Dangerous Economic Times, or Irrational Hysteria?

What is going on these days?!?

Stock markets up 3% one day and down 3% the next... Home foreclosures at record levels... Recession all but certain... Unemployment rising... Dollar plunging... Oil north of $100/bbl and gold above $1,000 per oz... Inflation IS heating up...

I don't remember a time with as much bad economic news as we're currently getting. And it seems as though people are reacting--panicking in fact--like the sky is falling. Check out the current yield curve for US Treasuries; that's the interest rate people are getting on bills, notes, and bonds, i.e., the rate Uncle Sam will pay you to loan him money. It's low because A LOT of people are willing to take those rates.

But here's what's crazy... Inflation (WITH FOOD AND ENERGY INCLUDED!) is peaking over 4% annually, in other words, at this rate something you buy for $1.00 today will cost at least $1.04 a year from now. So why are people willing to take a dollar, and give it to Uncle Sam knowing he'll give you back only $1.01 in a year? You're losing buying power... it's a negative real return!!

It's a rhetorical question, and there are (at least) two answers as to why. First, people are freaking out and afraid to invest in anything with risk. Even rock-solid municipal bonds are yielding more than treasuries, by a couple percentage points in some cases. And they're federal- and state-tax free! Are people really worried that, say, the State of California or City of Los Angeles might go bankrupt?! Crazy.

Secondly, a big fraction of treasuries are bought by foreigners who view the US as a safe haven for money, and of course they're not worried about our domestic inflation rate or US tax issues. BUT, they should be worried about our free-falling dollar, which is the currency in which they'll be paid back. If you lived in a Euro-zone country and bought a five-year bond in 2002, then you'd have lost a big chunk of your money by the time your bond came due last year. Why do foreign investors continue to buy treasuries?? Perhaps because our economy will drag down the rest of the developed world and they have no other options... dunno.

What I do know is that I'm confused about what to do. Normally, I'd look at this kind of panicky scenario and be salivating at the buying opportunities in the stock market. Blue-light specials all around.

But what scares me right now is inflation, not this "Core Inflation" BS but REAL inflation, of things I buy. It's insane to exclude food and energy costs, those are the fundamental products we need to survive! And prices are on the rise faster than I ever remember (well, at least since I've been an adult and worrying about savings and retirement).

Here's the some national-average price increases over the last year...

Price of bananas per pound.


Price of roasted coffee per pound.


Price of unleaded gasoline per gallon.



Of course, all three of these items are more expensive here in California for some reason. Lucky us.

So we're probably in a recession, yet prices are rising. Is that "stag-flation"? And what if all this cheap money that the Fed is pumping into the economy does nothing more than goose inflation even higher? People like me who don't work a lot will be hosed, that's what! Makes me think twice about taking chances in the stock market... but then again, as an investor, you have to realize the best opportunities arise when the masses panic and become convinced the sky is falling.

Is this one of those times?

(pardon me for writing about topics other than bike racing, but this is my blog and this is what's on my mind currently. By about Tuesday of next week, I'll be so obsessed with the upcoming San Dimas Stage Race that I'll barely have awareness of anything else...)