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Is the Soaring Stock Market Hiding a Darker Truth?

In my role as executive editor, I subscribe to dozens of newsletters, wire services, trade journals and news-bulletins. They roll into my e-mail box each day like an eight-hour-long avalanche.

Usually, I just open the ones that happen to catch my eye. One was this recent headline from a bulletin that said, "Dow closes at highest level since December 2007."

My first thought was that the bulletin should have said: "Dow closes at highest level since December 2007 – despite faltering economy, stubborn unemployment, accelerating inflation and the highest level of uncertainty we've seen in decades."

I guess they couldn't fit all that into the subject line box.

My second thought was that Martin Hutchinson was right – again.

You see, for the last couple of years the administration in Washington and the so-called experts on Wall Street have repeatedly told us that inflation isn't a problem. They continue to insist that the bailout plans and easy-credit policies that were used to end the financial crisis have yet to ignite the rise in prices that you and I refer to as "inflation."

However, in the Aug. 21 Private Briefing, Martin completely dismissed this Pollyanna point of view. There is inflation, he said. In fact, it's staring us right in the face – as a soaring stock market.

According to Martin, the "Real Dow" should be much lower.

Another Stock Market Bubble

With so much economic uncertainty – read that to mean, so much "risk" – there's no way stocks should be zooming like this, Martin said. The fact that they are is proof of a cheap-money-fueled "asset bubble" – a form of inflation, he explained.

The Permanent Wealth Investor editor also predicted that U.S. stock prices would continue their advance – especially if the U.S. Federal Reserve appeared willing to add additional stimulus.

And as the bulletin illustrated, that's precisely what happened.

Here's the thing: Now that "QE Forever" has arrived, this inflationary surge is about to get much, much worse.

Gold and energy prices have already muscled their way higher. Inflation at the consumer level won't be far behind.

"If the governments and central bankers continue to flood the world with cheap money, it has to translate into some kind of inflation," Martin explained. "We started with asset inflation. But my sense is that the transition from asset inflation to consumer inflation will happen very quickly."

This isn't just a U.S. phenomenon, either. The flow of cheap money is being felt worldwide.

European stocks have followed suit, recently hitting a 14-month high after a ruling by Germany's top constitutional court paved the way for ratification of a Eurozone bailout fund – a $640 billion contribution to the world's cheap-money club.

One upshot of all the stimulus, bailout money and below-zero interest rates is that inflation is starting to creep out in other places – as Martin also predicted.

For instance, China recently announced that inflation accelerated more than expected in August – even as industrial production slowed.

And that's not how inflation is supposed to work.

Traditionally speaking, inflation is supposed to be an outgrowth of a growing economy – either one where growth is accelerating much faster than expected, or one that's been growing strongly for an extended period of time. Either kind of growth leads to "bottlenecks" in the system, and boosts competition for limited resources – be it raw materials, labor or capital (money).

When demand for an item goes up, so does its price – which is inflation.

But now we're seeing inflation take hold as the economy worsens – which is the scenario Martin predicted.

Where Are the Jobs?

To see what he's talking about, just look at unemployment.

The American economy added 96,000 jobs in August – better than a year ago but an anemic number for a "recovery."

Washington points out that the U.S. unemployment rate has fallen dramatically from its recessionary peak up near 10%. But it seems to be stuck at a still-nagging 8%.

Indeed, of the 8.3 million jobs this country lost during the recession, only 43% have been recovered during the last 34 months.

Not only is the U.S. economy not getting healthier; despite a soaring stock market, it seems to be getting worse.

In a consumer-based economy like this one – which historically has derived 70% of its fuel from consumer spending – jobs are the oomph that make things go. Jobs create income. Income leads to spending. Spending fuels production. Production creates growth. Growth creates new jobs. And the circle starts again.

We've been telling readers for years – both in Money Morning and in Private Briefing – that the government unemployment statistics were bogus. And a new survey even calls into question what qualifies as a "job" and how the government defines "employment."

In a sobering new study, research consultant Gallup (of Gallup Poll fame) says Washington is dramatically overestimating the number of working Americans. You see, the Labor Department counts both full-timers and part-timers – including those who work at least one hour a week – as having "a job."

By that measure, the babysitter who watches your kids, or the college graduate who earns money walking the neighborhood dogs while he looks for an entry-level electrical engineering job, are labeled as "employed."

But Gallup says the quality of the job – and the security it provides – matters a lot, which is why it counts full-timers and not part-timers when it calculates its own employment rate.

Counting both full-time workers and their part-time counterparts, the government tells us the employment-to-population ratio here in America is an estimated 58% – the same as it's been for at least a year (since July 2011).

But Gallup's survey estimates that ratio is about 43% right now. About 41% of Americans were employed in 2011, and 43% in 2010.

Of course, "QE Forever" is supposed to "fix" all of this, but don't hold your breath. Six out of 10 market participants recently polled by CNBC say the central-bank initiative won't lower unemployment.

Martin agrees.

"Now you've got the problem of the U.S. economy being "de-capitalized' because you've got $1.5 trillion a year either flowing into the federal deficit or flowing out of the country [to pay our foreign debt holders], which means less capital for use in creating new jobs," he said. "That's not good news for U.S. workers."

This is an admittedly dour view. But you don't have to be one of the victims.

Because you understand how things are going to play out, you can take steps to protect yourself and your family – and even to profit (since there's a profitable side to every situation).

Hard assets and natural-resource investments are a must. Gold and silver investments are foundational holdings. Energy is key, especially since even "false-alarm" scares can ignite profitable spikes.

And look at income-generating strategies, starting with dividend stocks.

So with all of this inflation, what's the stock market really worth? You can see what Martin thinks by clicking here.

His answer will probably shock you.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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  1. Benton H Marder | September 26, 2012

    Please grasp the dictionary definition of 'inflation'. Inflation is the act of creating money and credit out of thin air. Rising prices and costs are the symptoms of inflation, coming as surely as night follows day. True growth in the economy is founded upon greater production of real goods and services. Some knowledgable people think that our economy, including the markets, is full of hot air due to artificial stimulation by the creation of money. How much hot air? I would not be surprised if the Dow, after the discounting of hot air, might be worth no more than 5000. All the rest is hot air. Further, the next-to-zero interest rates promulged by the Fed result in horrible misallocation of credit and wealth. All this is sheer instability. Eventually, the result will remind older people of the destruction of the Hindenberg at Lakehurst. Crash and burn.

    • fallingman | September 26, 2012

      Thank you Mr, Marder. You saved me some time.

      Precision matters. Inflation is NOT synonymous with rising prices and the word should NEVER be used as if it is. I don't care how corrupted the meaning has become in casual use.

  2. David Brown | September 26, 2012

    I believe the stock market reflects the fact that corporations are literally cash fat and that sustains investor interest. Normally that cash would be reinvested in plant and equipment and production job growth. In other words, we'd experience supply side economics. But managements are holding back on expansion to wait out the November election–some for purely political reasons. After the election, we'll see expansion due to pent up demand! Indeed, the stock market is not over valued, but is being artificially held back by politics and irrational fears. If Obama wins and things change from a "do nothing Congress," investors may be faced with the reality that the fairy tale days of Bush era taxes is over and the economy will readjust to something akin to normalcy! If Romney wins, we are likely to see a continuation of a severe recession due to failure to balance the revenue side of the budget and increased unemployment reflecting the harsh reduction in perceived entitlement programs favoring so called victims which will effectively transfer welfare programs to state and local governments and charities. The downward spiral could easily duplicate the Hoover days of the 1930s. There you go again!

  3. bill | September 27, 2012

    over my head that why i got guns and lots of bullets

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