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Bernanke or Bust: Everyone Loses During Hyperinflation

As Federal Reserve chair Ben Bernanke considers the timing of when to rein in monetary stimulus, some investors said the central bank chief should look back at the great inflationary period in the United States and the United Kingdom during the 1970s.

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CNBC.com


From 1965 to 1980 when the change in consumer prices year-over-year reached as much as 15 percent in the U.S. and more than 25 percent annually in Great Britain, none of the major asset classes – stocks, bonds, commodities – could exceed the returns of cash, according to a report by Nomura.

Investing $100 in cash (defined as the Federal Funds Rate minus inflation) at the start of that hyperinflationary period preserved that $100 in real terms (above inflation) when the 15-year period marked by oil shocks and war finally ended, Nomura’s analysis found. Cumulative real returns in the S&P 500 and U.S. Treasuries were negative.

For all the confident market timers out there, commodities showed enormous pops at times during this period, especially after the end of the dollar’s peg to gold in 1971 when the value of the CRB commodities index more than doubled. Over time though, even commodities came back to earth, managing to only keep pace with cash during that period, Nomura found. And since then, commodities have trailed inflation.

“The gold and silver trade is circular in nature,” said Brian Kelly, founder of Kanudrum Capital. “The rise in gold is a signal to the market that inflation will continue, which then signals investors to buy more gold, thus it becomes the ultimate bubble.”

Investors like to say a little bit of inflation is good for stocks. And it has been. The S&P 500 is up 12 percent the last 12 months. Gold and copper are up more than 20 percent. Silver has more than doubled. The 10-year Treasury is up 2 percent.

But now Bernanke is entering make or break territory. The ECB raised rates Thursday, following in the footsteps of China and India. Several Federal Reserve members over the last two weeks have hinted that it may be time to pump the breaks. Yet, the Fed under Bernanke’s direction is still in the middle of its $600 billion buying program of Treasury securities (effectively keeping rates negative) that ends in July.

The problem, points out Nomura, is that once inflation gets going in a certain direction, it keeps going for long periods of time.

“Inflation is not a random walk,” wrote Anthony Morris and Swati Aggarwal, in the note Thursday. “Inflation in the long run displays clear cycles.”

From 1980 until the deflationary period during the height of the credit crisis, inflation had generally gone down. On a shorter-term basis, Nomura found statistically that the previous month’s CPI reading tended to predict the change in prices next month.

February’s CPI annual reading came in at 2.1 percent and its expected to be higher when March’s price figures are released next week. For Bernanke’s sake, let’s hope this is not a trend.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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Trader disclosure: On April 8, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Terranova owns (C); Terranova owns (JPM); Terranova owns (VRTS); Terranova owns (UPL); Terranova owns (PBR); Terranova owns (TCK); Terranova owns (BAX); Terranova owns (XOM); Terranova owns (AKAM); Terranova owns (CNQ); Terranova is short (POT); Terranova owns (NFLX); Terranova owns (CAT); Terranova owns (F); Terranova owns (VLO); Finerman and Finerman's firm own (AAPL); Finerman owns (C); Finerman and Finerman's firm own (CVS); Finerman and Finerman's firm own (HPQ); Finerman's firm owns (JPM), is long (JPM) leaps; Finerman owns (JPM); Finerman and Finerman's firm own (MSFT); Finerman's firm is short (IWM); Finerman's firm is short (MDY; Finerman's firm is short (SPY); Finerman's firm is long S&P puts; Finerman's firm is long Russell 2000 puts; Pete Najarian owns (C); Pete Najarian owns (C); Pete Najarian is long (F) bonds; Pete Najarian owns (JPM); Pete Najarian is long (RSX); Pete Najarian is long (XLF) calls; Jon Najarian owns (AMSC), is short (AMSC) calls; Jon Najarian owns (CBOE), is short (CBOE) calls; Jon Najarian owns (CME), is short (NYX) calls; Jon Najarian owns (NYX), is short (NYX) calls; Jon Najarian owns (BBBY), is short (BBBY) calls; Jon Najarian owns (BRCM), is short (BRCM) calls; Jon Najarian owns (GDX), is short (GDX) calls; Jon Najarian owns (SLV), is short (SLV) calls; Jon Najarian owns (LLY), is short (LLY) calls; Jon Najarian owns (EMC), is short (EMC) calls

For Joe Terranova
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (CCG)
Virtus Investment Partners Owns More Than 1% Of (CASS)
Virtus Investment Partners Owns More Than 1% Of (CSVI)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (FCFS)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (KRC)
Virtus Investment Partners Owns More Than 1% Of (LDR)
Virtus Investment Partners Owns More Than 1% Of (NCRI)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLE)
Virtus Investment Partners Owns More Than 1% Of (XLF)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLK)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
Virtus Investment Partners Owns More Than 1% Of (YDNT)
Virtus Investment Partners Owns More Than 1% Of DOMINO'S PIZZA UK & IRL PLC

For Brian Kelly
Accounts Managed by Kanundrum Capital are long (GLD)
Accounts Managed by Kanundrum Capital are long (MON)
Accounts Managed by Kanundrum Capital are long (SLV)
Accounts Managed by Kanundrum Capital are short (XLF)
Accounts Managed by Kanundrum Capital are long VIX calls
Accounts Managed by Kanundrum Capital are short yen
Accounts Managed by Kanundrum Capital are short copper
Accounts Managed by Kanundrum Capital are long gold
Accounts Managed by Kanundrum Capital are long silver
Accounts Managed by Kanundrum Capital are long crude oil
Accounts Managed by Kanundrum Capital are long natural gas

For Scott Nations
**No Disclosures

For David Greenberg
Greenberg Is President Of Sterling Commodities, A Clearinghouse For Metals & Commodities At NYMEX
Greenberg Is A Former NYMEX Executive Committee and Board Member

SOT 2/25/11: Brian Kelly Netflix
**No Disclosure