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Team Bernanke Says This Doesn't Exist… But Don't Listen

Knight Capital Group Inc. (NYSE: KCG) is a stock-market behemoth.
To give you some perspective, the Jersey City, N.J.-based firm, part of the super-secret cadre of high-frequency trading firms, has said that it is responsible for as much as 15% of all trading in U.S. stocks. In late December, Knight agreed to be bought by Getco LLC – a privately held Chicago player that's in the same business – in a deal valued at $1.4 billion.
Getco's market share numbers are more carefully protected than the Skull and Bones' initiation rites, but analysts say it's about the same size as Knight. When the deal is done, the combined venture company could dwarf any other stock-market participant, and be involved in more daily trades than even the Nasdaq, which is America's largest stock exchange, analyst Larry Tabb told The New York Times when the buyout deal was announced.
Needless to say, anything these companies do is news. And any pronouncements company executives make would be foolish to ignore.
Just this week, Knight Capital Group Managing Director Peter Kenny warned that – despite U.S. Federal Reserve Chairman Ben Bernanke's statements to the contrary – the U.S. central bank's easy-money policies were fueling inflation in the U.S. economy.
And that inflation is only going to get worse.
"I'm not criticizing the Fed for the position they've taken and the policy implementation they have taken," Kenny said during an interview on Breakout, an online investing program sponsored by Yahoo! Finance. "But the bottom line is – because of quantitative easing, and because the dollar is the world's reserve currency – it does have an impact."
Although the headline inflation numbers that are reported on a monthly basis continue to come in below the central bank's 2% target, Kenny insists that inflation is there to see if you know where to look.
And these "quantitative-easing" policies (QE) are affecting the lives of everyday Americans – like you and me.
Take energy prices. Given the tepid growth of the U.S. economy, oil prices should be more like $65 a barrel – and not at $95-a-barrel where they are now. The actions of Team Bernanke continue to inject more and more dollars into the economy, meaning "more dollars are chasing that fuel," which can only result in higher prices, Kenny said.
The there's farmland. Despite the drought-like conditions we've experienced in recent years, arable land has soared about 400% in the last decade – yet another example of how cheap money is fueling asset inflation, instead of the price escalations we normally think of as "inflation."
And what about U.S. stocks? If you're talking about "asset inflation," the run to near-record highs we've seen in the U.S. stock market is perhaps the best example you're going to find, Kenny says.
None of these are reflected in the conventional inflation numbers, because they're either not accounted for at all, or are "carved out" because they're not considered relevant. Kenny disagrees, noting that inflation has been showing up "in everything we assume is a part of our daily life," such as food and fuel.
These are persuasive arguments. From a persuasive guy.
But I've heard them all before.
And so have you.
Back in August, our own Martin Hutchinson said the very same thing. In the Aug. 21 Private Briefing"Martin Spells Inflation "S-T-O-C-K-S' " – the Permanent Wealth Investor and Merchant Banker Alert editor disputed Bernanke's shtick that U.S. inflation was "benign" and told you that the bull run in American stocks was the inflation nobody wanted to talk about.
That was seven months ago – and nine percentage points on the Dow Jones Industrial Average. (In that column, we told you the Dow was trading at 13,265. It's now at 14,526.)
"I'm glad to see that [Knight Capital's] Kenny is saying this, too," Martin said during a private briefing yesterday. "And if you follow the news, you'll see that just today three regional Fed chairmen have come out in favor of even more QE – so the central bank policymakers aren't going to stop."
And that means this inflationary trend will continue until the bubble bursts.
Knight Capital's Kenny says that "he's hopeful" the Fed will ultimately be able to turn off the QE spigot – without damaging the financial markets or the U.S economy.
But Martin has his doubts. And those doubts are pretty hefty in size.
"I give it 12 to 18 months," Martin said. "Sometime between March and December of next year, it will burst with a loud "Bang.' Debris will go everywhere."
Eventually, asset-price inflation will "spill over" into other parts of the economy. But the time to prepare for that is now.
If you want to hedge against this inflation – but also continue to profit – Martin suggests several moves to make.

  • Go for the Gold: Look for undervalued gold and silver miners. When investors finally realize that inflation is escalating, precious metals will surge in price. Miners have badly lagged the actual metals prices. And many of those miners are favorably leveraged to metals prices, meaning their profits will surge when prices do the same.
  • Go Global: Be sure to diversify abroad – particularly in economies that have avoided the debt binges of their Western counterparts. Economies where the interest rates are higher than the rate of inflation are a bonus. Said Martin: "Apart from Singapore, I'm a great bull on Korea (very cheap currently). And you could do worse than Australia, where the mining companies should get a run."
  • Avoid Farmland: Although Martin says Knight Capital's Kenny "has a great point on farmland," the Money Map Press expert says that as an investment farmland is illiquid and will be tough to unload in a reversal. It had a huge run-up in the late 1970s, and then crashed in the "80s, bankrupting lots of rural banks, Martin says.

"U.S. monetary policy went off the rails in early 1995 – with the Dow trading at 4,000," Martin said. "The U.S. economy (as measured by nominal gross domestic product, or GDP) has doubled since that time. Based on that alone the "fair value' for the Dow is actually 8,600. In the aftermath of the Great Recession – especially in the zero-interest-rate era that we're in right now – America's monetary policy has totally disconnected from reality. Make moves that protect your assets, and you'll be much better off than those who don't when this finally unravels. And the moves we're making will even let you profit in the interim."
[Editor's Note: Unless otherwise directed, we recommend investors employ a 25% "trailing stop" on all holdings.]

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