he’s going to do. The only thing that can stop this, is public outrage. Which, if happens just means that we, as human, are too stupid. However, this does introduce a random dice into the scheme of things. We are in an unknown territory that does not have any example in history. Hence my confusion on what to invest in. What happens when a government throws $13 trillion at the economy? Interesting question.

A quick crash first

For records sake, there is a very big chance that a crash will happen after April’s earnings season. Truth is, factory orders from my sources in the front line of manufacturing have not improved. They have been the same from January to March and consist mainly of emergency orders for one month to replenish depleted inventories. The current rally in the market is due to excessive money that people have saved up, but have nowhere to put. I am not the only person that noticed the fact that bank only gives 1~2% return. There is absolutely no incentive for people to keep it in secure assets and every incentive for people to put it in the stock market.

The crash will most likely be triggered by the bankruptcy of GM in 2 months. Yes people have time to prepare for it, however, just like the Lehman Brothers meltdown people will bet and write CDS against the bankruptcy and ended up having to pay too much again.

If you are fully invested, you don’t necessarily have to sell during the crash. The upcoming effect of all the trillions of dollars invested will be enough to heal anything. Wiping out $800 billion dollars (Total money supply) will not cause a dent in $12 trillion dollars (of future committed government spending).

If you have cash on the sideline. You still have time to invest when you start hearing that factory orders are back to normal. i.e. the bookings are done for 2 to 3 quarters at a time. I will let you know when it happens.

The effects of inflation

Fixed rate vehicles that does not adjust its rate to inflation will take a big hit. Pensioners and people retiring will see their buying power reduced. Debt will be easier to pay off as the national income increases (Probably not this year or next for individuals as it will take time to trickle down). We are screwing over the older generation’s cash hoard and piling debt onto the next generation. It is the perfect time to be a working and contributing adult.