Tags: robert | Wiedemer | Fed | Easing | Fuels | Sucker’s | Rally

Wiedemer: Fed Easing Fuels 'Sucker’s Rally' in Stocks, Bonds

By    |   Monday, 28 Feb 2011 01:47 PM

There's no new reason in the economy to explain the sharp run-up in the markets, says Robert Wiedemer, co-author of the best-selling book “Aftershock,” which predicts two more economic bubbles directly ahead for the U.S. He warns that rising energy prices could easily kill an incipient U.S. recovery. He sees a potentially sharp dip ahead for housing, rising long-term inflation, and much higher gold prices.

Watching the Libyan conflict, some oil experts are bandying about barrel prices near $400 for crude, a move that would imply gasoline at $15 a gallon. If we see that, all bets are off, Wiedemer tells Newsmax.TV.

“It’s a huge problem because gasoline goes into everything, diesel fuel, aviation fuel, the airlines are especially vulnerable to this kind of problem,” says Wiedemer, president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds.

“It hurts consumers. Right now we’ve got a little bit of increase in consumer spending. If prices went that high, you’d see a decrease in consumer spending. That money would be flowing out of the country rather than internally. It would be a real problem for almost every sector of the economy.”

Editor's Note: Prepare for the economic "Aftershock" with a must-read book and exclusive access to a special Newsmax Internet broadcast featuring Fox News analyst Dick Morris — Click Here Now.

Problem is, the recovery isn’t very strong at all, so any kind of pressure from commodities like oil could kill it outright, he warns. Metals investors might see silver and gold settle downward, especially if the situation in the Middle East is resolved, but that won’t solve any of the larger problems facing the U.S. economy, Wiedemer says.

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“Silver might pull back a bit. It’s been more volatile than gold,” Wiedemer tells Newsmax TV. “But I still think long-term the trends are very much in favor of gold and silver. I think we’re headed into a period of higher inflation, clearly some instability ahead, and clearly less support for the dollar. So, all those things bode well for gold and silver.”

Wiedemer points out that while the official inflation rate is negligible, the “unofficial rate” calculated by economist John Williams of ShadowStats.com is much higher — more like 6 percent right now.

Williams uses the calculations in force before they were changed by former Federal Reserve Chairman Alan Greenspan two decades ago, Wiedemer notes.

“We’re on the road to 10 percent inflation,” Wiedemer says. “It’s 6 percent already and we’re headed to 10.”

As for housing, he takes issue with Yale economist Robert Shiller’s prognostication that housing prices could fall by as much as 25 percent this year.

Twenty-five percent would be “a bit much,” Wiedemer says, but the fact is that a rising mortgage rate puts a serious damper on home buying. As potential buyers see prices fall and rates rise, they become that much more reticent to buy for fear of buying into a falling market, an effect that leads to further price deflation.

“For every percentage point that the interest rate increases, say from four to five or five to six, the value of a house has to go down about 10 percent to keep your mortgage payment the same. So, a 2 percent increase in mortgage interest rates could have a pretty dramatic effect on housing.”

The knock-on effect will quickly spread to the markets, which Wiedemer maintains are being driven to artificial highs by the Fed’s easy money policy.

“It’s a sucker’s rally driven heavily by Federal Reserve printing of money. As soon as (Fed Chairman) Ben Bernanke announced it on Aug. 29, the market took off. We’re up 30 percent since then,” Wiedemer says. “The economy hasn’t gone up by 30 percent. It’s very much driven by printed money. That to me defines a sucker’s rally.”

Bond investors might be able to enjoy another few months in the sun, perhaps up to six months, but then long-term rates will rise and inflation will pop the bond bubble, Wiedemer warns.

“Inflation is going to take control of interest rates and away from the Fed. Good for the short term, let’s say for another three to six months, but I’d keep my finger on the trigger finger after that,” he says.

Wiedemer points out that gold has gone up by 400 percent in recent years even as stocks rose and bondholders prospered. That to him suggests an underlying lesson: If gold is rising in an environment that is typically bad for the metal, what will happen when stocks and bonds go south at last?

“Could it go up another 400 percent in a positive environment for gold? Yes,” he says.

Editor's Note: Prepare for the economic "Aftershock" with a must-read book and exclusive access to a special Newsmax Internet broadcast featuring Fox News analyst Dick Morris — Click Here Now.

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There's no new reason in the economy to explain the sharp run-up in the markets, says Robert Wiedemer, co-author of the best-selling book Aftershock, which predicts two more economic bubbles directly ahead for the U.S. He warns that rising energy prices could easily kill...
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Monday, 28 Feb 2011 01:47 PM
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