Today I will Experience Anti-Inflation

The mid-to-late 1960s were a colorful era, to say the least. Dayglo concert posters and strobe lighting symbolize that period of acid rock music. LSD was a mind expanding [per Timothy Leary], intensely color laden experience. I grew the hair, liked the music, but preferred the tamer indulgences.

My Macbook has been treating me to a late in life hallucinogenic show as it slowly dies. I've always been annoyed before as PCs crash and die after a few years. Vastly slowed performance, then a bunch of white numbers, letters, and symbols set against a black backdrop. Then I need to go to the electronics store for a replacement. Not the Mac.

My original Macbook, purchased when they came out in 1996, has been a work horse. It's been dropped twice onto hard flooring and the edges were held together by tape. But it always continued to work perfectly. The cursed colorwheel didn't even spin too often. Truly a good product and well worth the money spent.

But it now seems to be on it's last legs. Each morning it has been putting on a psychedelic light show of flickering, pastel lines. The show is so pretty that I don't even mind the inconvenience. After the performance, it lasts about 5 minutes, the Mac takes a bow and functions admirably the remainder of the day. I thought today might be the overdose as the performance lasted longer than usual, but I'm typing!

If it quits this afternoon, or the next day, I'll experience anti-inflation. We a regularly told that the USA has inflation well in check and the cost of living remains low in spite of galloping food and energy prices. In fact, since those two components are volatile, we should remove them from our core inflation calculation. How can this be? I'm about to actually benefit from anti-inflation and reduce my cost of living.

The Fed tells me that my new Macbook will have much more memory, speed, and features that its predecessor so that equates to a falling price. It won't feel like a lower cost when I write the check, but I will be able to take some solace in knowing that my personal rate of inflation isn't charging upward as it will have been tempered by all of the new Mac features. When I fill my tank I'll know that due to my buying a new computer my gas isn't really impacting me as much as it did at my last fill-up.

I'm rooting for the Macbook to survive even if it means I continue to be ravaged by food and energy costs without my electronics cost of living offset.

Are Central Bankers Throwing Life Preservers or Anchors?

Central banking 101 seems to view "financial rescue" as a virtuous deed. We saw this tenet put into action in the subprime crisis and it is about to emerge again in the coming European sovereign debt bailout. The problems are kicked down the road rather than addressed. CB101 states that it is better for all taxpayers to suffer later, so that creditors and investors don't feel immediate pain. It was put into effect to rescue Fannie and Freddie, and, it appears, the Germans and IMF are about to do an encore with troubled Euro zone borrowers.

Belt tightening is the solution. But, as proven by the recent strikes in Greece, politicians, and their constituants, don't have the stomach for actual solutions. Anchors disguised as life preservers are more palatable. Loan guarantees and public ownership do not solve problems, they only transfer and redistribute the problem. More debt doesn't cure a debt induced ailment. But it does if you are a central banker.

If failure isn't an option and if entitlement cutting isn't viable, what is left in the CB101 playbook. First, defer as long as possible. Put as much lipstick on the debt pig as possible. When she is no longer pretty to anyone, inflate the debt repayment to a manageable level. The bond market is starting to get it "a little" as yields have been moving upward. The Chinese get it "a lot" as they are diversifing their holdings and attempting to minimize the impact of upcoming reflation. There is no other option and smart creditors see the future clearly. The process to protect buying power has begun and will continue.

What might be done to counteract CB101? Equities should do better over time as businessmen tend to be nimble. But, my bet is that markets will offer a much lower entry point prior to reflation in ernest. Midwestern farm ground, even though prices have increased, should hold capital together and produce a modest return. Municipal bonds are going to get very risky as they carry not only interest rate risk, but, increasingly, default risk. Cities, states, and special improvement districts have serious problems, on balance sheet and off. A short term government bond ladder has merit only if one can stomach book losses and hold until maturity. Byron Wein, strategist at Blackstone, opined yesterday that fed funds would go from zero to two percent by yearend 2010. If his view is correct, I'd be patient till later this year and then build that ladder. But, consider quality corporate bonds for additional yield, and if you believe my statement that businessmen are nimble, and safety. Finally, gold, even though it doesn't produce any income and supply never goes away, should gain luster in face of bond inflation.

The next time you see Jean Claude Trichot or Ben Bernancke toss a life preserver, don't get giddy and think good times are here again, get wary and think capital preservation.

Cap and Trade May Be The Catalyst For Inflation

Recently Warren Buffett and Alan Greenspan joined the chorus warning about serious inflation down the road due to the vast amounts of money being spent by the Federal Government. The Obama administration rebuttal is that we won't have significant inflation because we have so much excess capacity and unemployment. When the economy improves causing business to start sopping up capacity and employment starts tightening, the fed can remove liquidity from the system and moderate any brewing inflation. Yeah right.

At present wage and price inflation isn't a pressing issue. Financing inflation is a fact and government borrowing rates would be a lot higher without the Fed's market support. I suspect that the voracious needs of the U.S. Government will continue to meet growing scepticism from bond buyers and result in continued interest rate inflation. Higher government rates will lead to increases in all categories of financing.

Cap and Trade taxation is thought to cause utiity bills to rise 25%, Per David Sokol-Buffett's utility guru, and gasoline will also experience upward price pressure as refiners and retailers pass on their additional expenses. Utilities and gasoline are expenditures that Americans can't postpone. There is very little discretionary nature to those expenses. Even with unemployment at 10+% there will be agitation for wage increases to help absorb the additional costs affecting consumers. Hence, going green is going to lead to demands for more green, paychecks.

I remain hopeful that sanity will return to the U.S. Congress, but I'm attempting to prepare for the inflation that is increasingly likely in the next few years.