An Inflationary Nightmare, a Stock Correction, and The End of the Bond Market Party all on the Horizon

1/25/2011 Portland, Oregon – Pop in your mints…

“Change,

Now it’s time for change

Nothing stays the same

Now it’s time for change”

Hu Jintao with apologies to Motley Crue

We are back in our tiny perch today with our sights trained on the horizon.  In the foreground, we see, along with the world, the horror of another terrorist attack.  This time at the Domodedovo Airport in Moscow.  Such senseless acts of violence, no matter how you may attempt to explain or justify them, have absolutely no place in our view of the world.  We grieve for the dead and injured and we further grieve for the blow that this may deal to the hope of many.  When fear overtakes hope, that is when things get truly dangerous.

Further on the horizon we continue to see reason for hope.  Hope that the current slow death of the US dollar regime may be about to speed up.  For starters, the Dow Jones industrial average, where much of the FED’s printed money makes its first stop on its way into commodity prices, rose to nearly 12,000 yesterday.  Are happy days here again?  Are the largest companies in America and the world returning to such incredible profitability that we are going to experience another bull market in equities?  We don't know, but the Maket Oracle, which seems to call a lot of things correctly, is calling for a 10% correction by mid February.  We generally think that, while nominal stock prices will continue to rise, stocks as an asset class will under perform a little known asset class called "real stuff" for some time.

Peering still further on the horizon, where our sight begins to fail us, we see that Peter Schiff is still predicting and “Inflationary Nightmare.”  Along with Mr. Schiff’s words, which come as no surprise as he has been warning of the coming problems that are now beginning to fully manifest themselves for years, another possible and plausible trigger for the inflationary scenario comes into focus. 

  

"You got it, Hu!  Now that's change I can believe in!"

So simple yet profound is the insight that we must pause to gather our breath.

We will pose a question:  Aside from the obvious fact that the FED's funny money will soon slip out of stocks, bounce off of the over-inflated bond market, and race into any and every commodity price on the planet, what could possibly set off this chain of events that would bring a swift end to the current monetary madness that we live in?  The answer is so obvious that we almost doubt it:  China is going to cause its currency to rapidly appreciate against the dollar.

Why?  Good question.  The simple answer, which is the only kind we are qualified to give here at The Mint, is that a rise in the Yuan’s value against the dollar would serve the dual purpose of solving China’s problem of rapidly rising food price inflation (food riots are no fun, just ask the people of Tunisia) as well as to silence critics who charge China with manipulating their currency lower against the dollar to favor them in trade relationships.  

There you have it.  China, in one grand gesture, pleases the West by giving them what they have been wanting for years (the US government has done everything short of claiming that a Yuan appreciation against the dollar is the sure solution to the US economic woes) and at the same time avert food riots at home.  Will it work?  Our guess is that it will work out quite well for folks on one side of the Pacific.

So join the chorus here as Hu Jintao, the Chinese Premier, belts out his plans for the Yuan/Dollar peg that has been hovering just below 7 to 1 since August 2008 with a lot of help from the Crue:

“I’ll change

I’ll change

Not tomorrow but today”

Stay Fresh!

David Mint

Email:  davidminteconomics@gmail.com

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Key Indicators for Tuesday, January 25th, 2011

Copper Price per Lb: $4.33
Oil Price per Barrel:  $87.66
10 Yr US Treasury Bond:  3.41%
FED Target Rate:  0.18%

Gold Price Per Ounce:  $1,335

MINT Perceived Target Rate*:  4.5%Unemployment Rate:  9.4%
Inflation Rate (CPI):  0.5%
Dow Jones Industrial Average:  11,981
M1 Monetary Base:  $1,783,700,000,000
M2 Monetary Base:  $8,879,300,000,000

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.