Thank God i bought a Porsche.
I was told it was would be a collectors item...;-)

This one is too easy to "predict." Now try a bit harder, Wayne, and help me with my stock & bond & fund choices! :D

Inflation, high interest, weak dollar. Hmmmmm.......

Same thing I've been saying for a while. My internal debate is whether we're headed back to economic turmoil like the early '70's, or if we're headed to a much worse situation of hyper-inflation, and the collapse of the US Dollar.

Either way, it's going to get ugly.

Yep, this one is a softball...

Just look at the programs our president-elect wants to fund out of thin-air ("deficits don't matter"). Like I said on PARF, he is going to make the inflation of Weimar Germany look tame.

We should be tackling paying for what we have already promised, not making more promises and delaying payment.

snow tires

Wayne's prediction will surely come true in the long run, but it isn't going to happen any time soon. In the short term we will see significant deflation and strengthening of the dollar. The fundamentals of the economy still makes deflation inevitable, despite the money being pumped into the economy. The problem is that there are too many deflationary pressures for the money the government is throwing at the economy to have any real effect. Inflation will come, but it will happen because the feds won't be able to put the brakes on their stimulous spending fast enough when the turnaround starts happening. That's when Wayne's prediction of high inflation and even higher interest rates will come true.

In the short term, commodity prices have fallen due to weaker industrial and consumer demand. There is excess capacity worldwide. So the cost of goods is lower while demand is lower. Companies have to engage in price wars to maintain sales. Fourth quarter figures will be coming out soon. They will be worse than anyone is predicting. Stock prices will fall again, resulting in more wealth being destroyed, again offsetting the money the feds put into the economy. Lower sales leads to excess capacity, which leads to cost cutting, which means layoffs. Unemployment is high now and going higher. Unemployment is deflationary. Until the job market gets back on its feet, neither consumers nor industrial demand will strengthen. Without strengthening demand, there won't be any inflation. So the key is to watch the money supply and unemployment rate.

Unfortunately, the uneployment rate is a lagging indicator, so by the time we know the economy is back on firm footing, it will have been back for at least a quarter, and it will take another quarter to be sure it's not an statistical aberation, so it will be at least six months too late before the Fed will start pulling back. That's going to bring serious inflation. It will be like someone turned one switch off and turned the other one on.

The market will keep going down the first half of the year, probably going below October 08's lows, before bottoming out in mid summer. However, you will not see a real recovery until first quarter 2009.

The investment plan we can formulate with this information is to hoard cash in the short term. Don't invest new money in stocks until industrial demand starts ticking up. One demand kicks in, stocks will jump. Once that happens, inflation will follow within a year, followed by high interest rates. At that point you shuld get out of stocks, they will be stagnant for a long time after the big run up, and you should buy a ladder of Treasury bonds once they hit the 8-10% range. If I can lock in on something like that, even in the face of what appears to be raging inflation, I will. Until then, cash is the place to be.

If inflation is a serious risk, you want fixed interest rate debt.

Wayne,

Is another book on the way? 101 projects to recover your 401k?

Respectfully

Dan,

Very much enjoy your writing on this subject, straight to the point.

If you really believe inflation is going to go sky-high, I'd say not only that, but buy as much as you can on that fixed-rate debt right now.

One of my primary motivations for buying a house right now. If things move the way I think they will and I end up able to pay the place off with dollars worth $0.20 of what they are today, I'll end up looking pretty smart.

Of course if it doesn't and we end up in a Japan-style era of stagflation with high unemployment, low rates and flat (or negative) growth I'll end up looking pretty dumb. But it's worth the risk methinks.

That's not looking good....really. And + 1 on snow tires...!

You can always ask for a government bail out...

Good thread Wayne, and yes you were right on. I saw the bubble forming, got out of my house, moved most of my savings to Europe and bought some foreign currency, some gold/silver. I predict a dollar collapse, unemployment in the 30-40% range, a depression that will last through 2023, hyperinflation, food shortage, civil unrest and possibly martial law or a civil war in the US. We cannot compare the US to 1990's era Japan. They are a creditor nation, with huge savings rate etc. We are the largest debtor nation in the history of the world (think about how big that is). We will never be able to repay our debt to China, Japan, Saudi's etc. We're adding over $1 trillion in deficit roughly every 15 months (probably more now that Obama is in the house). We got into this mess because of decades of borrowing money and spending it on worthless stuff (SUV's, vacations, home remodeling, I-pods, big screen TV's etc etc). This whole system was basically a giant pyramid scheme if you think about it. As long as people buy "stuff" the system functions, the minute they stop buying, it collapses. We can't get ourselves out of this by spending even more and going further in debt, it's basic economics. So the government bailouts will not work. These are my predictions! An I agree with Wayne, I'm not only keeping the P-cars, but will buy more with the deflation.

So, I take it you're a bit pessimistic.

I've been thinking about helping my daughter buy a house/condo with a fixed rate 15 year loan, but with the economy and the downsizing of my employer, I also think have money in the bank is important. Hyper inflation would certainly suggest buying soon, but having cash in the bank is important if something happens to my job. A real dilemma.

I like inflation. The reason is I plan on continuing to earn money self employed. Therefore, I don't have to wait for an employer to give me more money. And, as the cost of doing business goes up for everyone, I can undercut them by just staying a tick behind the market.

Better get me while I'm still this cheap.

Grins.

Folks just remember.....

this is coming from a guy who builds a wooded deck, over his swimming pool, and then needs help with a sump pump to keep the thing drained.

GRINS, no harm no foul Wayne, we love your site and fully support your biz with lots of parts purchased!

Good analyses. One issue. In your scenario, higher interest rates are neccessary to "attract" foreign investment to hold your dept when China bails - they will also reduce demand for product and may have the effect of reducing prices/ controlling inflation.

This is all very fine, but truthfully I'd rather spend my time thinking about how I'm going to succeed in these times than predict how bad its gonna get? No offence, seems to be the popular consensus this past 6 months.

Prior to the last half of 2008 I would spend about 15 minutes or so, 3 times per week on freshening my positive mental attitude (PMA). However, since September '08 I started spending an hour per day and sometimes two hours!!!

Garbage in, Garbage out. So it's all fine and dandy to take in all the negative, but you must realize that for every bit of negative you take in requires some gymn time excercising with positive.

I suggest land investments myself; I cashed out over 7 years ago and put it all into RE; then about 3 years ago I only made moves that I could live with for a minimum of 10 years expecting the so called 'burst' of the bubble. This recent burst was only a "correction" where I live. When people start losing money, then its a burst. I'm holding onto the 'correction' wave and hope to see things move upward very soon, stabilizing this bottom.

Land I say, buy Land. I would never buy another stock in a company that I wasn't the President of again! Never.

So what are you're plans for success in 2009?

Agree 100%. We have been deficit spending for the past 30+ years to fund a national lifestyle that we couldn't really support with our productivity. At some point, that's going to break your back. It's happening on a household and corporate level right now. I think it's going to happen on a governmental level in the not-to-distant future. Just plain common sense to me.

I keep hearing economists defend our debt level by comparing it to percentage of GDP or other nations. Such a comparison is not very persuasive when you consider that our GDP has been juiced for so long by deficit spending. I'd like to see any household, corporation or government that is long-standing that uses borrowed money to support operations. And I mean operations not investment, which as Wayne and others point out, can be a great reason to go into debt. Thirty years of deficit spending and what do we have to show for it: Chinese crap and a dinner at Applebees.

What is so amazing to me is that since I started paying attention to things like this, most, if not all, respected economists, worshipped at the altar of the free market. The Chicago School of Economics and Miltion Friedman basically discredited any economist who didn't adhere to the view that monetary policy could regulate the economy in good times and bad. The libertarian "oracle" Alan Greenspan was hailed as a giant in whom we trusted our entire financial system. One year into this, and all bets are off. Keynesian economics is being dusted off and employed once again.

My prediction: Too little, too late. As soon as the glow of Obama and his $1 trillion economic stimulus package wears off--say in a year or so--the shtts really going to hit the fan.

I wonder if Mexico needs a white "wetback" ? I can hang out next to the Home Depot in Chihuauha.

Question about inflation
 

I agree that we will be getting hyper inflation and all that goes with it but my question is - with every country in the world in the same over bought credit as we are it seem as though all countries are going to tumble. How will that affect us?

Is it planned?
 

One of Obamas top advisors made a comment "never let a good crises go to waste". When people are scared the gov. can grab more power and remove more freedoms. I think this economic cesspool may not be totally planned but they will extend it as long as possible.

and their hard assets!

Wayne,

OK, that's like predicting the sun will rise.

Oil has fallen. Gold, despite the hand wringing of the Ron Paul crowd, is a non-event. Show me the inflationary tendency in all that?

Retail just experienced one of the worst quarters from a comparables standpoint ever, and the results are about to hit.

So the idea that the current loosening of the money supply will suddenly result in too many dollars chasing too few goods and services just does not make any sense in the near term. Ask anyone you know, without exception, most people are concerned about their continued employment, their compensation and their earnings power in the future. People with that mindset tend not to spend, they tend to save.

Sorta like Japan during the "lost decade"-- 0% nominal interest rates and open market activity couldn't get the consumer to stop saving and start spending to jumpstart growth. Culturally we're different, but that is the mood here anyway.

After the '29 crash the money supply contracted for FOUR YEARS. The lack of availability of credit made the depression worse and worse. And it is that contraction that Bernake-san is fully aware of and attempting to prevent.

So unless you can call it within a quarter or two, sure we'll flip over out of negative growth and into positive territory, and sure consumer prices will begin escalating again. But that's like predicting an economic cycle, much like Buffett during the time of "irrational exuberance-" he was directionally correct but his timing was off by years.

And timing is EVERYTHING.

Hyperinflation or deflation? Hedging your predictions? Or just predicting monetary volatility?

I predicted a melt down 2-3 years ago , on the basis that the socio economics on a global leval cannot continue... more people , wanting more , with nothing added to the mix(the planet)... We've been overusing natural resources to increase quality of life since WW2, and as such have borrowed at increasing interests against the future of or next generations.


my prediction: inflation and interests will Jo-Jo at increasing rates, this is just the tip of the iceberg when you look at it in terms of the past 50 years, vs the next 50 years... This ain't the real meltdown yet, this is just a little earthquake as a warning sign for the about to blow vulcano... and like volcanoes, it could get really serious next month, in 6 months, a year, or 10 years...Personally i think in 10 years, not months, but it depends on the crazy factor, of the likes of Russia, North Korea, and those like it..

The only investment worth doing, is land, you want lots of it, in one place, fertile, natural springs, woodland, farmland, Think self sufficient living.
Build something on it that can take a beating, that can be defended, that has power sources locally, wind, water, geothermic, sun... And have everything you need in place for very rough times, skills, tools, raw materials...

Since i have no cash to spend on land worth getting, i'll do the next best thing... buy a house

Deflation for the next 12 months or so then going into hyperinflation after that. I think Obama will try to keep the bubble economy going with the coming "mega stimulus package" of $1 trillion, once that doesn't work, they'll probably go for a $2 trillion stimulus 6 months later..hell at this point just print like $50 trillion and throw dollars out of helicopters, except it won't buy you anything anymore..not even a oil filter for my 911 from Pelican! ;)

Heres a prediction. Oil. I reckon an exchange traded fund would do it. Its to cheap, something is wrong. If you listen to the tree huggers and oil is so rare then it should be $200.00 a barrel not $40.00 a barrel. Running out? Sure we are.
I never believed in conspiresies but something doesn't smell right. I live in SoCal and at $5 a gallon to $1.95?
Oh'....by the way, less traffic drove the price down.........ya right.
Forgive my mispells

snow tires

well, Wayne...


-Considering how much money we've just printed, it is a real guess when inflation is going to hit:

2009?

Its' a certainty that inflation is going to resurge. But the real question is WHEN-

Want to make money in the long term? Invest in the financial sector right now. Put about 30% of your coin in this, and perhaps 20% in real estate. That's what I've done. Of course, I'm long-term since I'm young.

N!

Most of the "financial sector" is in trouble because of all the bad loans out there and due to the fact that the collateral (the real estate backing the loans) is not worth the face value of the loans.

The problem is that when price inflation kicks in, the financial sector may see the collateral backing the bad loans (the real estate) come back to the loan face values, but -- and this is really important to understand -- the financial sector will be killed by the very price inflation that most are expecting will "help" them.

The value of the financial sector's loans -- which represents mostly lending at long-term fixed interest rates (even the variable rate loans normally have upper caps) -- will be essentially "worthless."

The financial sector has lent "expensive" dollars, they will be paid back in "devalued" dollars.

When the price inflation rate is higher than the interest rate the "financial sector" is receiving on their loans, the financial companies will be losing money.

Whether deflation or inflation, most of the current financial industry is "screwed."

It is not an area I'd suggest putting money in -- other than perhaps for some sort of "greater fool" trade.

Yes but it's a dry inflation......

Believe me you haven't seen the bottom yet, over the next three years things will even get worse, way worse. I would say this one will take 10 years to get back to where the economy was 2 years ago. But I'm still going to to enjoy this forum, on my dial-up connection and 386 :D

example of the crazy factor in action, Russia is bickering with Ukraine about gas prices, cuts the gas
Europe sort of hinted that things should not go unresolved in an attempt to protect it's own gas supply..
what is Russia doing, it cuts the gas supply to Europe as well... Right in the middle of winter, when there's a serious cold front going around...

Belgium is not immidiately affected since we get our gas mostly from other sources (north sea),
but i'm sure a lot of people will feel the pain over this, over some old school soviet tactics that nobody saw coming when the Berlin wall fell , or when Yeltsin had his big moment with the tanks ..

There will be more of this kind of crap in the future, a lot more
Those with resources will indirectly own those without

Thank you for stating the obvious.

Wayne, I think you definitely are on the right track, but are missing a few pieces to the puzzle. I have been going back and forth with a few friends/colleges of mine on this and all we can conclude is the world will forever be changed by these events. Anyway, here are a few things to take into account.

Back in December 2007 I bought a new 2008 GTI. On the day I was picking it up there was an R32 next to my car on the show floor waiting to be picked up as well. So I was giving my car the once over and then heard over my should "so how do you like your new car?" in a thick German accent. I talked to the gentleman for a while and we both talked about how we liked our new cars for a while, but that is kind of irrelevant. What was relevant was he was not a US citizen and the car was not going to be driven in the US. It was going directly on a shipping container back to Germany where the car was made. Why? With the exchange rate it was cheaper to buy it in the US and ship it back to Germany than to buy it in Germany.......that is when I knew Europe is heading for some serious trouble. They are still headed for it.

So why do I think this? Well how long can you sell about 40% of your products at a loss in a foreign country before you have to raise the price? But wait you can't raise the price because then you wouldn't be price competitive. That doesn't make any sense either because the cost to produce a car anywhere in the world is about the same right? Right now cars made in Mexico, the US, Japan and China are, but not Europe. The value of the Euro is at is highest point in relation to all those other currencies now. This is great for Europe's buying power, but it is slowly killing them on the back end. At some point that will catch up with the manufacturing companies in Europe and they will have to do major layoffs and cutbacks about equal to the US or maybe more. The result will be lower interest rates to stimulate the economy and a deflated Euro. The real poop has yet to hit the fan over there, but it will soon.

How do I know this and why do I think this is coming? History! This has happened before to us when the US dollar was strong. It is a major reason (along with many others) why manufacturing went to Mexico, Brazil, and Canada. This is a hedge against the US dollar. At the same time it basically keeps all those currencies linked to the US dollar. I have been in international business for many years so I understand the importance of securities, interest rates, bonds and treasuries. However, never forget what makes economies go round and round, consumers! Ultimately they are what really matter.

One more thing here on inflation. We have already had hyper inflation and are now going to going through a deflation period. In California you have not noticed it because everything there is inflated from the rest of the country anyway, but here are some examples of what has happened in the last 6 years in the Midwest. On average a 2 bedroom 1100 sq foot house that was worth about 80-90K in 2000-2001 is now worth 150-160K. That is 100% inflation in less than 10 years. Trips to the grocery store which used to cost $80 now cost $160. That is 100% inflation in less than 10 years. The price of a value meal at a fast food place was previously $3 and is now $6. That is 100% inflation in less than 10 years. Just about every cost I can think of has doubled in the last 10 years and it has all been driven by the price of oil. If oil remains below $60 per barrel thing will quickly continue to deflate.

As a final thought, wrap your noodle around this. What would happen to the economies of China and Europe (the only relevant economies in the world at this point) if the US dollar did collapse? We wouldn't be able to afford to buy anything from them, but our country is big enough and we would have enough resources to start producing things in North America again. We could then export things and undercut those countries essentially on price (like China has been doing to us for years now). They would have to drop their prices and essentially devalue their own currency to remain competitive. Big mess to think about.........

So where do I think we are going? I think like others have mentioned we are going into a drawn out recession as people change their driving habits, credit habits and save more money. This will be similar to what Japan went through. We have gotten over the hump of hyper inflation already. Now it is time to pay the piper and contract again until we can afford to purchase things. That is what I think will happen, but things are changing so fast day to day it is hard to predict anything anymore. There are many many many other factors here and don't have the time or energy to blurt them out on this forum, but those are a couple of major factors to consider when looking at the value of currencies. Two factors I have not considered at it would blow all my theories out of the water are war and tariffs. It is ultimately all about buying power and staying price competitive.

Right on cue, Barack Obama announced yesterday that we will be facing trillion dollar deficits for "years to come."

When the rest of the world wakes up and realizes we're basically running the same Ponzi scheme that Madoff was, the dollar will collapse and the dire predictions in this thread will unfold.

I think you need to differentiate between a "hedge" and an "investment" when talking about gold.

A hedge is like insurance; it is a position one takes with "protection" in mind. An investment is a position one takes with an expectation of growth/profit.

You are correct when you talk about gold having limited industrial and commercial uses, but gold as money is an extremely important economic use of gold. We are experiencing a "currency crisis" -- fiat paper money is the problem. The economy will need an effective substitute for paper money as it deteriorates in terms of purchasing power. Precious metals have traditionally served effectively as the tool of money in the economy due to the fact that their supply is limited by nature. (The new supply that is mined each year is pretty inconsequential when compared to the new amounts of "paper money" that the worlds' governments create each year.)

I've posted the link to this article before. I would suggest that you take the time to read it if you haven't already. It should help you understand the importance of money in our economy, and should help you understand why things like gold are an effective hedge against the price inflation our economy will be experiencing in the coming years.

Having savings in precious metals is likely to preserve their purchasing power as inflation destroys the value of the world's fiat currencies.

An excerpt from the article:
http://mises.org/story/3122

Gold
 

Some years back our Federal government passed a law making it against the law to own gold except as jewelry and the price was fixed at $32 per ounce. This law was repealed may be 30 years ago. The Federal government could reinstate this law and make all of your high priced gold almost worthless.