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Weekend: Bernanke's Box

Written By Brian Hicks

Posted April 30, 2011

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

In the face of high prices for practically everything these days, the evils of inflation deliver a tough lesson in every trip to the cash register.

Inflation is, after all, a pervasive danger that’s hard to stop once it gets started.

That’s because run-away costs destroy the very price stability that markets thrive on. Without them, there is nothing but market chaos, since rapid price fluctuations in one market inevitably wash over into other areas, swamping them as well.

That’s why the folks at the Federal Reserve talk tough about inflation once in a while, even if they don’t really mean it.

It’s the one part of their mandate they’ll bend over backwards to turn a blind eye to.

The problem with this approach, however, is pretty simple…

When the Fed chooses to pretend inflation doesn’t exist, it opens up a Pandora’s box.

Of course we all know the story of Pandora…

According to the Greeks, she was the first woman. Zeus sent her down to Earth with a box of troubles in her suitcase to get even with those rotten men. Before leaving, he told her one thing: “Whatever you do, don’t take the lid off of that box I gave you.”

Not long after, Pandora did just that and the evil the box contained was let loose on the world.

Now fast forward a few thousand years, and the Federal Reserve has done practically the same thing.

A decade of monetary hi-jinks has unleashed a pestilence of its own…

And with food and energy prices going through the roof for the second time in three years, the Fed has now given us a problem that can’t be easily reversed. Price inertia, after all, has a ripple effect.

But that is the kind of market-wrenching unpredictability that you turn loose when you decided to purposely create inflation. It’s impossible to contain in the short term — sort of like a bad 70s rerun.

Bernanke & Co., however, seem to dismiss this scenario, since it runs counter to their Keynesian notion that slower growth inevitably leads to lower inflation.

But it won’t, because it ignores reality.

Here’s why: A growing economy doesn’t explain every instance of inflation. It never has.

Just look at the 90s… It was a period of enormous growth, yet there was very little inflation. Prices should have soared, but they didn’t.

And look also at the 70s — the last time our economy tangled with stagflation. The period was marked by soaring unemployment, little or no growth, and rampant inflation. The conditions were so bad they gave birth to The Misery Index, which is making quite a comeback these days.

So you see, the magical checkbook isn’t as wondrous as it appears. And in case you haven’t noticed, the printing presses have been pumping out a tsunami-sized wave of greenbacks for years now.

Of course, all along this road, the U.S. dollar gets cooked and cooked and cooked some more along with your purchasing power. Yet the comical illusion goes on since the national scorecard — also known as the DOW — keeps climbing.

Just like Pavlov’s dog, we like it when the markets are green… even if the only reason to salivate is a falling dollar. We are stupid like that.

But it’s all connected. The high prices behind stocks, oil, gold, and the food in your grocery cart are all due largely to a devalued greenback. It’s where cause meets effect. The chart below is what I call “The Chart That Explains It All”:


As you can see, the DOW is neatly correlated to the falling greenback, which in this case is represented by UUP, the Proshares Bullish Dollar ETF.

So yes, the Dow is up over 10%. But the dollar is off by an equal amount — meaning you’ve really gained nothing at all. What is given with one hand, in other words, is taken away by the other.  It’s smoke and mirrors.

But this monetary magic show has its limits — especially now that oil has crossed the $112/barrel mark.

At those levels, energy costs have now gone past the magical 6% of personal consumption mark, which history tells us is a prelude to tough times. Of the six United States recessions since 1970, all but the “9-11 recession” have been triggered when energy prices crossed this threshold.

What may make matters worse this time around is there has been a steep increase in food prices as well, with food prices rising 6.5% since January.

For consumers it’s the double-whammy.

For all of these wonders, you can thank the Federal Reserve and their Pandora’s box of monetary chaos.

If you remember the Greek myth, in Pandora’s story, there was still Hope left in the box…

In this case, your best hope is in concentrating in those areas that benefit from a weak dollar, i.e. commodities.

They are going up faster than the DOW — which means you actually make money. The price action in precious metals like gold and silver is not an anomaly; it’s a vote against the Fed.

One way to ride this rising tide is in palladium. As metals guru Luke Burgess points out in this report, palladium is likely headed much higher.

How long this rise in prices can go on is another matter entirely… Paychecks put limits on price hikes that cannot be finessed.

Below are this week’s top-read investment insights from Wealth Daily and Energy and Capital.

Your bargain-hunting analyst,

Steve Christ
Editor, Wealth Daily

My #1 Uranium Stock: How Carlos Becker Solved the Energy Crisis
Editor Luke Burgess explains why uranium is the one metal we can’t live without… And thanks to spiking global demand, he’s on the trail of a company that will make early investors a fortune.

2011’s Best Energy Play: CNN Calls Them “Instant Millionaires”
Publisher Brian Hicks explains how ordinary Americans are cashing in on the payday of their lives thanks to a previously untouchable reserve containing 23 years’ worth of domestic energy

Cash for Trash: Best Market Since 1998?
Best Market since 1998? Ridiculous, but Adam Lass is not complaining while it’s still paying off in triple digits…

Bin Laden Hates This Car: $4 Gas and Truck Stop Hookers
Editor Jeff Siegel discusses a $4.45 billion electric car opportunity.

Trailer Park Investor: This Time, It’s Different
The roof just blew off. Hail the size of beach balls is pounding the house, breaking off drywall, and frankly, getting in the way of my research… The rain is running in like the North Shore at Oahu and there is an electric shock every time I touch the shift key.

The Marcellus Shale: A Bright Spot in U.S. Energy: Are You in the Next Recession-Resistant Region?
Editor Ian Cooper takes a look at the economic impact the Marcellus shale is already having on the East Coast, and offers one of the best ways to trade it.

Emerging Natural Gas Stocks: Are You Still Living in a Pipe Dream?
Editor Keith Kohl explains why natural gas is one of the answers to reducing our foreign oil addiction.

Silver to Soar as the Gold to Silver Ratio Stabilizes: 4,500-year-old Ratio Shows Silver Will Catch Up to Gold
Despite the recent swell in prices, silver should continue increasing — doubling within the next few weeks and vaulting the price of the white metal over $100 an ounce.

China Set to Pass U.S. as Global Leader: The Day The Communists Won
Well that’s it… It’s been a good run, but after 235 years of dominant reign, the U.S. is being forced into global superpower retirement. Maybe we’ll at least get a nice watch for our service.

Gold Has No Value: There’s Money to be Made
There is no reason for gold… It holds no intrinsic value, despite what the pundits would tell you. The whole industry is one of futility.

Canada’s Peak Natural Gas Crisis: Feeling the Pinch from Peak Natural Gas
Editor Keith Kohl takes a hard look at why Canada’s natural gas crisis is already underway, and what implications investors can expect from the decline.

The Housing Market’s Silver Lining: Why I’m Bullish on Apartment REITs
Editor Steve Christ peers into the dark corners of the housing market and finds the silver lining in it all.