There is some truth here, and I wish I didn't believe it..

Date:   9/21/2005 6:05:16 PM ( 19 y ago)

COMMENT: Stagflation Whammy.

Dear A-Letter Reader:
When last I left you on Monday, dear reader, it was in the middle of my
conversation with Money Trader editor Boris Schlossberg, in which he
explained why he believed stagflation - stagnant economic growth
combined with inflation - would rear its ugly head.

Stagflation is when inflation is rapid but economic growth lags or is
missing altogether. Stagflation makes the poor wretchedly poor, it can
put the middle class on the slippery slope toward poverty, and anybody
with any money tends to hide in precious metals.

In a nutshell, Boris made his case this way...
* Consumers are already strapped
* Rising interest rates will burst the housing bubble, removing the last
piggy bank of cash for Joe and Jane Shopper
* Energy and food prices will continue to rise, squeezing the bottom
lines of companies who can't raise prices in the face of consumer
weakness
* Outside of oil and food, we may even see deflation - falling prices.

Boris also warned that the worst is yet to come, with yet another
deflationary force poised to suc*** punch the U.S. economy. And that is
where we pick up today's tale of potential woe.

America, Boris says, faces a potentially huge deflationary hit from
recently passed bankruptcy legislation that goes into effect in October.
It will double the minimum credit card payments from 2% to 4%.

"I think it would be very interesting to find out how many Americans pay
off their credit card debt every month," he said. "How much is that
going up?"

I couldn't find that stat, but I found a few others to spoil my
breakfast...
* Americans are now $2.1 trillion in debt - not counting home loans.
That's up 26% in the past five years.
* On the savings side, Americans save less than $1 of every $100 earned.
* Credit card debt now averages $7,200 per household. But that's
actually misleading. 62% of all Americans with credit cards carry
balances. The average amount of those balances is $9,300!
* At the end of 2004, American owed $796 billion in credit card charges
alone.

Boris isn't worried about a crash. In a way, that's the really scary
thing. He thinks the US, Great Britain, and other bubble-icious
western economies won't end with a bang. More like a fizzle...a hiss of
a leaking tire that could take decades.

"Active central banks act to ease the pain - but it drags the pain out,"
Boris said. "Look at Japan. Their bubble burst 15 years ago, but it
wasn't a quick decline. It was long and torturous. Japan is 15 years
into it, and they're still not completely out of it."

Indeed, Japanese retail sales fell in July from June as wage earner
household spending dropped unexpectedly by 3.5% from a year earlier, and
the jobless rate rose. Retail sales dropped 2.2% month-on-month,
seasonally adjusted. And Japan's consumer price index dropped 0.2% in
July. The kind of deflation Boris is talking about has haunted Japan
for over a decade.

"Japan's still not out of the woods," Boris said. "Their consumer
spending is dependent on US consumer spending. And US consumers are
going to be squeezed."

Hurricane Katrina, along with flooding New Orleans, also delivered a
whammy to US consumer confidence, sending it to its lowest level in
more than a decade.

According to the latest figures, released on Friday, the University of
Michigan's widely watched preliminary index of consumer sentiment
slumped to 76.9 in September from 89.1 last month. Not only is that
worse than economists expected, that's even worse than the drop
following the 9/11 attacks in 2001.

The worst pessimism came in the outlook for the future. The
expectations index, based on optimism about the next one to five years,
fell to 63.6 from 76.9, the biggest decline since 1990.

Now, as we watch another storm, Rita, churn toward her destiny in the
Gulf of Mexico, I have to wonder what economic impact this will have.
What new burden will consumers and taxpayers have to bear?

I'm thankful that Florida, where I live, dodged another bullet. But I
somehow feel that America is in the economic cross hairs.

And remember, hurricane season isn't over yet. I can prepare for
hurricanes physically - storm shutters, extra food and water, and spare
gasoline to bug out of town in case a monster storm moves our way.
And I recommend that we all take stock of our finances as well. That
means diversifying overseas, looking for investments that will hold up
in a changing economic environment, and investing in different baskets
...not just stocks, but economies and currencies as well.

Good luck and God bless,
SEAN BRODRICK, Investment Director
The Sovereign Society Ltd.



 

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