"A little is alright" - the danger of inflation

Earlier this week US Federal Reserve Chairman Ben Bernanke uttered this infamous phrase about inflation:

"A little is alright"

This blog has talked about the dangers of inflation before.  And just like interest rates, the idea that inflation could rear it's ugly head again is considered insanity by villagers on the Edge of the Rainforest.

But Bernanke has a different message, "a little is all right." Or at least that’s what he said when asked about the evidence of inflation in the U.S. recovery.

This is a change for Bernanke. In the past he has simply said he  doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”

Bloomberg picked up on Bernanke's shift from 'subdued' to 'a little is alright' message and made some good points.

Looking back at history, inflation has a way of coming about suddenly and, once it does, can be very difficult to stop.

The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. 

Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

“Sudden” has happened to us before. 

In World War I, an early version of what we would call the CPI-U, the consumer price index for urban areas, went from 1% for 1915 to 7% in 1916 to 17% in 1917. 

To returning vets, that felt awful sudden.

History has other examples. In 1945, all seemed well: Inflation was 2%, at least officially. Within two years that level hit 14%.

All appeared calm in 1972, too, before inflation jumped to 11% by 1974, and stayed high for the rest of the decade, diminishing the quality of life for everyone.

As central banks around the world massively increase the money supply (the true definition of inflation - it just takes several years to see it reflected in prices), we are told not to worry by Bernanke.

First he told us it isn't there.

Now he is telling us a little is a good thing.

Why will this time be any different?

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Bedtime Story: Inflation at 2%

Quantitative Easing 2 was supposed to revive the economy.

Declared as a failure, the US Federal Reserve will meet on Tuesday and ponder it's next steps.  Many wonder if the inevitable QE3 will be announced.

In the meantime, let's take a look at what the reality of what has happened since Ben Bernanke announced his QE2 policy in August 2010:

• Unleaded gas prices are up 45%.
• Heating oil prices are up 46%.
• Corn prices are up 71%.
• Soybean prices are up 26%.
• Rice prices are up 13%.
• Pork prices are up 31%.
• Beef prices are up 25%.
• Coffee prices are up 38%.
• Sugar prices are up 48%.
• Cotton prices are up 13%.
• Gold prices are up 42%.
• Silver prices are up 115%.
• Copper prices are up 23%.

Never mind those figures though... officially the fictional math of the CPI says inflation is only running at 2 - 3%. 

Riiight.  Makes a good bedtime story tho.

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Thursday Post #3: Remember... there's no inflation (the government said so)

Faithful readers know this blog has been harping about cost-push inflation for quite a while now.

Back on October 7th, 2010 we said:

• We will have deflation... in some areas. But we are also going to suffer a concurrent bout of inflation too, producing a paradox that many have difficulty reconciling.
  
  The vicious cycle created by the Federal Reserve’s Quantitative Easing [Note: we now call it QE 1] monetary policy is kicking in. We are seeing a huge influx of speculative money flows into the commodity sector pushing up food prices across the board. At some point, sooner rather than later, the rising cost at the wholesale level as indicated by the CCI and the futures boards will translate into higher retail prices for consumers, who are already being pinched by stagnant wages and falling net worth.
  
  The result – consumers are forced to retreat on spending with the next result – a slowing economy – with the next result – more Quantitative Easing – with the next result – more rising prices as currency induced inflation in essentials rises further will compound the problem exponentially as the cycle repeats itself.

Well QE 1 begat QE 2 and now we are discussing QE 3.

Meanwhile, as the NBC story above outlines, the predicted retail level price shock is starting to set in.

Currency induced cost-push inflation is hitting store shelves, especially in the grocery store.

Prior to that post, on September 15th, 2010, we asked what did cost-push inflation mean?

• "It means the consumer is on the verge of watching his disposal income be decimated by high food prices... the only saving grace is that energy prices have not YET begun moving up alongside the rest of the commodity complex. But it's only a matter of time. When the crude complex gets involved you will see home heating bills, home cooling bills, industrial energy costs and gasoline prices join the list of soaring costs nationwide. But don't worry. None of this counts towards the Consumer Price Index anymore. Thus... there is no inflation."

One of the biggest deceptions we are being spoon-fed right now is that inflation is running at only 2-3%.

When you hear that, you certainly don't conjure up images of the 1970s do you?

But as we have discussed before, the manner in which inflation is calculated was changed in 2000. Calculate inflation as it was calculated in the 1990s, 1980s and 1970s and you get quite a different picture.

That's why I continue to be a big fan of John William's website Shadow Government Statistics.

Among other things, William's continues to offer calculations based on the pre-2000 formulas for measuring inflation.

Currently the rate of inflation is over 11%.

As people drop into the grocery store, few would dispute that right now.

Watch what happens next.  All you are going to hear about from officials is the threat of deflation. Deflation and a collapsing stock market will set the stage for QE 3.

Get ready... it's coming.

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Inflation + Debt = Higher Interest Rates

The vicious cycle created by the Federal Reserve’s Quantitative Easing monetary policy is now kicking into high gear.

Back on October 7, 2010 I wrote that while we would have deflation in some areas, we were going to suffer a concurrent bout of inflation - producing a paradox that many have difficulty reconciling.

Last Wednesday we noted that CNBC was reporting something that we have said for over 2 years now... that if you go back to the way inflation was calculated prior to 1999/2000 (when all the important components of inflation were stripped from the calculations to hide it's true impact) that inflation is actually raging at almost 10% right now.

But now even the highly manipulated current inflation calculation method is unable to disguise what is going on.

As the Wall Street Journal notes, Canada's consumer-price index jumped by its biggest monthly increase in two decades, adding Canada to the list of major economies recently pressured by inflation.

• "The jump surprised economists and analysts here, many of whom had been comforted by so-far benign inflation pressure across Canada, much of that thanks to a strong Canadian dollar. It also raises the likelihood of an interest-rate increase by the Bank of Canada, the central bank, sooner this year rather than later. Some economists had pushed back their forecast timing of such a hike after the Bank of Canada, which kept rates steady last week, offered a less hawkish tone on future action than many had expected."

Meanwhile in the US the big news is that the ratings firm Standard & Poor’s lowered its outlook on the United States rating to negative. Although the agency did not actually lower its highest AAA rating on America's debt, it was the first time since the S.& P. started assigning outlooks in 1989 that the country was given an outlook that was something other than stable.

This has lead M&T Bank Corp. CEO Robert G. Wilmers to warn today that the United States "may be on the same calamitous path" toward an economic and government debt crisis akin to that of Ireland, Greece and Portugal if it doesn't rein it its ballooning spending and debt.

As this blog has said before, the story of this decade is going to be all about sovereign debt.  Gobs and gobs of sovereign debt.

The gridlock in American politics combined with the paltry spending cuts proposed only guarantee things are going to get worse.

Meanwhile, as Zero Hedge notes, the real beauty about waging a two front war (keeping gold from hitting the barrage of $1,500 limit spot orders; and silver from passing a dollar a day) means that the COMEX cartel has to pick its fights. Today gold loses for now, as the $1,500 spot (but not futures) price is safely defended. The same can not be said for silver. $44 was just taken out. And those who actually wish to buy American Eagles or Silver Maple Leafs can do so at the low, low price of $47.32

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Inflation actually near 10% according to CNBC

Quick post for today.

As faithful readers know, this blog has often posted that inflation is not only coming at us hard, but is in fact already here.

Numerous times we have talked about how the methods used to calculate inflation were changed in 2000. If you calculate inflation the way it was calculated in 1999 and before, the inflation rate is well into early 1970s levels.

And today, CNBC has come out with a story saying just that.

With an article titled "Inflation Actually Near 10% Using Older Measure", CNBC confirms what the blogosphere has been saying for almost a year now.

In case it gets yanked, here is the full story:

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After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels.

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site, Shadowstats.com.

“Near-term circumstances generally have continued to deteriorate,” said John Williams, creator of the site, in a new note out Tuesday. “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead.”

The pay-site and newsletter by Williams, an economic consultant for the last 30 years to companies, has gained a cult following among bloggers hungry to criticize Bernanke these days. The mission statement of the newsletter, according to the site, is to expose and analyze “flaws in current U.S. government economic data and reporting…net of financial-market and political hype.”

Investors are anxiously awaiting the release of March’s CPI reading on Friday. The consensus estimate from economists is for an annual inflation rate of 2.6 percent.

“Given ongoing inflation problems with food and the spreading impact of higher oil-related costs in the broad economy, reporting risk is to the upside of consensus expectation,” said Williams, citing a 10 percent jump in gasoline prices in March, in the note.

“While the federal government would have us believe the numbers are rather tame, our own personal gauge leads us to believe inflation is running between 5 percent to 6 percent annually,” wrote Alan Newman in his latest Crosscurrents newsletter that refers to Williams’ statistics.

Newman uses recent comments from Walmart CEO Bill Simon that inflation is going to be “serious” to back up the much higher CPI figures from him and Williams.

“Given Walmart's sales of $422 billion, we think Mr. Simon has a good idea of what’s in the pipeline,” said Newman.

To be sure, the BLS argues that the changes it has made over the last three decades more accurately reflect a true change in the cost of living. For example, in response to its hedonic adjustments, the BLS web site states, “to measure price change accurately, the CPI must be able to distinguish the portion of price change due to this quality change.

Still, going by recent strong comments from Federal Reserve officials, even members of the central bank must believe inflation is being underreported. Dallas Federal Reserve President Richard Fisher said in a speech last week that the central bank was reaching a “tipping point” as far as changing its policy so it can react to inflation. Maybe Fisher stumbled across Shadowstats.com. The voting member did, after all, mention Volcker in the same speech.

“The need to break the back of that (budgetary debt) spiral is as dire now as was the need for Paul Volcker to break the back of inflation in the 1980s,” said Fisher on April 8th. “As a result of his steadfast determination to press on with exorcising inflation, Mr. Volcker is today among the most respected living Americans and widely considered an exemplar for public servants worldwide.”

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Wal-Mart US CEO To America: "Prepare For Serious Inflation"

Faithful readers know that beginning last September I started harping on cost push inflation. At the time I said,

• [It's] inflation that isn't (because government doesn't count it anymore).

  The quantitative easing and stimulus money are working their way into the commodity sector which is allowing the dogs of inflation to slip their leashes and work their havoc.
  

  Take a look at the way food prices are being driven to unseemly high levels once again just as they were in 2008.
  

  Corn is coming up on $5.00, wheat is more than $7.00, soybeans are over $10, sugar is over $0.24/pound, cotton is closing in on $1.00, coffee is up near $2.00 pound wholesale (which is a 13 year high), cattle are just shy of $1.00/pound, bellies are trading over $1.50/pound for fresh product.
  

  What does it all mean?
  

  It means the consumer is on the verge of watching his disposal income be decimated by high food prices.
  

  In Canada this comes at a time when most Canadians are living paycheque to paycheque and are saddled with the highest levels of household/mortgage debt ever. Disposable income is at an all time low. In the USA, a record number of Americans are on food stamps and are either unemployed or underemployed.
  

  The only saving grace is that energy prices have not YET begun moving up alongside the rest of the commodity complex. But it's only a matter of time. When the crude complex gets involved you will see home heating bills, home cooling bills, industrial energy costs and gasoline prices join the list of soaring costs nationwide.

Well 7 months down the road and we see that the CEO of Walmart has this warning Americans that U.S. consumers face "serious" inflation in the months ahead for clothing, food and other products.

Walmart says that "every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along. Except for fuel costs, U.S. consumers haven't seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory."

Read that again... inflation will be unprecedented in recent memory.

But since governments in both American and Canada changed the way they calculate inflation starting in 2000, 'official' statistics will claim there is no inflation. Which means that as workers try to negotiate wage increases to offset the ravaging effects of higher costs in just about everything important, they will be denied as employers hide behind the government sham that is the Consumer Price Index.

You may have already noticed the rising cost of things on your pocketbook. But the reality is that you haven't seen anything yet.

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Presto-Chango

I had to laugh this morning.

As many of you know I have been warning about cost-push inflation since Quantitative Easing began.

The flood of liquidity would find it's way into the markets, commodities would surge, and the cost of doing business would spike for business translating into higher prices. All while jobs numbers - and wages - stagnated.

NONE of this, however, would show up in our Consumer Price Index because in 1999/2000 government changed the way the CPI was calculated and gutted all the factors like food and energy from the calculations.

Thus we have a situation where inflation, when calculated like it was in the 1970s, 1980s and 1990s, is surging along at about 8% while 'official' government statistics peg it at 1-2%.

Yesterday our friends over at Financial Insights commented how inflation is raging in China and retail margins over here are facing a coming squeeze.

(A squeeze which isn't just coming, it's already here. We're finally seeing it translate into higher prices but make no mistake, that squeeze has been going on for months)

I commented on the post at FI and jokingly said that China would just have to change the way they calculate inflation like we did in 1999/2000 and... presto-chango... no inflation.

Turns out is wasn't all that much of a joke as China is about to do just that.

The old saying goes that there are lies, damn lies and then there are government statistics.

Remember that the next time you're wallet is bare and the government (and some bloggers) tell you there is no inflation.

As I said last Friday, combine this squeeze on basics with rising interest rates and new mortgage rules... and life for home owners with a mortgage here in the Village on the Edge of the Rainforest is going to get very, very difficult.

Once this process kicks into high gear, and the serious price inflation comes, I think we will all look back and be shocked that there were people who actually worried about deflation in 2008-2010.

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Stagflation, anyone? (updated)

It is said that history doesn't repeat itself, but often follows similar patterns.

And if you have followed this blog for any length of time you know my thoughts about inflation are that we are following patterns similar to what we experienced in the 1970s.

Since Quantative Easing began in 2009, I have cautioned that the biggest looming threat is not deflation, but the inevitable inflation that all this liquidity is going to trigger combined with a stagnating economy.

Inflation is already with us.

It has been taking root around the world for the past 6 months, machinations of a deliberate monetary policy to debase the world’s reserve currency.

All that debasement has had one objective... the creation of a little inflation to get America and the west out of the deflationary spiral caused by the failure of those horrid financial instruments known as OTC Derivatives and un-payable government debt.

Around the world, inflation has erupted in global food prices. Most of the world has no savings to get through difficult times and “hedge” inflationary outcomes.

Those outcomes appear quickly and change realities violently. American monetary policy and the global “race to debase” is the reason you are seeing raging crowds on TV from Ireland to Greece and Egypt.

Looking at China and India alone, despite the fact that the yuan and rupee rose 2.4% and 1.3% respectively against the dollar through November of last year, inflation rates in both countries dwarfed the relatively tame readings we are reporting in North America; Chinese consumer prices up 4.4% and India's up 8.6%.

Frequently you hear people say "if inflation is such a problem, why isn't it registering in the consumer price index?"

The answer to this supposed riddle of non-existent inflation: inflation is all in how you measure it.

In North America food, along with energy have been stripped out of our CPI, and the result is a more tame inflation reading.

But those price pressures still exist notwithstanding.

30 years ago when Ronald Reagan entered the White House, it was precisely the spike in food and energy - ignored today - that had Reagan and others so concerned about inflation.

Times change, and governments become slick and manipulative, and now those price pressures have supposedly 'disappeared'.

Calculate inflation today the way it was calculated in the 1970s, 1980s and 1990s and the federal government's measure of inflation would be substantially higher than what we are currently being told.

Once you understand that... then the latest statements from the Governor of the Bank of England that standards of living are about to plunge are not all that surprising.

Mervyn King, Britain’s counterpart to the Bank of Canada's Mark Carney, has delivered a stern, sobering message to his country:

• "In 2011, real wages are likely to be no higher than they were in 2005... One has to go back to the 1920s to find a time when real wages fell over a period of six years."
  
  "The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy."
  
  "The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies."
  
  "Furthermore, inflation may rise to somewhere between four per cent and five per cent over the next few months."
  
  "The idea that (we) could have preserved living standards, by preventing the rise in inflation without also pushing down earnings growth further, is wishful thinking."
  
  "Unpleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal."
  
  "I sympathise completely with savers and those who behaved prudently now find themselves among the biggest losers from this crisis.”

The Governor of the Central Bank of England has looked his country in the eye and admitted that he is completely powerless to prevent the inevitable decline in living standards that inflation and a stagnating economy are about to ravage upon us.

Meanwhile in Canada, our Central Banker has been sounding alarm bells since last February about high debt and the impact of significant looming interest rate hikes combined with an economy that will not grow fast enough to offset them.

Both Governors can see what's coming.

And as the blog has repeatedly posted, it's all about inflation, a stagnating economy and the looming spectre of rising interest rates.

Meanwhile Reuters reports that more manufacturer's are warning of rising input costs.

Emerson CEO David Farr said inflation ran well ahead of the company's own projections, and the company was spending three times as much on materials as on labor.

"We'll have to significantly increase prices around the world because this is not a momentary blip," Farr told analysts on the company's conference call.

"In my opinion, I think net material inflation could run at higher levels for the next two or three years. That's a plus and a minus in many regards but in reality this is an issue we'll have to deal with. It's not going away."

Earlier this week, Illinois Tool Works, which makes a variety of products for the automotive, residential construction, and industrial marketplace, warned it might not be able to fully recoup all the raw material price increases it is seeing - even though it expects to raise prices this year.

Officially it's known as cost-push inflation. Wages don't rise, jobs don't increase and the economy founders, but manufacturing costs rise anyways pushing up prices.

QE1 and QE2 are the causes. And now there's talk of QE3.

Inflation has only just started.

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Happy Boxing Day

Before settling down for the holidays I pre-wrote this post and scheduled it for Boxing Day for you reading pleasure.

I hope every one's Christmas went well.

No doubt driving around to visit friends and family you took time to fill up your gas tank.

If you live in Greater Vancouver, your jolly spirit will have been tempered by gasoline prices which have touched north of $1.20 per litre ($1.22 at some stations).

Whoa!

Gas has gone back to the highs we experienced when oil was at over $140 per barrel, whereas right now oil is at $90 per barrel. What gives?

Even better, government statistics tell us that inflation has fallen to 1.3%.

Uh-huh.

In the inflation/deflation debate, you will see a great many analysts predict that inflation fears are a ways out. They argue that until debt deleveraging runs its course, and credit demand picks up, inflation will remain low. Until the velocity of money increases, we will we not see significant inflation.

I disagree.

Make no mistake... I agree that there is a significant amount of debt deleveraging still to occur.

But we will see these deflationary pressures coincide with inflation.

A blogger I follow articulated it best.

He noted that most folks only understand and recognize demand-pull inflation.

This is the classic demand side, Phillips Curve inflation, that says rising wages, employment and wealth cause economic expansion which leads to more money chasing a static amount of goods.

New, excess demand "pulls" prices up and the result is price inflation.

With deleveraging picking up steam, and credit continuing to contract, demand-pull inflation cannot take hold.

Pretty simple stuff.

But what we have been experiencing, and what will intensify in 2011, is a forgotten strain of the inflation beast called currency induced cost-push inflation.

This type of price inflation is caused by producers and merchants being forced to pass along through higher prices the rising cost of inputs to their products.

Consumers, particularly the lower-and-middle income ones, bear the brunt of the pain.

Your income isn't rising to keep pace with rising expenses and you get squeezed. Hard. And its not luxury items that are going up in price, its the staples. Bread, milk, gasoline, clothes, eggs, meat... the basics that no one can realistically live without.

Bloomberg reports beef prices increased 6.2% above last November, with steak prices up 5.4% and ground beef prices up 7.4%. Pork is up 12.9%. Poultry prices (including turkey) up 3.2%.

Egg prices increased 4.7%. Dairy 3.8%. Cheese 5.4%. Ice cream and related product prices 32.1%.

Cereal and bakery product prices are down 0.3%, but rapidly rising wheat futures mean prices can only be held in check for so long.

Meanwhile coffee, sugar, and wheat are up over 35%.

Consumers are going to be hit with sticker shock and 2011 is going to be a mean year.

Why will input costs go up?

Simple, they are all dollar-dominated and with US Federal Reserve now engaging in Quantitative Easing to infinity, all dollar-dominated assets are going up in price. Significantly.

That's why businesses like McDonalds are already letting consumers know they plan on raising prices next year. As noted by the Wall Street Journal:

• "Timing and executing price increases can be tricky as McDonald's and other companies are caught between paying more for key materials such as meat and wheat, and keeping prices low to attract price-sensitive customers in a still-weak economy."

Even that bastion of low prices, Wallmart, has been forced to hike prices. Inflation is raging in China and their costs are soaring. Wallmart simply cannot procur products at the same low wholesale costs.

So prices rise in North America while wages stagnate and deleveraging/credit contraction continues.

And it's nothing compared to what's coming.

Currency induced cost-push inflation has already arrived and is at work. Mark my words. In the midst of a tremendous amount of deleverageing, 2011/2012 is going to be a time of skyrocketing prices.

Pants, coats, groceries, gasoline, you name it.

Come next Christmas you will be wondering what hit you.

Good news though. The government will come out with Consumer Price Index stats that tell you inflation is only around 1%.

As I have posted before, the way government calculates inflation was changed in 2000. Everything that realistically affects the CPI has been stripped from the statistics.

Calculate inflation the way it was pre-2000 and inflation is raging at over 7%.

Take another look at those price changes above. Which statistic do you believe... inflation at 1% or inflation at 7%?

"Four legs good. Two legs better." Couldn't have said it better myself, George.

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Sign, sign, everywhere a sign.

So the big item on a lot of Canadian blogs today is a report from TD Bank titled Canadian Household Debt a Cause for Concern.

No kidding.

A couple of salient points:

• At 146% of average after-tax personal income, Canadian household debt has become excessive.

• Nowhere was the impact of lower borrowing costs and greater household confidence more clearly observed than in the housing market, where ownership rates increased steadily over the past two decades. A self-perpetuating cycle occurred. Strong increases in demand bid up housing prices, which together with equity market gains prior to the 2008/2009 recession, raised net wealth. This positive wealth effect encouraged households to increase their rate of investment and consumption, further driving up borrowing and debt levels.

• Based on the new figures, a slightly higher 6.5% of households are currently financially vulnerable (or have a debt-service ratio of 40% or above).

• More striking, the share of those on the verge of becoming vulnerable (those with a debt-service ratio of 30-40%) had risen from 7.2% in 2009 to 9.3% – up almost two percentage points.

• Given the change in the distribution of debt, we have estimated that as much as 10-11% of households may become financially vulnerable if the overnight rate rose to 3.5%.

Thus we have a situation whereby if the Bank of Canada rate rises to 3.5% from the current 1%, over 10% of all households will be diverting over 40% of their pay to debt servicing.

And I can guarantee you that in the Village on the Edge of the Rainforest this will apply to more than 10% of all households.

As I have said over and over, it is going to be rising interest rates that will trigger an implosion of our housing market, with Vancouver as ground zero of a massive correction.

Those who wring their hands in frustration at the stubborn persistance of the housing bubble here only have to look at interest rates to find the reason why.

The Bank of Canada has issued endless warnings about the levels of our debt and the threat of rising interest rates. Bank after bank has come out with similar warnings.

Interest rates are at emergency levels. They will not stay there.

If you own, now is the time to cash in on your equity. Well invested it will multiply exponentially in the coming years as we are hit with the ravages of currency induced cost push inflation.

If you're afflicted with housing lust, DON'T BUY! Rent and force yourself to invest the difference between what you pay in rent and what you would be paying on a mortgage. When inflation and cost push inflation strikes, and the housing market collapses under rising interest rates, you will be in a position to buy a house outright - double digit interest rates be damned.

The warning signs are everywhere. I do not yearn for the carnage they portent, but neither do I deny the ominous calamity they give warning to.

Recognize those warning signs... and position yourself to take advantage of what's coming.

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Inflation... and Realtor 'Incentive'

On the right side of this blog some of you will have noticed that under the spot price of Gold and Silver, there is a chart called the US Dollar Index.

This index measures the strength of the US Dollar. A few weeks ago it was up over 80. This week it slid below 77 - which is big news.

It's indicative of a weakening US Dollar.

Perhaps at work you know some co-workers who this week are all giddy that the Canadian Dollar and the US Dollar moved to parity. Some, no doubt, rushed out to exchange loonies for greenbacks for upcoming trips to Vegas or other locals south of the border.

It's not so much a testament to the strength of the loonie, but it owes more to the weakening of the US Dollar.

Such developments are a big concern to OPEC. The oil producing Arab nations trade oil in US Dollars. And a weakening US Dollar means they are getting less for the same amount of product.

"The U.S. currency’s weakness means the 'real price' of oil is about $20 less than current levels," said Venezuelan Energy and Oil Minister Rafael Ramirez after yesterday’s meeting of the Organization of Petroleum Exporting Countries in Vienna.

Their response?

The OPEC nations want to push the price of oil from the current $80 to $100 to offset the declining value of the dollar.

And since the Canadian Dollar is at par with the American Dollar, it means you and I will also feel this 20% increase in the cost of everything oil related - which is just about every aspect of our lives.

This is another example of currency induced cost push inflation at work.

'Real' inflation last month raged at 8.5%. Look for it to accelerate in the coming months.

Vancouver Real Estate

As we noted earlier this week, the slow melt is meeting the winter freeze and the chilling sales climate will clash with stubborn sellers in a stalemate which will probably last until spring.

Come springtime many observers believe you will start to see sellers move on their prices and the decline will finally start.

And a primary impetus that will push the stubborn sellers to move on their asking price will be Realtors.

This month BCREA's pumper-in-chief, Cameron Muir, has made much of the declining numbers of listings on the market. He pumps this as a move to a 'more balanced market'.

Through the late summer and early fall, many owners have tested the market waters. They put properties on the market, only to remove them when buyer interest proved to be reduced. Many of these owners plan to put those same properties back on the market and many will likely do so in spring of 2011

As our friends over at VREAA have noted these sellers will be re-entering a market in which local Realtors has seen sales (and by 'sales' we actually mean to say 'commissions') have been at 10 - 15 year lows.

There are a great many Realtors feeling an income pinch right now, a situation which will be greatly exacerbated come Spring 2011.

As VREAA notes,

• Sales are down year-over-year in the lower mainland, in some areas of BC they are down as much as 50%. There are twice as many Realtors in BC now than there were 10 years ago, and they are now competing for a shrinking pie. In many markets we are seeing Realtors talk about the importance of ‘sharp pricing’. They are applying pressure on sellers to drop prices to points at which they meet buyers. They are a force against the ‘sticky pricing’ that is characteristic of this stage of a bubble burst.

Look for this pressure to be severely ramped up when many of these sellers return to the market in Spring 2011.

Many observers anticipate ongoing minor price drops through October, November and December. Then, in the first half of 2011, you will probably start to see significant changes.

Speculators, boomers, foreign holders, overextended locals and developers will all come to the market and be met by hungry Realtors desperate for income after 8-10 months of the worst sales in over a decade.

Eager to close deals at almost any price, significant pressure will be exerted to speed the price decline.

It could be an intense spring.

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Double, double, toil and trouble

I think it's funny how slow things seem to move sometimes.

I first started talking about the foreclosure crisis over a week and a half ago. The enormity of the issue seemed, IMHO, self-evident.

The fallout, just as obvious.

Yet it has only been the last two days that stocks in the financials sector have started to take a hit. I mean, wouldn't you have dumped those stocks the very next day?

But things move slowly.

And what of the investment banks?

As this article on Seeking Alpha notes, there's a pretty strong case that they lied to the investors in many if not most of the mortgage bond deals they put together.

The risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

What has been sold to these investors is nothing short of fraud.

These investment banks bought up loans they knew were bad, packaged them up and sold them on to some buy-side sucker under the guise of a triple A rating.

As the Seeking Alpha article outlines, it’s clear that the banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool.

That’s a lie of omission. And you can bet your bottom dollar there is going to be a Tsunami of lawsuits from investors who are going to want their money back.

It is going to be a very long time before the banking system is going to be free and clear of the nightmare it created with these securitized mortgages.

And those financial stocks? The drop over the last two days is nothing compared to what's coming.

Inflation

If the destruction that is going to be caused to the banking system by the foreclosure crisis wasn't bad enough, there is the topic of inflation.

Here is another earthquake that most of us are completely oblivious to.

The paradox of concurrent deflation/inflation continues to elude the grasp of many.

One of the biggest deceptions we are being fed right now is that inflation is running at only 1%. When you hear that, you certainly don't conjure up images of the 1970s do you?

But as I have discussed before, the manner in which inflation is calculated was changed in 2000.

That's why I continue to be a big fan of John William's website Shadow Government Statistics.

Among other things, William's continues to offer calculations based on the pre-2000 formulas for measuring inflation.

Take the month of September, for example.

The September consumer inflation rate was an almost non-existant 1.1%.

But calculate the inflation rate as it was calculated before 2000 and the rate of inflation in the month of September was 8.5%.

8.5%!

If we are going to compare today with the stagflation of the 1970s, you have to use data that is calculated in the same manner.

And keep in mind that the US Federal Reserve is desperate to boost the rate of inflation even higher. They are trying to achieve a target under the current format of about 3-4%. This means we are probably looking to achieve a rate of inflation that is something on the order of 12-20% based on using pre-2000 statistics.

Currency induced cost-push inflation is already upon us. It's important you understand and appreciate that.

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Turbulent Days

Well Gang.

I sat back today and watched events play out. Without a doubt we are living through one of the most fascinating periods in history.

Faithful readers know I consider the events of 2008 a massive financial earthquake, the depth and breadth of which many of us still do not fully understand nor appreciate.

Two years later the fallout is only just starting to be felt.

US Foreclosure Fraud Saga

This massive story took a couple of interesting twists today.

Early this morning Reuters had reported that a bill toughening foreclosure challenges had zoomed through the Senate last week.

The bill, named the Interstate Recognition of Notarizations Act, would require courts to accept document notarizations made out of state. Its sponsors intended to promote interstate commerce. But homeowner advocates warn the bill could allow lenders to cut even more corners as they seek to evict homeowners... not to mention make it easier for forged documents to be easily accepted.

The bill passed without public debate in a way that even surprised its main sponsor, Republican Representative Robert Aderholt. It requires courts to accept as valid document notarizations made out of state, making it harder to challenge the authenticity of foreclosure and other legal documents.

The timing raised eyebrows, coming as a rising furor over improper affidavits and other filings in foreclosure actions by large mortgage processors was making big news.

But by this afternoon the White House announced that President Obama will not sign the bill passed by Congress without public debate using a "pocket veto" on the bill, which will effectively kill it.

This story has a long ways to play out yet.

Fluctuating Gold/Silver

Meanwhile, overnight, gold soared into a new record high above $1365 US with silver following suit putting in a fresh 30 year high at $23.53 US as the US Dollar continued sinking further in the Asian and early European trading.

A number of analyst had predicted that the trend would come under assault when morning came to North America and it did. As the sun rose here it was not long before the Euro, the Swissie and the Pound began giving up their gains and out came the selling in the metals pits.

It will be interesting to watch the overnight battle on the gold/silver front. Europe and Asia are piling into gold like crazy.

In India there is a gold rush going on the likes of which that country has not witnessed in a decades. Fears of double dip recession in the US and the subsequent global fallout of such an event has caused high net-worth individuals in India to shift assets massively.

"The way this class (wealthy investors) responds to a fear situation is by buying bars and kilos of gold," said A L Adjaniawala, precious metals analyst at KJMC Capital, a Mumbai-based research firm. "Given the firming up of bank deposit rates in India, consumers in the world's biggest buyer of the precious metal are keen to increase the share of gold in their investment portfolio to 20%-25% over the following year, from the current 10%-12%."

Meanwhile Silver swung over a dollar over the course of the day.

We do live in interesting times.

Cost Push Inflation

All week I have been meaning to do an in depth post on this topic. A number of readers of this blog are staunch defenders of the looming deflation scenario.

We will have deflation... in some areas.

But we are also going to suffer a concurrent bout of inflation too, producing a paradox that many have difficulty reconciling.

The vicious cycle created by the Federal Reserve’s Quantitative Easing monetary policy is kicking in.

We are seeing a huge influx of speculative money flows into the commodity sector pushing up food prices across the board. At some point, sooner rather than later, the rising cost at the wholesale level as indicated by the CCI and the futures boards will translate into higher retail prices for consumers, who are already being pinched by stagnant wages and falling net worth.

The result – consumers are forced to retreat on spending with the next result – a slowing economy – with the next result – more Quantitative Easing – with the next result – more rising prices as currency induced inflation in essentials rises further will compound the problem exponentially as the cycle repeats itself.

As long as the market is convinced that the Federal Reserve is going to set off another round of QE, it will go after the US Dollar driving it lower forcing money into commodities making life miserable for a large swath of North American citizenry.

The decision by the Federal Reserve to deliberately sacrifice the Dollar is going to come back and haunt all of us for years to come.

When I can, I will expand on this.

Interesting times indeed.

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Hey... did you hear? The Vancouver R/E decline is OVER!

Tis true folks. According to the real estate 'pumper-in-chief', CREA's Cameron Muir, "the number of new residential listings in the province has fallen 30% since April. With fewer new listings, total active listings are now on the decline, signaling that an end to the buyer’s market may be on the horizon."

Woohoo... perhaps Andruff was right and it IS time to pack in the blog.

Meanwhile let's turn our attention to the inflation that isn't (because government doesn't count it anymore).

The quantitative easing and stimulus money are working their way into the commodity sector which is allowing the dogs of inflation to slip their leashes and work their havoc.

Take a look at the way food prices are being driven to unseemly high levels once again just as they were in 2008.

Corn is coming up on $5.00, wheat is more than $7.00, soybeans are over $10, sugar is over $0.24/pound, cotton is closing in on $1.00, coffee is up near $2.00 pound wholesale (which is a 13 year high), cattle are just shy of $1.00/pound, bellies are trading over $1.50/pound for fresh product.

What does it all mean? It means the consumer is on the verge of watching his disposal income be decimated by high food prices. In Canada this comes at a time when most Canadians are living paycheque to paycheque and are saddled with the highest levels of household/mortgage debt ever. Disposable income is at an all time low. In the USA, a record number of Americans are on food stamps and are either unemployed or underemployed.

The only saving grace is that energy prices have not YET begun moving up alongside the rest of the commodity complex. But it's only a matter of time. When the crude complex gets involved you will see home heating bills, home cooling bills, industrial energy costs and gasoline prices join the list of soaring costs nationwide.

But don't worry. None of this counts towards the Consumer Price Index anymore. Thus... there is no inflation.

The technical term is 'Cost Push Inflation'. And it's insidious havoc is silently taking root.

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