Hyperinflation is now here: throwing gasoline on the fire

Kapitalcon cited my post discussing the $223 billion dollar US Federal deficit in February, and then went further to predict QE III:

Important to note is the Federal Reserve’s recent announcement that it may have to begin its third round of QE in response to sky-rocketing oil prices.  Atlanta Fed President Dennis Lockhart stated at the National Association of Business Economics in Arlington that “If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation.”  As oil increases, so too does the cost of most, if not all, goods and services. This includes anything that requires petroleum in the production process, not to mention increased transportation costs for moving the product to market.  Such is the rationale for QE3.

Do I fear my commodity stocks going down like they did in 2008-9?  Not with people like Mr. Lockhart running the Federal Reserve Bank.  The problem of the commodities is too much liquidity chasing too few goods.  If the Federal Reserve Bank’s solution is to just throw more fuel on the fire, then I’ve nothing to fear.  QE, which I affectionately call the Bernanke Put, will be the ultimate cause of hyperinflation.  It is as though they are trying to fulfill this prophetic video that the National Inflation Association created a few months ago:

Jeet kune do investing IV: Venezuela

The Globe & Mail presented a contemporary example of hyperinflation in article by Frank Jack Daniel:  “Trying to survive inflation? Ask Venezuelans“.  One point stood out to me:

Over the past 25 years, its citizens have developed all sorts of techniques for stretching their money and offsetting price rises. The main rule is get rid of cash fast.

“There’s no point leaving it in the bank, it’s better to invest. I bought this car for example,” said Caracas town hall official Jorge Juarez, who leaves home at 4 a.m. to beat the snarled traffic and uses his 2007 Fiat as a taxi after work.

Mr. Juarez is in many ways a typical middle-class Venezuelan. Through a mix of hard work and shrewdness he has kept up his family’s living standard even as his salary’s buying power shrinks.

Cars are a good investment in the Caribbean nation, where gasoline is subsidized to the point of being almost free and demand for vehicles far outstrips supply. As such, they increase in value as they age, faster than consumer prices.

Cars were seen as a good investment during hyperinflation in Chili, according to Gonzalo Lira, as I mentioned in an earlier post about  why I was buying Toyota RAV4 on 0% 36 month financing.  If gold is the measure of real estate, then real estate is suffering in price even while here in Canada it is experiencing phenomenal nominal gains.  This too accords with what happened in Chili according to Lira.

NB:  this post is part of a series on Jeet kune do investing, named after Bruce Lee’s martial arts, a style which is no style.

Hyperinflation is now here: Food prices rising

The Globe and Mail says that 7% price increases in food could be on their way to Canada. What is to blame?

Bad crops around the world, oil trading for more than $100 (U.S.) a barrel and the economic recovery are driving prices higher.

Key words that do not appear in the article:  money base, quantitative easing, Ben Bernanke, Federal Reserve Bank, Bank of Canada, low interest rates, deficit spending.

The media’s general lack of awareness and insight into what ails the world leads me to believe that they are stuck on stupid.

My investment conclusion:

Short:  US dollar, all fiat currencies

Long:  Wine kits, beans

Education bubble XIII : Did you know that liberals are smarter than conservatives?

The NPR’s former fundraiser, Kevin Schiller was caught on video saying a whole load of ugly things about conservatives and Christians. The Washinton Times summarizes:

“The current Republican Party, particularly the Tea Party, is fanatically involved with people’s personal lives,” he said. They are “very fundamentalist Christian – I wouldn’t even call it Christian, it’s this weird evangelical kind of move.” People on the right are “white, middle America, gun-toting,” not to mention “seriously racist people.” He also said that conservatives are “anti-intellectual,” in contrast to the “more educated, fair and balanced” liberals.

I’m a conservative and I’m a Christian.  I also have a PhD, though I’m not sure that really matters much.  I wonder if it is a fair question, Mr. Schiller, What is your terminal degree?

Liberal schools train little brains full of mush who become small-minded liberals who are similar to this Kevin Schiller.  This is just snobbery.  It is not a sign of higher intelligence.

The price of a real estate in gold

The Daily Reckoning has a chart showing that nominal gains in housing since 1913 has been in the neighborhood of 4.4% per annum.  Take the following example:

5561 Keith Ave Oakland, CA  1913- $5,750; 2011 ; $843,500.  = 14,595%

But what happens if we price the house in gold which was $18.93 per ounce in 1913 and $1435 today ?

5561 Keith Ave Oakland, CA  1913-303 oz gold ; 2011-587 oz gold = 93%

That’s on the high end of the scale.  Suppose we took another house on the low end:

28 Sanford St. Trenton NJ  1913-$3,600 ; 2011 $200,500 = 5469%

28 Sanford St. Trenton NJ  1913-190 oz gold ; 2011-140 oz gold = -26%

The nominal gain in the 28 Sanford house over 100 years was 5469%, but the real gain as measured in gold is -26%.  This is a remarkable consideration.  In my view, what it really means is that those investment advisors (e.g., James Altucher) who say that buying a house to live in is not an “investment” have been absolutely correct.  It is likely a relatively good store of value, as compared to the dollar, but even that really depends on the location of the house.  If a house is bought in a thriving industrial metropolis but ends up in a ghost town like Detroit, real estate is a very bad investment indeed, in the long run.

I would contend finally that home owners often win in this game because they have access to a low interest debt product, a mortgage.  The interest paid, the maintenance on the house, insurance and property tax, the main expenses of the house, are roughly equivalent to or less than what one would pay in rent.  The significant advantage of borrowing a large sum today and paying it off over the course of time is that the dollars borrowed are worth more than the dollars paid, because inflation, which has been more common than deflation over the last 100 years, benefits debtors.

But real estate as an investment gives the impression of phenomenal gains; but as measured in gold, these gains are far less dramatic.  However, in some cases, owning a home may protect the investor from robbery via inflation.

Just for fun, I’ll do the same with my house:

Price paid in 1997 = CDN $200,000 ; 2011 – CDN$400,000 = 100%

Price paid in 1997 = 404 oz gold; 2011 = 287 oz gold = -29%

I conclude that my house has had phenomenal nominal gains in the last 14 years, but no serious real gains in that same period.