The Cost Of The Rally

Many investors are convinced the worst of the crisis is now over after yesterday's massive 900+ point gain on the Dow. It's shaping up to be another great day on the markets as the Nikkei ended up a mindblowing 1,171, up nearly 15%, to 9,447. With LIBOR and TED spread numbers continuing to fall (slowly, but falling) folks have their sights set on Dow 10,000 and beyond. Ben Bernanke says that things will be getting back to normal now.

Bernanke, writing an editorial in the Wall Street Journal, did not give details of the plan, which will be announced as part of government efforts to save the global financial system from collapse after a series of U.S. and European bank failures.

Details of the plan come this morning, and the Dow is licking its chops, hoping for another big green number today. Everyone who is kicking themselves for missing yesterday's rally will be climbing in today, for sure.

But it's the "beyond" part that worries me. While a bear market rally after a 20% weekly loss was inevitable, the core economic stats have only gotten worse. The sheer amount of cash pured into the market will lead to dramatic inflation, and soon. Don't get used to that $2.79 gas, folks. Oil prices will skyrocket again, along with other commodities.

Commodities will benefit the most from the coordinated bailouts because the plans are sowing the seeds of future poverty, fuelling an already raging inflationary fire, analyst Puru Saxena, CEO at Puru Saxena told CNBC on Tuesday.

"All this money-printing which is going on all over the world" will bring "tradable rallies" until the first, second quarter of next year, but afterwards economic woes will intensify, Saxena said.

In a research note, he compared the bailouts with shots of heroin to fix the problem of an addict and said they were poison for the long term.

"It's very good to prop up the asset markets … but many, many other countries have tried to print themselves out of trouble and the end result has been a total collapse of the economy as well as the currency," Saxena warned.

"What this is going to cause is sky-high commodity prices in the next few years and a general deterioration of the standard of living and sharply rising consumer prices and a huge contraction in the purchasing power of money," he added.

Say it with me now, folks: hyperinflation!

It's coming. In doing what we had to do to save the markets, we've only shortened the next boom/bust cycle to a period of months instead of years with a massive overcorrectional force worth several trillion and increasing almost weekly as the world markets join in to bail us out. When hyperinflation catches up with us next year, we'll be finally trapped for good and there will be next to nothing we can do about it.

We have traded in the credit crisis for the hyperinflation crisis six months from now:

1. The Greenspan rate cuts after 9/11 led to a huge credit and real estate bubble.
2. Deflation from the housing depression when the first bubble popped led to massive rate cuts and an overcorrection by the Fed that failed to solve the basic problem
3. ...and led to the second bubble popping in the credit markets, wrecking banks and leading to more inflation.
   
4. As the dollar continued to weaken, it led to a series of worthless Fed actions that led to a deflationary spiral, and then the Lehman Brothers failure that collapsed the confidence in the credit markets.
   
5. Pumping trillions and trillions into the system stopped the deflation for now but assured the next President will have to worry about an even worse hyperinflationary event in a matter of just a few months.

So enjoy that rally. Buy into it if you like. Everything the Fed has touched since 9/11 has led to a worse economy down the road. We're about to take the final step down that path to Hell.