Welcome back, today we will continue our discussion about the inflation/hyperinflation/ stagflation trade. In my last article I illustrated how the important news stories of last week clearly unveiled the footprint of the inflation trade. You may recall that I ended with the familiar refrain: “Inflation (particularly hyperinflation) is a currency event, not an economic event.”
Therefore, the investment strategy required to profit in this environment is one that begins with the close monitoring of the U.S.$ and ends with the investment in assets that appreciate in value when the U.S.$ suffers.
What is the number one asset we expect to benefit from this developing trend? I will pause here and allow long time readers, clients of RCM, and partners of the Fortune’s Favor Family of Funds the chance to shout in unison…GOLD! And as Ed McMahon used to say, “Yes, you are correct!”
With the above investment strategy in mind, I would like to continue our journey following the footprints with a recent word from a respected investment professional. One who has vast experience and in a succinct manner uses his success through the years to impart some valuable wisdom…
The Sage, Richard Russell: “…What happens next is that the cheap dollar is dumped on the market in huge quantities. When any currency or any item is created in massive quantities, that item must fall in value. And the dollar is falling. Ah, Professor Bernanke, what do you do now? To make a currency more attractive, you raise the rates that it pays. But raise the Fed Funds and you squeeze that already gasping US economy. Also, when you raise rates you raise the cost of carrying the gigantic US debt. Total public and private debt in the US is around $57 trillion. A one percent rise in interest rates would drain $500 billion each year out of the US economy….”
Well said! So what are the Fed members saying this week? Is there a will to raise rates?
Fed’s Lacker says he doesn’t “think we should tighten policy today”; willing to go along with purchasing full amount of long-term securities purchases for now…Seeing rise in losses from commercial real estate lending, likely to continue for a while…
No, there is no will to raise rates and to make matters worse the bulk of the commercial real estate tragedy has yet to unfold. In fact, the tentacles of the commercial real estate problem are winding around the neck of small businesses, as evidenced by the lack of bank lending. Banks who are concerned with their commercial real estate portfolio are not willing to part with capital.
Without small and midsize businesses recovering, unemployment will continue to get worse further impeding the Fed’s ability to raise rates.
These developments are all U.S.$ bearish. Central bankers around the world see the writing on the wall and are moving towards the exits.
Meanwhile, the price of Gold has advanced roughly 22% since the beginning of the year. Our hedge fund, Fortune’s Favor Precious Metals, has exceeded the performance of gold year to date. You can review our investment philosophy as well as the quarterly and annual returns on our website: http://www.rosenthalcapital.com/
I have received many questions recently about the sustainability of the precious metals move higher. As Gold took out the $1,000 level a menagerie of analysts and letter writers wrote of the impending doom of the Gold rally. As Gold moves above $1,050, I hear countless tales of certain failure, of commercial shorts winning the day. I LOVE THIS TALK! This type of bearishness is typical of continued momentum higher.
To sum up, I will simply reprint the headline from a recent Barron’s story: Gold Is Still a Lousy Investment by Dave Kansas. Need I say more?
Until next time, chew on this: “It is not because things are difficult that we do not dare; it is because we do not dare that they are difficult.” Seneca, philosopher
Bret Rosenthal, Principle
Rosenthal Capital Management, LLC.