There’s a major threat looming on the horizon. It’s a threat to the wealth that you’ve worked hard to create or the wealth you’ve inherited. It’s a threat that UK investors have not experienced since the 1970s, but which is serious enough to put many of us in the poorhouse.
But if you take the right steps right now, you can protect yourself. I’ll show you how you can do that.
I’m talking about the great wealth destroyer – a coming wave of inflation that, according to colleagues of mine, threatens to “cut your wealth in half” in short order. It will slash the purchasing power of your savings and of any income that you make from your investments and your employment.
It’s our own government that has created this threat. They’ve engineered the whole thing in order to get themselves out of a hole… or, as they’d say, to put the economy back on the road to recovery.
All this money pumping will kick off inflation
In February the Bank of England and HM Treasury agreed to a £150 billion injection of new money into the economy. In May they pumped in another £125 billion. And hundreds of billions of pounds of further support has been pledged...
All this is designed to kick start the economy and to get people spending. We’ve had a period of falling prices and of asset price deflation recently. But that won’t last.
As The Telegraph’s Liam Halligan wrote recently, in the Bank of England’s latest inflation report, “it has stopped warning of deflation because it is no longer credible to do so. In truth, it never was. CPI inflation remains at 2.9pc – way above the Bank’s target, as it has been for 31 of the last 33 months. As sterling has fallen, import prices have surged. In an open economy like the UK, that’s highly inflationary.”
The bottom line is that with interest rates near zero, and with governments around the world pumping money into the system, it’s only a matter of time before people start spending and prices start rising again… big time.
And when inflation comes back, it’s going to come back hard and we need to protect ourselves from it now. We need to make sure that our wealth grows at a faster rate than inflation.
So how do you protect yourself against higher inflation? My colleagues at The Fleet Street Letter have put together an in-depth report on this, which I hope to be able to send to you soon. It’s not ready quite yet, but I’ve got some suggestions for you. Let’s take a look.
How to beat inflation...
Over the long term, investing in property works well. But let’s face it, the housing market is still falling. And we don’t see it reaching bottom any time soon. This is not like the 1990s and early 2000s when property just kept going up. Property prices could stagnate for years to come. Good to live in, but not to grow your wealth.
What about shares? With all this lowering of interest rates and printing of money, surely stock markets will soar. That might be true in a general sense. We’ve already seen that investors have taken on a renewed confidence since government started their programme of quantitative easing. But a word of caution…
Remember that an onslaught of rampant inflation would devalue company earnings. And company earnings are the major force that drives share prices. So you can’t just pile into stock markets with abandon. You need to look carefully for the companies that are able to pass on price increases to customers.
If you can find companies that have this pricing power and can pass on price increases without losing customers, then you’re on to something. Because that will allow the shares of those companies to rise even when inflation is climbing – and that should make for great investments. Diageo, AstraZeneca and Tesco are examples of sector leaders who should all be able to pass on price increases… and keep on doing great business.
Meanwhile, I prefer the time-tested, classic inflation hedge: gold.
Gold is the ultimate store of value. Whereas the value of virtually everything else is eroded by inflation, gold has risen from around $300 an ounce six years ago to $900 today. When inflation really takes hold, there could be nothing to stop gold soaring to $1000, $2000 and beyond.
It’s time to protect yourself from the coming wave of inflation…
Good investing,
Best regards,
Frank Hemsley
For The Right Side
P.S. As I mentioned earlier, colleagues of mine at The Fleet Street Letter have been working on a new in-depth report. It reveals specific steps you can take right now to protect yourself from the coming wave of inflation. It is nearly ready. Keep an eye out for this – I hope to be able forward it to you tomorrow.
MARKET NOTES
‘Fear index’ showing pullback panic
BY SHIVVY ARORA
The VIX is a yardstick we like to revisit from time to time. It’s the Chicago Board Options Exchange’s volatility index. In a nutshell, it reflects investors’ expectations of how far the S&P 500 is likely to rise or fall over the next 30 days.
What tends to happen is the market rallies when the VIX falls and vice-versa.
At around this time last month, we saw that this ‘fear index’ had dropped by near-40% from the start of the year. Investors were seeing less risk of a fall in stocks. But what’s interesting to see is that the VIX hasn’t managed to take out its recent lows, despite the stock market showing some new short-term highs.
You can see this on the chart below. It shows the VIX (blue line) versus the S&P 500 Index (red line) from 2008 to date. Note the inverse relationship between the two. When the market has crashed, the VIX has risen.
The fear index doesn’t seem to be easing up anytime soon 
The fear index’s failure to break lower is a sign that investors are once again worrying about a pullback in the market and could be looking for a pause in the rally.
Even as we have seen equities hitting seven-month highs, the VIX has stopped falling. And with little sign of any good news in the markets, we could well see the two lines converging again… as the VIX rises and the market falls.
The Daily Reckoning – Two ways to de-leverage an economy
BY BILL BONNER
London, England
Tuesday, 9 June 2009
The dumb money is fairly easy to spot. It’s the money that always shows up late to the party, wearing yesterday’s fashions. It watches TV and thinks the reality shows actually show reality... it thinks Ben Bernanke is a great economist... the SEC protects investors from fraud and misrepresentation... and Tim Geithner makes sure the economy keeps running smoothly.
It’s the dumb money that thinks you can correct a generation-long period of credit growth in 24 months – with less than 10% unemployment...
Stocks have now been in a rally for 3 months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market.
Yesterday, not much happened. Stocks held steady. Oil too. Gold fell $8... closing at $952. And the dollar rose to $1.39 per euro.
But while the dumb money has its eyes on the stock market, the smart money is watching the economy.
Unemployment has risen to 9.4 million in the US. Experts think the rate of job losses is slowing. But month after month, more and more people are not collecting wages. Instead, they’re coming to rely on handouts from the government. The press reports that one in every six Americans is now on some form of government life-support (more on that tomorrow).
Same thing in the housing sector. House prices are still going down – but not as fast. Still, big resets, defaults and foreclosures are still on the way – in prime and Alt-A mortgages.
Robert Shiller says the housing slump has already knocked prices down 32%... and has a long way to go. This alone guarantees a long period of adjustment. Bad decisions—usually those with huge debt bombs attached – will blow up. Then they need to be cleaned up... and then, after the destruction, comes the constructive rebuilding. All that takes time... years in fact.
People whose houses are going down in price and whose incomes are falling do not buy more stuff. Sales go down, profits go down and dividends go down. Why would investors buy stocks when earnings and dividends are falling? Good question. Pull your shorts up, dear reader... pull your shorts up.
Meanwhile, when companies don’t sell... they don’t ship either.
The trucking industry says traffic is off 13% from a year before – the biggest drop in 13 years.
Airplanes are carrying 21% less cargo. And the commercial airline industry says it is losing $9 billion this year.
As for shipping... well, don’t even bring it up. Shipping has been in a catastrophic slump since last year – with cargo rates down 90%.
Obvious conclusion:
“Every smart trader I know is massively short the stock market,” says Jeff Clark.
You should be short the stock market too...
Read on...
To read the Daily Reckoning in full, click here.
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