Here is a sampling of comments I received this week from Berkshire clients:
"Just wait until higher prices start hiking the inflation rate."
"Interest rates are rising because of inflation."
"Look at the government deficit disaster, the only thing we can do is inflate our way out of debt."
It is as if everyone in the United States is absolutely convinced that we are on the verge of hyperinflation. And yet the inflation rate remains below the Federal Reserve's target of what is considered a healthy rate of inflation. It's time I cut through the hyperbole and set things straight for you and I.
I believe that until the unemployment rate drops substantially, inflation in the U.S. will be contained to no more than 2 or 3 percent.
In the meantime, in order for the housing market, the banking sector, the nation's unemployed and the economy overall to improve, we need to spend more money and ignore the deficit for now. The Fed has it right. Drown the system with dollars until even the most recalcitrant lender has no choice but to lend despite the perceived risk.
Commodity prices are rising because of 1) terrible weather and 2) economic recovery worldwide. Those price increases may or may not be inflationary depending upon where you live and do business. Additional demand for wallboard by a local builder, for example, is a good thing because there is a lot of excess capacity right now in the U.S. The same is not true for Chinese or Indian builders, who are populating their country's skylines with thousands of new buildings. For them, higher prices for every additional nail, two-by-four or steel girder fuel their already high inflation rates.
Quantitative easing has been judged a failure by a host of economists and strategists because it has caused interest rates to rise and asset prices to increase, but those are positive developments in my opinion. The price rise in assets (capital goods) is why big takeover deals are back. The impetus behind "merger mania" is simple: investors' expectations have changed drastically from last year's "double dip" mentality. Both market participants and corporations now believe that the return on investments over the coming years will be far higher than expected so assets are worth more now; thus the price increase. That's why investors are loving the increasing stream of takeovers and mergers. These asset price increases will lead to a surge in economic activity and ultimately increases in employment.
The rise in interest rates does not indicate inflation fears. They are simply reflecting the new reality that real returns on assets are increasing. In order to stay competitive, the bond market must offer higher rates. So don't be spooked by higher rates. Their increase is a natural, predictable and welcome development in any country's economic recovery. Don't let the talking heads tell you otherwise.
Expect the dollar to continue to weaken. Very few countries outside of the U.S. have any form of QE I, II. As a result, other countries' currencies will strengthen against the greenback as their interest rates rise much higher than our own. As I've written before, this is good for our exports because a cheaper dollar increases demand for "Made in America" products. Witness this week's take over of the New York Stock Exchange by the Germans.
As for the stock market, contrary to everyone's expectations of an impending correction, the averages continue to confound to the upside. I say expect a correction, but don't wait for it. We have considerable upside ahead of us. Stay the course and stay invested regardless of any pending pullbacks.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at firstname.lastname@example.org. Visit www.afewdollarsmore.com for more of Bill's insights.
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I went into Big Y last week, I bought a gallon of vinegar, it was $6.17. I got back home and threw the old container out, I bought it four months ago. The price tag on the old container??? $3.99. No or little inflation??? I don't think so.
I buy wholesale food for a living. The price increases in certain grain and grain related commodities are the result of market specific forces. They are not related to monetary policy, which is the right wing (and Chinese) talking points. Some retailers are gouging because they have not been able to raise prices in three years. You would think they were gas stations and not grocery stores.
LaRouche: Slap Controls on Food Prices--Now! Wall Street Is Causing Hyperinflation; Food Isn't Causing It!
February 15, 2011 • 11:36 AM
Lyndon LaRouche, when briefed on yesterday's food riots in Bolivia, the wheat price shock hitting the Maghreb, Egypt, and other crises, issued the policy call: slap controls on food prices now! "What we do need to have, we need to have a limit, a protection, a control of food prices."
He said, "We need to slap a control on it now. Now the point is, what happens is, the food price increase is a matter of absorption of hyperinflation. The food is not causing the hyperinflation, it's Wall Street!
"So what we simply say, is that we have to put a ceiling on food prices at the wholesale and retail level. We have to look very carefully about the movement of food—the food as used as financial speculation medium. This is the current issue of the day. We need an international ceiling on food prices. We need a freeze on food prices—a cap—now! And the Egyptian and the Tunisian situations are the warning.
"That means, of course, that financial institutions are going to go belly-up. So what! Who cares! If a food-price ceiling causes the bankruptcy of financial speculators, that helps to solve the problem, by eliminating a problem.
"That's the kind of view we have to take. That corresponds to what the lesson is of Tunisia and Egypt. A ceiling on food prices. And also drastic, draconian bans—measures—against anybody who manipulates the market, moving food from one place to another, causing starvation, but allowing people to get a profit on food price increases.
"We need a cap on food prices. And enforcement on the way that there is speculation on food prices. There is speculation on movement of food. We need this urgently."
How much longer do you think the US dollar will be the reserve currency of the world? The Chinese yuan is sure to take this position shortly. Our economy is toast and their is nothing we can do about it. Soon we will be paying the full price for food and fuel with Brazil becoming the major food and fuel exporter.
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.