If Paul Revere were around, maybe he’d get on his horse and start yelling, “Inflation is coming! Inflation is coming!” I think it is coming. In fact, in many ways, it’s already here, just not yet widely recognized. The deflationists still hold sway in the bond market, where investors happily accept puny yields.
The deflationists argue that the dollar will buy more tomorrow than it does today. It is inflation’s opposite. When most people talk about inflation and deflation, this is what they mean. This definition would pain the old economists who were more careful in their use of language.
Be that as it may, deflation today is an argument facing death by a thousand cuts. Every day, evidence rolls showing that the dollar is buying less. Today’s Wall Street Journal points to the whale in the aquarium. One headline reads, “From Cereal to Helicopters, Commodity Costs Exert Pressure.”
The article goes on to point out what is painfully obvious to anyone who follows commodities and companies. The cost of nearly everything is going up. General Mills will boost the price of a quarter of its cereals to reflect rising prices for grains. Kraft is raising prices. Domino’s Pizza hasn’t said it will yet, but it did say the price of cheese is up 29% from a year ago. Profit margins are suffering in the meantime.
There is a long list of companies battling rising costs of the commodities. As the Journal notes: “Corn is up 44%, milk is up 6.5%, hot rolled coil steel is up 4%, copper is up 29% and oil is up 14% from a year ago… Across Corporate America, more companies are wrestling with when and how much to raise prices as raw materials costs climb.”
Still, the Journal’s article had no discernible effect on the optimistic bondholders. (Or should I write “bag holders”? For soon, they will be left holding the bag.) The bond market seemed bored and yields inched up just a touch today, such that the 10-year note recently paid a whopping 2.50%.
By the time the bond market says inflation is here, it will be too late – too late for bondholders. In the meantime, the prices of gold and silver are up too. All of these things point to the obvious: The dollar is buying less.
Let us the count the ways. There is the US government bleeding red ink and heavily in debt. Both factors portend bad things ahead. How will they square the circle? The easiest – and the most politically expedient – way is to print more money.
There is the jawboning going on between central banks of the world all trying to cheapen their currencies. The rationale is to stimulate exports. But don’t be fooled; the real effect of a cheapened currency is that your dollar will buy less. There are all kinds of fancy names for what the Fed is doing – “quantitative easing” comes to mind. But at bottom, they all mean the Fed will create more money.
I was at Grant’s Fall Conference in NYC recently. Jim Grant, the host and editor of the excellent newsletter Grant’s Interest Rate Observer, said: “Don’t you sometimes get the feeling that the economists are pulling our leg? A bartender would call it watering the whiskey.”
That is a good way to think about it. More dollar-printing simply dilutes the buying power of all dollars. And so we see today the beginnings, the mere sprouts, of a fully-fledged inflation. It can and will get much worse.
Don’t pay attention to that thing called the Consumer Price Index, or CPI. It is running at about 2%. It is an engineered figure and not to be trusted. Oskar Morgenstern, who along with John von Neumann contributed so much to game theory, once described it as a “mere index of doubtful validity,” as Grant relayed.
Nonetheless, on the basis of this suspect fluff, the Fed tells us inflation is under control. In fact, the Fed is complaining that the inflation rate may be too low. As Grant quipped, “That’s like the New York Police Department complaining about the lack of crimes.”
Bernanke would have us believe the Fed can calibrate inflation within tolerances of 100 basis points. But it way overestimates its powers. Once the inflation train gets going, it will be very hard to slow down. One day, the Fed will wish inflation were only 2%.
In the meantime, what to do?
I think we do what we have always done in my investment letter, Capital & Crisis: We try our best to invest intelligently. That includes investing in commodity companies that benefit from a higher inflation rate. Their selling prices will rise faster than their costs.
The price of commodities adjusts quickly to the falling dollar. Wages always lag that. Plus, there are fixed costs that adjust more slowly – such as leases, for example. So there will be a window for commodity companies to make some serious hay.
Investing intelligently also includes investing in good businesses at good prices, especially if they have the opportunity to grow much larger over time.
for The Daily Reckoning
Good day… And a Marvelous Monday to you! 2of 3 from the 1st place Reds, wasn’t too shabby, sure would have loved to see a sweep… The long winning streak still hasn’t materialized for my beloved Cardinals, but winning 2 of 3, is better than losing 2 of 3! The tropical storm / hurricane in […]
Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents.
You left out the rising cost of housing.
Pingback: tag away ingredients()
Pingback: zamunda net()
Pingback: klicken Sie hier()
Pingback: jennifer lawrence hot()
Pingback: mesothelioma georgia()
Pingback: click here()
Pingback: 10 Tips To Improve Your Credit Score()
Pingback: horror films()
Pingback: raspberry ketones benefits()
Pingback: electronic cigarettes free sample()
Pingback: one direction what makes you beautiful()
Pingback: How To Conceive A Girl()
Pingback: casino bonus senza deposito()
Pingback: green coffee bean extract()
Pingback: kurs zlota()
Pingback: Rhode Island()
Pingback: free smokeless cigarette()
Pingback: book of ra echtgeld online()
Pingback: How To Conceive()
Pingback: paintless dent repair()
Pingback: tropical storm pictures()
Pingback: smokeless cigarette starter kit()
Pingback: demande de pret()
Pingback: Joshua A Jacobi()
Pingback: Joshua Jacobi()
Pingback: pure garcinia cambogia extract()
Pingback: Belgravia Price()
Pingback: divergente 2014()
Pingback: seducir a mi ex()
Pingback: pippa middleton sin maquillaje()
Pingback: Singapore Pools Lobang()
Pingback: slot machine gratis da giocare senza scaricare()
Pingback: remove skin tags()
Pingback: the glades()
Pingback: get rid scars()
Pingback: book of ra online igra()
Pingback: website for law()
Pingback: Website maintenance()
Pingback: website consulting()
Pingback: carbunckle markcus()
If you’re just tuning in, we’re two parts deep into our three-part conversation with Richard Duncan. Part III continues with talks on globalization, deflation, quantitative easing, the dollar crisis and more. Read on...
Modern anesthesia makes critical operations possible that few humans could survive otherwise. But according to a new study published in the journal Geophysical Research Letters, some of the numbing agents we breathe may also be significant contributors to global warming.
Look, we ain’t gonna see $100 oil anytime soon. That's great news for businesses guzzling a lot of fuel. Operating costs are way down, which means higher profits. And higher stock prices. And yes, you can still find plenty of great opportunities to book profits as companies save money on fuel…
If you missed it, we featured Part I of a conversation we had with our friend economist and author Richard Duncan yesterday. Today, Part II of our conversation with Richard Duncan continues. Read on...
This past Monday, we had a long conversation with Richard Duncan encompassing his perspective on how capitalism has died… Read on for Part I of our conversation with author and Macro Watch publisher Richard Duncan...
Nuclear power has been hammered since the Fukushima disaster in Japan four years ago. But as Greg Guenthner explains, nuclear power is making a comeback as countries around the world appreciate its great potential. He’ll also tell you exactly how to play this trend.