Wayne's Next Big Economic Prediction - Inflation, High Interest Rates, Weak Dollar

[Wickd89]

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

[Jim Richards]

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

[Dantilla]

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.

[legion]

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.

[Jim Richards]

snow tires

[MRM]

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.

[red-beard]

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

[Danimal16]

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.

[Porsche-O-Phile]

Originally Posted by red-beard

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

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.

[Zef]

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

[red-beard]

Originally Posted by Porsche-O-Phile

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.

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

[Axeman]

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.

[Jim Richards]

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

[Hugh R]

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.

[Zeke]

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.

[Rusty Heap]

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!

[tiwebber]

Originally Posted by Wayne at Pelican Parts

Yup, you heard it here. In my thread from two years ago, I predicted that oil would return from $100+ a barrel to a more reasonable $35-$45 a barrel. The fundamentals didn't support such a huge run up in prices:

The price of oil will soon be $35-$45 a barrel...

...
So, if this all happens, what we'll see is inflation (from the government printing more money), higher interest rates (to protect against inflation), and a weaker dollar (because it's being inflated rapidly). -Wayne

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.

[911Rob]

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?

[reed930]

Originally Posted by Axeman

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.

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.

[red-beard]

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