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Stealthy Inflation

4 August 2010 One Comment

The deflation / inflation thing is crazy.  To be honest, I keep going back and forth.  They are both real.  Amazingly, the deflation that is present in the economy – namely, the shrinking pie of the economy – is very real.  It is present in falling home prices, consumers cutting back, etc.  However, at the same time, stock prices are up and the government is determined to keep deflation at bay no matter what.  If you understand nothing, understand that in order to stay in power, the government and the Fed must prevent a total collapse of the economy and the only way they can do this is to print money and debase the currency.  This is happening now and will continue for years.

So, where is inflation right now?  Rather than actual price increases, I believer we’re seeing a more stealthy form of inflation in consumer prices.  For example, rather than raise the price on a box of cereal, the cereal manufacturer is keeping the price the same, but decreasing the size of the box 25% (this is the same as a 25% price increase).  If you watch for it, you can find similar examples across the board – with cuts in either quantity or quality.  It’s a way to inflate prices without consumers being alarmed.  And since we’re too busy paying attention to who the next judge of American Idol will be, this is a great strategy.

Make no mistake about it, our purchasing power is decreasing.  If the reflation trade continues to be successful, here’s another example to consider if oil hits $100+… a tank of gas will continue to increase in price.  This is another form of inflation.

My guess is that the reflation strategy will continue, but due to the instability of this system, and more and more retail investors saying forget the stock market, we’ll see some volatility.  Take advantage of massive dips down and buy some quality stocks as inflation-hedges.  Also, take advantage of dips in precious metals.

If you doubt what I’m saying here, read Alan Greenspan’s comments over the weekend about why the Fed wants a higher stock market.

An update on gold…

Gold seems to have found its footing after moving down to the $1150/1160 level.  As I write this it is back over $1185.  While gold hasn’t moved higher in some time, it’s important to realize that gold has not lost much ground.  In my opinion, gold has put in a solid base from which to launch higher in the coming months & years.

The U.S. Gold Bureau sells gold bars, gold coins and rare coins direct to the public at wholesale prices. They have certified coins from before the gold confiscation of 1933 as well as certified modern coins, including the Gold American Buffalo and Gold American Eagle.

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