The Dow may be hitting record highs, but not everyone sees rosy times ahead
for the U.S. stock market. On Friday, investors seemed to put on the brakes as
the latest jobs number suggested a weakening economy.
Earlier this week I introduced you to Rudolph-Riad Younes, co manager of the
Julius Baer International Equity Fund. Since 2002, Younes' stock picks for
Barron's have increased by almost 42 percent a year. His fund has gained 17.5%
per annum since 2001, well outpacing the S&P.
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We discussed that Younes believes the U.S. equity market is not safe.
But in his recent interview with Barron's, Younes also worries that the U.S.
government is not telling the truth about real inflation.
Phony Inflation Numbers
One reason Younes is worried about the U.S. economy is the dishonesty of our
economic books, most importantly our CPI or inflation rate.
Younes told Barron's that "inflation is something there should be no debate
about and somehow there is."
He then tears apart the U.S. for using a "core" inflation number that does not
include energy prices and does not accurately capture housing costs that have
skyrocketed. If the government did that it "would change the inflation picture
dramatically."
Younes then says bluntly, "If you consider headline inflation and include asset
prices instead of rental equivalents, the true inflation number would be between
7% and 10%."
That figure is more than double the current rate of 4 percent.
Recently the legendary former Fed Chairman, Paul Volker, said that he was
"worried about inflation and the [political] pressure [put] on the U.S. central
bank to not do anything about it."
It is true: Investors are losing values in their assets at much faster rates
than believed.
Financial Intelligence Report has been raising the alarm about the
false inflation numbers put out by the U.S. government. [See "Inflation Lie"
— Go Here Now.]
Interestingly, we have argued in FIR that inflation is at least 50 percent
higher than official estimates.
Younes then asks a good question. "If real inflation is 7 percent to 10 percent,
why don't we see it in wages?"
One reason is that most employers in the U.S. link wages to the official CPI
number. Most Americans (unlike most Europeans) obediently accept these official
numbers as gospel. Workers are not up in arms because their salaries are being
slowly boiled to death. They don't realize how insidious inflation is.
The same can be true of investors, especially ones that invest in CDs and bonds.
If inflation is really 7 percent today, your CD paying 5 percent is declining in
value at a rate of 2 percent a year. And don't forget to add the taxes you have
to pay on the 5 percent of interest income - making your net inflation adjusted
loss more like 3.5 percent for the year.
For the moment, as the economy goes through a shakeout, CDs and cash equivalents
may be a good idea.
Younes argues that one reason Americans have not felt the impact of stealth
inflation has been home asset prices. American consumers have been able to keep
a high standard of living by using equity lines against their asset-appreciated
homes.
But, as we all know, home equity rates are way up and that is coming to an end.
Editor's Notes:
