02/04/11 Buenos Aires, Argentina – Faithful and unfaithful readers alike will have noticed a recurring theme in our recent reckonings. We refer, of course, to inflation; that insidious, noxious tax which appears to be gushing out of every economic orifice in the land, but that, somehow, fails to register as even a drip on the government’s official inflation-o-meter. Curious, no?

Regular reckoner, Chris Mayer, identified inflation as the “wrecking ball” of 2011 in his column “Inflation’s First Phase”. Eric Fry addressed it in both “When Stock Market Rallies Validate Effective Monetary Policy” and “Tracing the Fed’s Vital Role in the Decline of the US Dollar”. And our Reckon-in-Chief, Bill Bonner, touches on it in some fashion, on most days.

In fact, most people in possession of at least one of the five basic human senses seems to see, feel, hear, taste or smell inflation’s foul presence. Which means that those trained specifically to keep an eye (ear, nose, etc.) out for it – and who so adamantly deny its existence – are either blessed with a sixth “masking” sense to which the rest of us are not privy…or that they are simply senseless morons, blinded by the light of their own academic brilliance.

Most likely, inflation will continue to be…and not to be. In other words, those manning the controls in the government’s “Ministry of Information” will continue to churn out numbers that agree with whatever qualitatively-eased, policy-of-the-month they are pursuing. Meanwhile, the rest of us will continue to weather the adverse consequences of these econo-commands as they express themselves in the form of everyday higher prices.

This time last week, we heard from some of our frontline reporters across the United States. Fellow reckoners wrote in from grocery stores and gas pumps around the country to lend some of their own boots-on-ground perspective.

Alas, this academically-defined non-inflation is also pushing up prices in other parts of the world. But fear not. We have eyes (ears, noses, etc.) in those parts, too. And so, without further ado, we present a handful of reader mail from some international Daily Reckoning reader posts…

First up, here’s what reader B.L. had to say:

“I currently live in Singapore and travel throughout Asia Pac, Central Europe, ANZ, and was back in the US over Christmas/New Year’s. I see food inflation everywhere I go. [In] Singapore the prices have risen noticeably since I’ve been living there, which was April of 2010. When I was in the US – North Carolina – I was shocked by the food prices when I bought groceries for two families for New Year’s Eve and day. Combine the food prices with the fuel price rise and I can see why so many American families are getting support for food from good ole Uncle Sam.

“In places like China or India, where food makes up a huge % of a families cost to live – over 50% versus less than 10% for the middle class in the US – they are really feeling the pinch.

“Lots of reasons, but very scary for those of us that have to eat – oh wait, that is all of us last time I checked on the human condition.

“Keep up the good work.”

Sticking in the East for a bit, here’s what another reckoner had to say:

“Here in Thailand, inflation is running high.

“On January 1st, 7/11 mini-marts, of which there are thousands across the country, increased all their prices by 10%.

“Hotel rates, mostly in the 4 and 5 stars categories, are going through the roof, 25 to 50% higher than a year ago.

“Restaurants of all kinds regularly increase their prices.

“Overall, the national inflation rate is certainly in the double digits.”

Thailand? But why would prices be rising in Thailand? Another reckoner, based in that (offensively gorgeous) part of the world offers some thoughts:

“The millions of dollars flowing into Thailand form your neck of the woods is causing real problems with food prices and more noticeable is the increase in washing powder, soap etc. These too are increasing due to the raw material costs.

“Cambodia and Vietnam are feeling the winds of change also. I live here in Thailand 6 months a year then go home to shitty Britain to fish for trout. I was in Cambodia last week. My friend has just opened a small guest house there and we both went to see friends in Vietnam. Same problem; big inflows of money.

“I hope this adds a new thinking to your insight into inflation.”

But what about Japan, the leader in all things DEflationary? Reckoner Gary?

“I live in Japan, and have observed over the past year, food prices have gone down. In fact, prices have been about the same for many years. Last year flour was about Yen 230 a kilo, this year about Yen 150. Living on a fixed income, I must say, I like DEFLATION much more than INFLATION. So tell me, why is Bernanke trying to increase my food costs – doesn’t he have my interests at heart?

“The US system is broke, financially, economically, morally, education, etc. And with all the partisan fighting in government, Republican vs. Democrats, secret agendas, it isn’t going to get better. I think the best solution is to just let all those banks and zombie companies crash and burn, and we start over again.”

Hmm…but what about this… Another email from The Land of the Setting Sun? This one from Reckoner Matthew:

“One small slab of mozzarella cheese imported from Germany costs about 600 Yen, or 7.26 US doll hairs. A small pack of blueberries from Chile costs about the same. These items have become extravagances for consumers.

“How about gasoline? Just filled up my car with a tank of the stuff. Converting liters to gallons and Yen to USD, I paid 6.64 dollars/gallon (high octane, mind you) at today’s exchange rate.

“Try guessing what will happen to the USA when prices get to this point? Here in Nipponville, everyone’s numb to it all.”

And in Australia, Reckoner Ronald:

“The cost of our city-supplied water has tripled in the last ten years. In the last 29 years, the local daily newspaper has quadrupled in price and the TV weekly magazine is up 625%. But petrol (gasoline) is ‘only’ up 308%.”

How about in Europe? Reckoner Paul?

“After taking 2 weeks holiday around Christmas, I returned to my commuting routine to my office in Hamburg, Germany. Between the station and my office, I usually pick up breakfast at one of many bakeries. Between 18 Dec. 2010 & 3 Jan. 2011, my breakfast cost went up on average 3%. Oh My! 10 cents more for my apple turnover or chocolate croissant!”

And finally this observation from Buenos Aires, where your editor experiences daily the effect of government-induced non-inflation…

“Argentina is a good example of food inflation. Meat (main food for most locals) is now 100 % more expensive than a year before, as a result of government controls and policies against production, just in order to maintain local prices in line. Result: less production, less consumption and less exports of an Argentine symbol. Is this a recipe to be applied in other countries?”

A big thanks to everyone who wrote in with frontline reports on the effects of inflation that, we are told, doesn’t exist.

Joel Bowman
for The Daily Reckoning

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.

Regards,

Chris Mayer
for The Daily Reckoning

01/27/11 Baltimore, Maryland – We asked, you responded. In Monday’s edition of your Daily Reckoning, we addressed the steady, inexorable creep of inflation. And this despite our guardian angel central bankers doing their best to maintain price stability…through, we are told, the flagrant manipulation of our currency.

Here’s Jean-Claude Trichet, head of the European Central Bank, reporting from the frontlines:

“All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to…be very careful that there are no second-round effects” on domestic prices, Mr. Trichet told The Wall Street Journal from his office overlooking Frankfurt’s financial district.

“Can you believe it, Dear Comrade?” we wrote on Monday. “If we are reading Mr. Trichet’s comments correctly, it would seem that the world’s food and energy communities are consciously rallying against us. Long thought to be soulless, mindless vegetables and minerals, commodities have apparently taken it upon themselves to ‘become’ more expensive, to raise their own prices. We can almost hear the battle cries coming from the fields: Ears of corn unite!”

Given the fact that we are now at war with self-inflating vegetables and energy sources, we decided to conduct a little front-line reconnaissance operation…with the help of the Daily Reckoning brain trust. Specifically, we asked readers to send us some boots-on-ground anecdotes from their own gas pumps and grocery stores.

“Are you noticing a price creep in your monthly bills?” we wondered. “Could it be that inflation is already here, that it has infiltrated our defenses and lurks in our very midst?”

Reckoners filed the following field reports:

Don, writing from Goffstown, NH, notes that, “Locally, gasoline is up 8-10 cents/gallon. Food is up about 10% over last year. And McDonald’s announced this morning it will be raising its prices.”

Fellow Reckoner, Anna, observed:

“Those rebels, the vegetables, fruits, corn, and other food items, have attacked our neighborhood stores in ways unimaginable. When growing a lowly bell pepper in my garden this past summer, I had no way of knowing that the scoundrel would turn traitor and cost $4.39 each at my local supermarket. Had I known that, I would have established a green house to grow these crooks in and, thereby, would have used their rebellion for my benefit.

“Ah, the value of hindsight,” Anna continued, “it counts for naught. And the asparagus! It was raging at a full price of $3.98 per pound! I couldn’t believe my eyes. I could go on but I am sure by now you get the picture. This is not JUST 10%. The bell pepper was at least four times higher than the same item last winter. The asparagus, by comparison, was ONLY around 40% higher. And it was not just these two vegetables but to continue would take more pages than you would want to read.”

Chimes another reader, “VTY”:

“The recent Scottsdale antique car auction had bidders paying anything just to secure something that wasn’t greenbacks. Cars that seemed pricey a year ago at $50K were going for twice that. To me, that means the big money is scared; they have lost faith in government, the Fed and our ability to manage our future.

“Besides,” VTY concludes, “it’s much harder to steal a 5500 pound Packard than a clutch of Krugerrands (And the Packard seems so innocent by comparison.)”

And from Florida, Larry reckons:

“The Tampa Bay Area has creeping inflation. Food prices, clothing, gasoline have all gone up. Makes stretching the dollar harder. Candy bars and basics like butter, milk and bread are up 20 cents or are the same price, but the sizes are smaller. McDonald’s prices are going up and Arby’s are closing because beef is too expensive. Go figure!

“1963 Franklin Half Dollar Silver coins have gone up from $7.50 to $12.50. Other silver coins are being bought at 12 times face verses 5 times face value from the prices last year. Silver dimes are being sold for $2.10. Peace Dollars have gone up from $12.00 to $16.00 for junk silver.

“But according to the Feds and the government I must be mistaken, because we only have a 2 to 3 percent inflation rate. So my figures must be wrong! But my better half wants more money to shop for food with! I’m not going to tell her she is wrong!”

And “A. Grocer” has this:

“I have been keeping an eye on things since I stocked shelves at the grocery store here in Elyria, Oh. We used to sell pasta 3 lbs. for $1 as an advertised special about 2 years ago. Now it goes for $1 per lb. Apple juice was advertised for 99 cents for a 64 oz. bottle. You’ll be lucky to get it for $1.59 now. I could go on… Things used to go up here and there by 5 to 9 cents at a time. Now they jump 59 cents at a time…and this is just the beginning! It is truly shocking…I reckon’ ya better say yer prayers my friends.”

There were so many emails inflating our inbox, it was hard to keep up.

From Rick:

“Car Insurance is up 11.3 % yoy…despite all vehicles being one year older. Health insurance up 13.5 % yoy. Homeowners Insurance up 32 % yoy…”

From Rex:

“Domestic beer is up $1.33 on a 12 pk in less then 8 months. That dummy Bernanke. What’s next, smaller cans?”

And this, from a Fellow Reckoner in the Lone Star State:

“I work with those ‘foot-soldiers’ in the corn army. When I went into that field back in ’02, you could ‘enlist’ 6 to 8 of these ‘soldiers’ for one paper dollar. Now they won’t recruit for less than 68 cents. Now, the current generation of corn ears is asking 85 cents to sign on to your dinner table. This is in TEXAS; we grow corn here for crying out loud.”

Indeed!

We also received reports from Reckoners in Europe, Asia, South America and far beyond. Who knew we had readers, for example, in Australia? (Which reminds us: Hi mum!)

Thanks to everyone who wrote in. We’ll feature more frontline reports, including some international insights, in future issues. For now, let’s dive into today’s column…also about inflation…

Joel Bowman…and The Daily Reckoning Readership
for The Daily Reckoning

01/18/11 Baltimore, Maryland – This morning, we see Britain’s consumer price index grew in December to an annualized 3.7%. Fuel prices are growing at their fastest pace since July, and food prices are zooming at a rate last seen in May 2009.

Like the US Federal Reserve, the Bank of England has an inflation “sweet spot” of 2%. But Britain’s CPI has been above 3% for 13 months now. Unlike in the United States, even the “core” rate of inflation in the UK is rising at an alarming 2.9%.

“If history is any guide,” Chris Mayer contends, “inflation will likely get much worse. 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%.

“The year 2011 is the year when inflation will play the role of wrecking ball,” Chris declares.

“Emerging markets have been a vital part of 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.

“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.”

But that’s not all they will put the brakes on… Here’s an old video of Jim Rogers, Vancouver keynote, saying that given the current reckless spending and printing strategy in Washington, we’ll eventually experience “an inflationary holocaust.” In 4:33 or so is the mark that he gets into the holocaust theme.

Here’s another one from our friend Ron Paul laying into Ben Bernanke a while back. In the 3:43 mark he “goes off” on the Fed chairman explaining how money printing is already hurting retirees.

And for good measure, here’s video of another Vancouver veteran, Nassim Taleb, saying he feels more jittery about a currency crisis now than he did when he left his native Lebanon during a meltdown.

Fact is, once it gets started, inflation is hard to stop. Not that Wall Street bankers or your friendly Washington representatives give a hoot. They’re not the ones who get walloped when money stops buying necessities…and interest rates spiral upward out of control.

Addison Wiggin
for The Daily Reckoning

By Michael K. MacLeod

Read more: Inflation Hedges http://dailyreckoning.com/inflation-hedges/#ixzz156FwIshJ