August 4, 2010
Deflation Threats Are Best Contrarian Indicator
The amount of deflation rhetoric in the mainstream media has been continuing to surge this week. Yesterday there was an article in the Wall Street Journal entitled, "Defending Yourself Against Deflation" and on Monday Paul Krugman wrote an editorial in the New York Times entitled, "Why Is Deflation Bad?". We decided to do a simple Google News archive search to see when previous spikes in media chatter about the topic of deflation have taken place.
The largest spike this decade in articles about deflation came in May of 2003. At that time, the Dow Jones was 8,500, the price of gold was $350 per ounce, and the price of oil was $30 per barrel. The Dow Jones went on to rise for four years straight reaching a high in 2007 of 14,198 up 67%. Gold went on to rise for seven years straight reaching a high this year of $1,248 per ounce up 257%. Oil went on to rise for five years straight reaching a high in 2008 of $147 per barrel up 390%.
The second largest spike this decade in articles about deflation came in November of 2008. At that time, the Dow Jones was 8,000, the price of gold was $725 per ounce, and the price of oil was $50 per barrel. Since then, the Dow Jones has risen as high as 11,257 up 41%, gold has risen as high as $1,248 per ounce up 72%, and oil has risen as high as $88 per barrel up 76%.
NIA has come to the conclusion that the mainstream media talking about deflation is the most accurate contrarian indicator out there. The false threat of deflation in 2003 came at the beginning of the biggest rise in asset prices in U.S. history. The false threat of deflation in 2008 came almost exactly when stocks, precious metals, and commodities had reached their bottom. NIA believes that the threat of deflation today could mean that the biggest move to the upside for gold and silver in history is right around the corner.
Investors today are currently faced with a dilemma. It is becoming increasingly obvious that the U.S. economic recovery is phony, but the U.S. dollar is rapidly being debased. The U.S. dollar is no longer a safe haven and with the fundamentals of our economy continuing to deteriorate, stocks and Real Estate are no longer attractive investments. The only asset class suitable to protect investors from both inflation and our collapsing economy is precious metals.
The U.S. Dollar Index has been in free fall since early June and could be setting up for a crash. Yu Yongding, a former Chinese central bank adviser, wrote on Monday, "I do not think U.S. Treasuries are safe in the medium-and long-run." According to Yu, a “scary trajectory” of budget deficits and a growing supply of U.S. dollars has put the value of China's U.S. Treasuries at risk. Yu is concerned that China has no way to sell their U.S. Treasuries in a "big way".
Of course China has no way of selling their U.S. Treasuries in a "big way". China needs to continue buying larger amounts of new U.S. Treasuries in order to keep this ponzi scheme going. If China decided to sell in a "big way", the only buyer out there will be the Federal Reserve and we will see immediate hyperinflation.
With the U.S. dollar in rapid decline, the price of crude oil surged yesterday to over $82.50 per barrel. Surging crude oil prices will help contribute to across the board price inflation in the months ahead. The sentiment on Wall Street will quickly shift from fears of deflation to fears of massive inflation as soon as the bankers on Wall Street who are in control of the mainstream media are done accumulating their positions in precious metals.
NIA's eagerly anticipated new movie "Japan: America's Lost Decade" is tentatively scheduled to be released this Friday. This 12-minute video will be the most comprehensive report ever done about Japan's "Lost Decade" of deflation and how Japan's economy compares to the U.S. If you would like your friends and family to be the first to see NIA's new upcoming movie, tell them to become a member of NIA for free.
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