Economic Bailout Fallout: Hyperinflation?
By Kristina Zurla Landgraf • Dec 10th, 2008 • Category: Broker Commentary, Market Updates
Economic Bailout Fallout: Hyperinflation?
By Matt Roma
“The main cause of hyperinflation is a massive and rapid increase in the amount of money, which is not supported by growth in the output of goods and services. This results in an imbalance between the supply and demand for the money…” –Wikipedia
We have to step back and take a good long look at our economy today. These are times many of us have never seen the likes of before. The economic crisis facing our country, and the world for that matter, is going to take some time to work out. I believe there will be many adverse effects on the economy that many have not foreseen, or maybe they have and decided it is worth the risk for short-term stability. Today we are talking about deflation; tomorrow it could hyperinflation.
The bailouts we have seen in 2008 to shore up the financial system and pull the economy out of its malaise are unprecedented. Bears Sterns: $30 billion; Fannie/Freddie: $200 billion; AIG: $150 billion; auto industry: $25 billion (part of spending bill, possibly more to come soon); TARP: $700 billion; Citigroup: $247.5 billion. There will probably be more to come after this is written.
“Because it allows them to hide their spending and avoid an obvious tax increase, governments have resorted to printing money to meet their expenses.” – Wikipedia (en.wikipedia.org/wiki/hyperinflation)
The government has been issuing new debt and printing new money for months now in order to finance these major bailouts, and I believe we have not yet begun to see the effects of this, but we will soon.
We have watched the U.S. dollar rally, along with Treasury bonds and notes, driving yields to historic lows. We have even seen the yield on the three-month Treasury bill turn negative for the first time ever as the fear of stocks has forced money into what is perceived as the safest option by investors.
The stock market seems to have stabilized in the short term. In my opinion, however, we have not seen a bottom yet. We will see another leg down to new lows in the stock market before finally bottoming. Once that bottom occurs, I believe we will see value buying take place as confidence comes back to the stock market. Once this occurs, I believe we will see a rapid decline in the dollar as people sell dollars and start buying stocks.
I think the dollar’s decline will be swift and painful as people start looking at all the debt that the U.S. has taken on in the past six months, and confidence in short-term debt becomes weak.
Commodities Looking Bullish in 2009
So how do you protect yourself? I believe commodities will be the best form of protection in the year to come. Many commodities are priced in U.S. dollars, so the dollar’s standing has an impact on commodity price trends. This year’s drastic stimulus measures and monetary easing will lead to price inflation in 2009. In my opinion, commodities are due to rise in a major way. In 2007 and 2008 we saw the impact of a weak dollar on commodities. It wasn’t all that long ago that commodities like crude oil, gold and corn were at record highs, and people were facing fears of food shortages and gasoline prices above $5 at the pump. I believe that was a preview of what we will see in the coming year.
Treasury Yields Bottoming
We have reached historically low yields on long-term and short-term U.S. government debt. The 10-year Treasury note yield has seen its lowest levels since the 1960s, falling to 2.505 percent on December 5. Remarkably, the yield on the three-month Treasury bill has actually turned negative, falling to -0.01 percent on December 9, 2008. The government’s auction in mid-December saw $30 billion of four-week bills sold at zero percent
I think the U.S. Treasury may have been buying up bonds to force yield lower on all new debt issues to finance all the new debt. Some time soon in my opinion, demand for these bonds will dry up and foreign governments will demand a higher yield, thus forcing bond prices lower.
My prediction for the 30-year Treasury bond is for a return to the 113- to 118-range in the first half of 2009. I think the U.S. dollar will head lower. The U.S. dollar index futures, which represent the dollar’s standing against a basket of six global currencies, will move back below 80, perhaps as low as 70, causing another bullish year for commodities.
Due to the current tightness in credit markets, I believe many farmers are going to have great difficulty finding financing to buy farm equipment, seeds, and fertilizer to plant crops this spring. Therefore, I think we will see a major shortage in agriculture supplies next year.
So what does this mean? We are going to see far less plantings this year, causing a shortage of goods. With the amount of dollars being printed, we are going to see a major money supply increase. Going back to the first line of this article, in my mind, this would seem to present major inflationary pressure.
There are a few strategies that I have already begun to implement to take advantage of the present market situation and present opportunities. Other strategies I am looking to implement in the coming weeks. Commodity trading is not suitable for all investors however, so please call me to discuss an appropriate strategy for your individual situation. I can be reached at 1-866-277-2511 or MRoma@lind-waldock.com.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
You can hear market commentary from Lind-Waldock market strategists through our weekly Lind Plus Markets on the Move webinars, as well as online seminars on other topics of interest to traders. These interactive, live webinars are free to attend. Go to www.lind-waldock.com/events to sign up. Lind-Waldock also offers other educational resources to help your learn more about futures trading, including free simulated trading. Visit www.lind-waldock.com.
Futures trading involves substantial risk of loss and is not suitable for all investors. © 2008 MF Global Ltd. All Rights Reserved. Futures Brokers, Commodity Brokers and Online Futures Trading. 141 West Jackson Boulevard, Suite 1400-A, Chicago, IL 60604.
