US Hyperinflation?

The finance ministers of the Eurozone met yesterday and they’ve tried to stem the euro’s (EUR) rise… But they’ll need more than words to get the job done! And so we begin a new day…

Front and center this morning, the currencies – which had given background overnight to the dollar – are back in rally mode, and are taking liberties with the dollar once more. For most of the night, that was not the case, though. The dollar had rallied back and sent the euro, for instance, to the 1.48 handle, after the single unit spent yesterday at 1.49 and change… There seemed to be a move to the dollar, but that didn’t last long, and the currencies are once again rallying versus the dollar this morning, and the euro has pushed to 1.4970 as I write.

Daily noise, eh? Yes, you have to wade through it most days, and keep your eyes fixed on the horizon…

OK, I mentioned above that the finance ministers of the Eurozone met yesterday, and tried to stem the dollar’s decline by backing the US administration’s stated preference for a strong dollar… Of course we all know that the US administration’s stated preference for a strong dollar is a bunch of horse dookie! So… What was it that the Eurozone FMs were backing? A false statement by the US? Now, that’s something to hang your hat on, eh? The dolts just continue to mount daily don’t they?

But, you can’t be too hard on the beaver (Eurozone FMs) for they have to sound like they don’t want their euro to get too strong, for if they really said what they wanted to say, the euro would be back to 1.60 with a bullet in a heartbeat! So… In the end, I don’t think currency traders were swayed by the Eurozone FMs, at least not for too long!

Yesterday, I talked about Canada and the Bank of Canada (BOC) and how I thought that the BOC would remove their statement about interest rates remaining on hold until the second half of 2010… I had a few readers question me on this, saying that Canada’s economy is in no shape to withstand a rate hike… OK… Hear me out on this… I’m not saying that the BOC will hike rates now, or even in 2009… But, if Canadian energy prices of oil, natural gas, and coal continue to get stronger, I’m afraid the BOC will have to entertain thoughts of raising rates to fight inflation… But not now… So… I hope you get what I’m saying here.

So… The US fiscal deficit for 2009 was $1.42 trillion… Remember how I used to take the previous administration to the woodshed for posting $450 billion fiscal deficits? How did we go from $450 billion to $1.42 trillion (if that’s really the number)? Well… That’s not a question to really answer, folks, we all know how we got here… But now that we’re here, what happens next?

I came across this when putting the two monthly newsletters together on Sunday; I think it would be appropriate to share it with you here…

Peter Bernholz (Professor Economics in Basel) studied the world’s 12 most important periods of hyperinflation and discovered that the tipping point occurs when deficits amounted to 40% of the expenditures.

For the United States we have arrived at exactly that point. The deficit of $1.5 trillion amounts to 41.7% of the $3.6 trillion in expenses.

You see, that Peter Bernholz rounds some numbers, but for those of you keeping score at home, the real point is that the US deficits are greater than 40% of expenditures… And you know me, I truly believe in this history repeating itself.

The point I’m trying to make here is that according to Mr. Bernholz, we can soon expect a bout of hyperinflation! OH BOY! Where do I sign up for that? Not only do we have a falling dollar causing us to lose purchasing power, but what purchasing power we have left is going to be eaten away with inflation! Like I said, OH BOY! Gee Willikers, that sounds like the cat’s meow! NOT!

So… Here we go again, with me getting on the soapbox and telling you that the only way to protect yourself from a falling dollar and hyperinflation is to diversify with non-dollar currencies and precious metals.

OK… I get emails all the time from readers that say, “OK Chuck, you tell us to diversify, but you don’t tell us what to buy”… Well… To the untrained eye, that would be true… But to long time readers they know better… So, keep reading, and it will hit you right between the eyes one day, and you’ll slap your forehead and say, “I could have had a V-8”!

The boys and girls over at Citigroup have written a letter to their clients telling them “the dollar is weakening because foreign central banks are diversifying their reserves and US investors are buying high-yielding emerging market assets.” They went on to say, “The Australian and Canadian dollars are likely to rise to parity against the US currency.”

So, there’s one more on the roster that believe Aussie dollars (AUD) and loonies (CAD) will go to parity against the dollar… The loonie isn’t exactly the same stretch of a forecast as the Aussie dollar, as loonies are almost 97-cents right now, with Aussie dollars trading near 93-cents…

Doesn’t that make sense given the talk we just had about hyperinflation? What currencies are going to help protect you against hyperinflation? The commodity currencies! Aussie, kiwi (NZD), Canada, Norway (NOK), Brazil (BRL) and you can even throw in the S. African rand (ZAR), for those who like Mr. Toad’s wild ride!

The folks at Citigroup also had this to say about the euro, which I found to be quite interesting… “The euro will extend gains against the US dollar and the British pound, and may reach parity against the UK currency in 6 to 12 months.”

I would think that for the euro to reach parity with the pound, it would involve the pound falling quite a bit from current levels… And that makes sense to me… Did you see the report the other day from the UK where they reported bad bank debt to be twice the forecast amount? YIKES!

You know… The Asian currencies – which never really participated in the first bout of dollar weakness – are still stuck in the mud… Well, they are being manipulated to be stuck in the mud, for the most part… But, something’s got to give here sooner or later. Why do I say that? Well, as I’ve told you for months now, the Chinese economy was the first to exit their slowdown/recession… Shoot Rudy, even Japan is showing signs of economic growth! And then we have India going strong too… And of course you have the “kind of Asian countries” of Australia and New Zealand… Where we already know that Australia has raised rates and New Zealand would love to raise rates… So, this region is leading the world out of the recession… Hmmm… I thought only the US economy was allowed to do that! Uh-Oh… Looks like we have a shift in how the world works!

Hey! Even Big Ben Bernanke sees the Asian countries as leading the world out of the global recession! Big Ben said… “Asia appears to be leading the global economic recovery.” Hmmm… See, even a blind squirrel can find an acorn! HA!

I had to laugh when I read this headline this morning… “Yen rises as Fujii repeats reluctance to stem currency’s rise”… I laugh because the last time Japan’s new finance minister talked about not intervening to stop the yen’s rise, he back-pedaled and said that traders mistook him to say that he was not going to intervene… So this on again/off again love affair with Fujii and intervention, just makes me laugh! I would think that after getting burned on Fujii comments a couple of weeks ago, that Traders would not get too lathered up when he talks about not intervening.

OK… Here in the US while we are still a sovereign nation, the Fed Reserve, is doing some testing of reverse repos as a means of drawing the excess liquidity/stimulus out of the markets… I don’t think we have to put too much into these tests right now. But it will be a method that the Fed uses at some point in the future… The IMF is against removing any stimulus now… So, that may carry some weight.

Gold prices rose yesterday for the first time in a couple of days, pushing back above $1,060… I would think that until we know for sure that the Fed is removing stimulus, that gold would remain well bid… When we do know that stimulus is being removed… Gold might take a step or two back… But then we’ll have to wait-n-see what happens with inflation.

I read where ETF holdings of gold are sluggish… Well, that certainly makes sense to me! With what we’re seeing these days from our government pushing us toward who-knows-what, physical gold is the thing people want right now… And you can’t get physical gold out of an ETF! So… All those people that have long said that the ETF was just as good as holding gold either in your buried coffee cans in the back yard, or in pooled accounts, are wrong, when it comes to physical gold demands.

And I don’t know about you, but I filled my gas tank the other day, and the price of gas has really shot up recently, eh? And a quick look at oil prices tells it all… Oil prices have risen to $79, while trading at $69 just a month ago! Is oil the proxy for rising inflation?

OK… To recap… The dollar rebounded a bit overnight, but has given back to a currency rally this morning. Citigroup believes Aussie and Canadian dollars will reach parity to the US dollar. The Bank of Canada meets today. Our fiscal deficit reached 40% of our expenditures, which historically is a harbinger to hyperinflation, and gold is back above $1,060 this morning…