BusinessWeek is Bracing for Inflation. Let's take a look at an article written by John K. Castle, CEO of Castle Harlan, a New York private equity firm.
Growing
evidence suggests American consumers, businesspeople, and political
leaders should all be bracing for double-digit inflation, probably as
early as 2009.
The relative price stability of the past 15 years
is giving way to worsening inflation, despite the recent softening of
oil prices. The Consumer Price Index for all items shows the inflation
rate averaged 2.6% a year from 1992 through 2007 but has doubled since
January, reaching an annual rate of 5.6% in July. By next year, the
monthly figure could hit double digits, and the inflation rate for 2009
overall could triple 2007's 2.85%.
I say this not only because I
have looked at a broad range of statistics that point in this
direction. I also run a private equity investment firm that owns
companies in a number of industries—including restaurants, the
manufacture of gardening tools, oil and gas exploration services, and
distribution of entertainment products such as books and videos—that
are already being forced to pass price increases on to the consumer.
The
skyrocketing price of oil is obviously a central element in the
accelerating price spiral. But a sea change in China's role is
beginning to have a huge impact as well. .... Growing evidence is that Castle is way off base.
Those preaching inflation simply do not understand the Implications of the Slowing Global Economy. Let's take a look at this from a second angle; What's Hot and What's Not.
What's Hot
- Walking Away
- The Frugality Reality
- Raising Capital At Any Price
- Writedowns
- Deleveraging
- Lawsuits
- Regulation
- Small Cars and Driving less
- Camping Close To Home
- Collapsed Trade Talks
- Tightening Lending Standards and Peak Credit
- Home Cooking
- Rising Corporate Bond Yields
- Rising Risk Spreads vs. Treasuries
- Layoffs And Rising Unemployment
- Rising Savings Rate
What's Not
- Alt-A
- Subprime
- Leverage Buyouts
- IPOs
- Toggle Bonds
- Covenant Lite Agreements
- The Securitization Model
- The Shopping Center Economic Model
- Hummers, Trucks, And SUVs
- Private Jets
- Flaunting Wealth
- The Idea That Housing Always Goes Up
- Whole Foods
- Eating Out
- Expensive Vacations
- SIVs
Of
course inflation and deflation are not about prices at all but rather
about money supply and credit, and credit (especially credit marked to
to market is plunging). That is restricting bank lending, business
expansion, etc. Consumers now finally realize they cannot depend on
rising home prices as their retirement. The Savings rate in the US is
soaring.
Finally, "price inflation" which is what Castle is
talking about is a lagging indicator. So even from a "price inflation"
standpoint, I am willing to take the other side of the bet. Year over
year CPI comparisons are going to be easy to beat for quite some time
to come.
Magazine Cover Stories As Contrarian Indicators
I used the Time Magazine cover "Why we are gaga over real estate" to call the peak of the housing market in summer of 2005.
And
it was former Citigroup CEO Chuck Prince's statements marked the peak
of lending stupidity. I used his statements to call the top in the
equity markets in August 2007. I was wrong on that by a few months. The
markets made a new high in November by a few percent. By November,
Chuck prince had already danced out the door. Let's take a look at
Prince's statements one more time.
Chuck Prince: “When
the music stops, in terms of liquidity, things will be complicated. But
as long as the music is playing, you’ve got to get up and dance. We’re
still dancing. "The depth of the pools of liquidity is so much larger
than it used to be that a disruptive event now needs to be much more
disruptive than it used to be. At some point, the disruptive event will
be so significant that, instead of liquidity filling in, the liquidity
will go the other way. I don't think we're at that point."
Oil And Magazine Covers
It was a cover on the Economist "Drowning in oil" predicting oil at $5 that marked the bottom in crude prices.
The Economist strikes again. Please consider the May 29, 2008 cover of The Economist.
Barry Ritholtz talked about the above cover in Uh-Oh: Economist Cover on Oil.
For
those of us who believe in such things as contrary indicators, this
suggests a short term top in Oil to me. I would bet we don't see new
highs in Oil for the next 6 months, and perhaps even 12 months.
Excerpt:
Thirty-five
years on, oil prices have quadrupled again, briefly soaring to a peak
of just over $135 a barrel. But, so far, this has been a slow-motion
oil shock. If the Arab oil-weapon felt like a hammer-blow, this time
stagnant oil output and growing emerging-market demand have squeezed
the oil market like a vice. For almost five years a growing world
shrugged it off. Only now is it recoiling in pain. Barry was off by a tad, but obviously I endorse the idea.
So
now we have magazine covers fretting over oil, pundits everywhere
calling for $200 oil, and BusinessWeek articles "Bracing For Inflation"
in spite of a slowing world economy. These are all contrarian
indicators. And as goes oil, so goes the CPI. So unless there is a
breakout of War in the Mideast, the oil bust may be deeper and longer
lasting than anyone thinks. Originally posted at: http://globaleconomicanalysis.blogspot.com/
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