Posted on 02/03/2011 6:06:18 PM PST by blam
Inflation’s First Phase
By Chris Mayer
02/03/11 Gaithersburg, Maryland – The year 2011 is the year when inflation will play the role of wrecking ball. It seems to threaten everything from emerging markets to the pretty earnings narrative of the market as a whole.
I use the term “inflation” here as the man on the street does. It is when prices for most everything go up. It is not the best definition, because it obscures the reason why prices for most everything go up in the first place. The reason is that governments everywhere can’t help but print lots of money. But let us not wander off course. It is what it is.
Instead, let’s think about the big emerging markets for a moment. They have been so important to the investment story of the last decade, for sure. Yet rising food and energy prices pose a big risk to them.
In India, food prices are at their highest levels in more than a year, rising 18%. The dabbawalla, when he is done delivering lunchboxes, trots off to the market and finds that the price of onions has doubled in only a few months. Even the basics, like potatoes, have become expensive to the average Indian.
One 54-year-old cloth trader in Mumbai complained: “It seems everything is going up in price, from vegetable and meat to diesel and household cooking gas. We are always worried as to what is next.”
Food prices are again becoming a serious issue, as they did in 2008 when the last food crisis brought riots in 30 countries all over the world. The UN tracks an index of 55 food commodities. It rose for the sixth straight month and is, in fact, above the previous high in June 2008.
In China, the typical Chinese also faces rising prices for nearly everything. The official inflation rate recently hit a 28-month high. But it’s the surging price of coal that may prove to be China’s Achilles’ heel, at least in the short term. Coal is what powers the great boom in China. And coal is at two-year highs.
The basics like food and energy are like brakes on these economies. I think it would be surprising if, say, China could continue to grow 8% a year in a world of $100 oil – at least initially. (Solutions are found, in time.) Of course, the US and the more mature economies are not immune to rising food and energy prices, either.
The thing is it is early in this story yet. Inflation will likely get much worse, if history is any guide. Everyone seems to know the US inflationary story of the 1970s. The official inflation rate hit nearly 14% by 1980. In other countries, it was worse. In the UK, inflation topped out at 27%; in Japan, 30%.
It was not that long ago. Who is to say how bad things can get today? We will see, and we will watch things closely.
In the stock market, inflation poses its own challenge to earnings. Thus far, out of the March 2009 bottom, earnings have exceeded expectations. The market has danced accordingly. But rising prices for commodities mean that many companies will face cost pressures. Whether they are able to pass on those increases to consumers and maintain their profit margins (and sales) is the challenge.
Plus, those expectations have shifted. The market has risen to date on the back of a skeptical and pessimistic earnings view. As all bull markets do, it has successfully climbed that wall of worry. Yet cheerful forecasts make for a market vulnerable to near-term disappointment. The consensus forecast is $96 in earnings for the S&P 500, which would top its record mark in 2006. For the upcoming quarter, the consensus calls for a 29% increase in earnings from a year ago.
We won’t have to wait long to see some early indications if this is likely or not, as earnings start to roll in this week. Regardless, I’m convinced inflation is going to become the story in the markets this year. There are a number of investment consequences of the above, which we’ll work out as we go along.
However, since it is still early in the inflation curve, I think commodity businesses ought to do OK for the simple reason that what they sell adjusts nearly instantly to the effects of inflation. Oil companies, coal miners and farmers don’t apologize for the prices of their goods. A barrel of oil is a barrel of oil, and you either pay the price or you don’t get it. It’s not a bag of Doritos, for which you can switch to a knockoff brand if they raise the price on you.
But not all commodities will be on such footing. Take US lumber prices. I found this next chart very curious:
As David Wilson of Bloomberg points out, “Lumber has bounced back to prices seen during last decade’s boom in US housing even though the homebuilding industry, one of the biggest sources of demand, is still in a bust.”
How so? Chinese demand. But the increase is from a temporary surge. China is trying to reduce its dependence on Russia, which is China’s largest supplier. Perhaps it is a long-term shift. Or perhaps the Russians will sweeten the deal to get back their market share. If so, then the earnings of Plum Creek, Rayonier, Weyerhaeuser and other US log producers may enjoy only a brief day in the sun.
In the commodity realm, I prefer longer-lasting advantages. Oil, for example, has held up well, and we know how difficult and expensive it is to find new sources of supply. The price of gold may be the most durable price of any commodity. Especially as the inflation thesis plays out. I’d stick with the smaller miners, because I think inflation will make it more attractive for big gold producers to buy smaller ones than to create such production from scratch.
Despite this big-picture guesswork, I think it will be important to be choosy. First, the recent market rally has lifted all boats, even the leaky ones. But over the long haul, the leaky ships will still sink. It will pay to be in the right names. Second, you always have to consider the consequences of being wrong. You’ll fare better in such cases with a quality name, well financed, led by talented people and acquired at a cheap price. Such investments will likely make you money over time, even if you get the big picture wrong. This is what smart investing is all about.
ping
Tell you what. I have several friends that are OTR truckers and they all say that they are now delivering loads that are less in value than the fuel they are putting in to get it to the final destination.
This aint gonna go on for long.
From The Collaborative International Dictionary of English v.0.48 :
Inflation \In*fla"tion\, n. [L. inflatio: cf. F. inflation.]
1. The act or process of inflating, or the state of being
inflated, as with air or gas; distention; expansion;
enlargement. --Boyle.
[1913 Webster]
2. The state of being puffed up, as with pride; conceit;
vanity. --B. Jonson.
[1913 Webster]
3. Persistent expansion or increase in the general level of
prices, usually caused by overissue of currency, and
resulting in a reduced value of the currency. It is
contrasted with deflation, and is when it occurs to a
very high degree is called hyperinflation. [U.S.]
[1913 Webster +PJC]
From WordNet (r) 2.0 :
inflation
n 1: a general and progressive increase in prices; "in inflation
everything gets more valuable except money" [syn: rising
prices] [ant: deflation, disinflation]
2: (cosmology) a brief exponential expansion of the universe
(faster than the speed of light) postulated to have
occurred shortly after the big bang
3: lack of elegance as a consequence of being pompous and
puffed up with vanity [syn: ostentation, ostentatiousness,
pomposity, pompousness, pretentiousness, splashiness]
4: the act of filling something with air [ant: deflation]
From Moby Thesaurus II by Grady Ward, 1.0 : =========== End quote ===================
Definition from another source.
That said, some commodities are going up, simply because there’s not much demand for other items. They’ll get your money any way they can. ;-)
Continue the trend by avoiding unnecessary purchases, unless you want to feed big revenues to big government. And try to find ways to become more energy independent, as large amounts of revenues are fed through energy companies and multi-energy investors.
And now they're paying twice as much for food. In 2008, when diesel spiked, food prices (grocery & restaurant) were very low.
This time around, I'm looking for the breaking point at 3.50 to 3.75 a gallon gasoline.
The welfare people & the food stampers didn't get a COLA for the "non-existent" inflation.
Arrogant jerks like The Bernank & his fellow fully-employed economists don't understand the lot of the peasantry.
This time around, I’m looking for the breaking point at 3.50 to 3.75 a gallon gasoline.
Please explain what you mean by “breaking point”. I think I know what you mean but please clarify. Thanks.
You may be confusing cause and effect. For those few Americans who actually value and even dare to prioritize their consumption of food (e.g., corn, wheat, rice, beef, pork, chicken, milk, vegetables) and fuel (e.g., gasoline, heat, oil, natural gas, electricity), rising prices of those commodities may decrease their demand for other items. I recognize that most Americans voted enthusiastically and overwhelmingly for Barack Hussein Obama because he promised that under his Presidency, they wouldn’t be able to afford to drive automobiles, heat their abodes in the winter, subscribe to electrical services, or even eat adequately. For what else did he stand? Annihilating the next generation of Americans, born and unborn. I can’t imagine that that position attracted any significant support (but I acknowledge that unfortunately in this culture of death, it did...scary, I know).
But I submit that SOME Americans (including incidentally the overwhelming majority of Oklahomans) actually value food and fuel so intensely that when prices for those items (which we call “necessities” because we are so accustomed to opulent lifestyles) skyrocket, they curtail their purchases of other items, driving demand for those items downward. I recognize that many Americans think differently, preferring to purchase other items rather than enjoying electrical services, warm abodes in this bitter winter, and full stomachs.
Government inflation measurements exclude food and fuel because in the estimation of our betters in big government, urban consumers don’t purchase those things in significant quantity except rarely as extreme luxuries. In the heartland, however, increased food and fuel prices (caused by big government policies) drive more money into food and fuel, lessening demand for “other items,” causing the price of those “other items” to decrease (relative to food-and-fuel prices) to attract demand, in turn causing declining government inflation measurements, which we, ever focused on food and fuel excluded therefrom, disbelieve.
Should I cut back my expenses on food and fuel? Yes, absolutely; I have an overspending problem. Now can I get this “global warming” off my house to make doing so more comfortable? Perhaps not.
Wal-Mart Executives: There Are Families Not Eating at the End of the Month
From American Renaissance, September 2010:
Wal-Mart at Midnight at the End of the Month
From NPR, October 2010:
Our Veterans didn’t get a Cola increase either. If food/energy prices keep escalating we may see people in the streets here. The Feds printing is also hurting the savers who did the right thing.
Veterans Journal: No cost-of-living increase for pension benefits
http://www.projo.com/news/content/Veterans_column_10_01-10-11_VILR6NA_v11.b48a6.html
Thank you for the confirmation.
The following are projects for families willing to do some work. Gardens and livestock are also helpful for anyone with enough space (and for keeping prices down for others). All of those efforts work well in my area, where temperatures were lower than -30 over the past couple of nights (greenhouses, shelters/barns and plenty of sun and wind).
$1000 Solar Water Heater
http://www.builditsolar.com/Experimental/PEXColDHW/Overview.htm
The Solar Shed — Using Solar Collectors Mounted on an Outbuilding for House Heating
http://www.builditsolar.com/Projects/SpaceHeating/SolarShed/solarshed.htm
OtherPower.Com (homebuilt wind turbines and more)
http://www.otherpower.com/otherpowerfront.shtml
It’s not about environmentalism. It’s about denying revenues to those who don’t deserve them.
As for commodities, many investors have run from bonds (once considered to be safe) and other losing investments to commodities (many of which have been formerly seen as risky). That drove the prices of the often mentioned commodities up.
You are mistaken. CPI-U includes both food and energy.
Here is some info.
In the meantime, let’s pay farmers to grow corn so we can force people to burn it in their cars.
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