Inflation, What Inflation?

This word is going to be on everyone’s minds in 2016 … Here are our three top ways to diversify your portfolio … The FBI Director said something deeply antidemocratic…

The one word to know for 2016 … We are fast approaching the economic prediction season for 2016. So, before the crowd of “prestidigitators, prognosticators and posers,” as Jeff calls them, starts throwing around all kinds of rubbish, we’re making a call. One word will make a reappearance next year: stagflation.

For those who don’t know, stagflation is what happens when relatively high inflation is coupled with high unemployment and stagnant economic growth. And we’re well on our way to that world.

We already have structurally high unemployment and underemployment. And as Jeff has said: When the world comes to grips with the idea that U.S. interest rates are not heading higher anytime soon, the dollar is going to reverse course, and through a series of economic dominoes, we’re going to drift into 1970s stagflation. That scenario has become ever more obvious since numerous economic players, from China to the European Central Bank, have made significant moves in recent weeks.

Here’s more from Jeff:

I was but a tyke — 9 or 10 years old — when stagflation rampaged across the country in the 1970s. At that point, I was more concerned with watching Happy Days, M*A*S*H and Sanford and Son with my grandfather. But I became a student of economic history in university, and I’ve grown up to become an investor who seeks to connect seemingly disconnected dots that link economic events across time and geographies.

And in connecting those dots, the picture I see is stagflation.
I’ve said over and again since May 2012 that the Federal Reserve is impotent at this point. It cannot risk global catastrophe — which would ricochet back upon us — by raising interest rates. The situation is even more complicated now because China just last week cut interest rates and the European Central Bank has announced it’s ready to dump a bazillion more euros into its quantitative easing (QE) campaign. And, as always, we have Japan in a permanent QE campaign. With that as the current backdrop to global economic affairs, there isn’t a chance in any version of hell that the Fed will raise rates anytime soon. It cannot be the only economy with rising rates when the planet’s three other leading economies are effectively cutting rates and driving down the value of their currencies.

The dollar would surge and U.S. companies would feel the cramps. Already more than half of the S&P 500 constituents that have reported earnings have blamed the strong dollar for struggles they’re facing. Any more dollar pain and the U.S. economy grinds even slower.

Which brings me to stagflation…

The Fed has no capacity to raise interest rates without causing pain here and abroad. So it can’t really fight inflation. I hear some people asking incredulously, “What inflation?”

I pulled apart the Bureau of Labor Statistics data recently, and it clearly shows that many American goods — specifically those that cannot be imported and are not tied to commodities — are rising in price. Think: apartment rents, medical care, education, event tickets, haircuts, insurance … the stuff we pay for every day. Oil and commodities, and things we import such as shoes and clothes and certain food products — they’re the items that are keeping overall inflation tepid.

But a lot of that is specifically tied to the strong dollar! Imports are cheaper when the buck is rising, and commodities, including oil, fall in price when the greenback is strong.

Yet the greenback cannot remain strong in a world where the Fed concedes ultimately that it has no mojo. When the day comes that the dollar reverses because rates are not going up, commodity prices and import prices will rise … even as our other everyday consumer prices go up. That is inflation.

And to top it off, we have wage pressures all over the system now. Wal-Mart and Mickey D’s are raising minimum wage and that will trickle up to other workers (which I began warning about more than a year ago, and which has already begun to happen — see Wal-Mart for proof). It will also migrate across to other low-wage employers who will now have to compete for workers by paying higher wages.

Meanwhile, the federal government and big cities all across the country have mandated higher wages, as though that will magically erase the inequality gap that exists (not stopping to realize, as government is wont to do, that higher wages will simply lead to higher consumer prices, thus leaving minimum-wage workers in the same pickle they wrongly thought they were escaping).

And as all of this is happening, the U.S. economy faces limp economic prospects, as I wrote about in the October Sovereign Investor, when I showed that the Fed’s expectations for long-term U.S. economic growth are now as low as 2% — and falling.

Limp economic growth, rising wages, lurking inflation — and the Fed’s inability to fight inflation because of the impacts interest rates will have on the world economy and the U.S. economy (and Congress’ ability to deal with debilitating higher debt payments) — mean we face the 1970s all over again. Only this time we’re stuck with the useless Kardashians for our entertainment instead of Richie, Hawkeye and Lamont.

So, be prepared for stagflation; it’s coming. Your best strategy: Own high-quality dividend-paying companies and oil/commodity companies, and avoid growth stocks. That’s the prescription that saved the 1970s.

No matter what, you should also remember to continue diversifying your portfolio. Remember, some of our top diversification tips are to:

  1. Buy gold.
  2. Always have exposure to more than currency.
  3. Invest in the inflation-proof collectibles market.

This way, you’ll be protecting your investments from America’s rocky future.

The FBI Director said what? On October 23, FBI Director James Comey said something deeply antidemocratic: He mentioned it’s possible the magnifying glass that’s been placed over police departments since last year’s Ferguson shooting has emboldened criminals and made police hesitant to control crime. As Ted told me, he’s basically blaming the increase in crime on the people who are finally standing up against questionable police practices.

Come again?

This backward thinking from one of the most prominent law enforcement agencies in the U.S. is exactly why this country is headed down a shaky path. Of course government agencies need to be subject to public scrutiny — it’s essential to the democratic process.

I’ll let Ted take it from here:


It’s not easy being a principled lover of liberty. If you really want to walk the walk, you have to push yourself to live by the golden rule: Do unto others as you would have done unto you. That’s so even if you think the “others” in question might not always deserve it.

I know that many people are inherently sympathetic to the police, and will respond favorably to Director Comey’s comments. We tell ourselves that most local cops are good folks, and that in any case the people out there on “the street” are “no angels.” That subliminal predisposition becomes the lens through which we interpret everything — and there are plenty of people on the nightly cable shows who do everything they can to reinforce it.

But step back and ask yourself: What’s at the root of so many of the government’s violations of our own liberty? It’s the inherent bureaucratic tendency to generalize, to lump classes of people together and to make policy based on statistics, not facts. For example, the horrible impositions on U.S. citizens under the Foreign Account Tax Compliance Act — which even the IRS acknowledges are wildly disproportionate to any actual “problem” — are based on generalizations about a specific class of people: those of us who bank abroad. Assuming that the cops are always right and those they “abuse” always deserve it is no different.

Then there’s the question of increased public scrutiny and police behavior. The FBI Director says crime is rising in certain places because the police are afraid to “do their jobs” in the era of smartphone cameras and YouTube. But what sort of public “job” requires secrecy and police control over information? Not the good ones … not those that are being carried out in accordance with the law and Constitution.

The only thing that increases public attention on policing is forcing cops to play by the rules. And believe you me, as my grandma would say, there are plenty of cops who definitely don’t want that. If it were the IRS, or some environmental and labor bureaucrat saying they wanted less public scrutiny of their actions so they could be more effective, we’d be in an uproar. In fact, we are.

I always say — because I firmly believe it, since I’ve seen it with my own eyes — that any liberties the government takes with “the rules” when dealing with people on the margins of society eventually become the norm, to be applied to everyone, including us. If you don’t believe me, consider that almost all of the invasive technologies being used on us these days — “Stingray” cell scanners, surveillance aircraft and so on — were initially developed either for the failed War on Drugs or adapted for that purpose from military uses.

If Director Comey is unhappy with the “Ferguson effect,” it’s because ultimately, he sees value in violations of law by police, such as this one. And that should be absolutely unacceptable to all of us.

If you find this profoundly unacceptable or you’d like a more in-depth look at how this country is being pulled apart at the seams by an overreaching government, click here.

In dividend news … Northland Power (Canada: NPI, hold) is dropping its monthly dividend of C$0.09 into your account on November 15.

Until next week,

Jessica Cohn-Kleinberg
Managing Editor, Premium Services
November 01, 2015