Wednesday, 17 February 2010 18:00

Is That Stagflation That I Hear Coming?


From CNBC: 

Both the number of workers filing new applications for unemployment insurance and producer prices unexpectedly surged, dealing a setback to hopes the economy was showing a strong recovery.

 

Hmmm... What happens when wages and earning assets go down in value as input prices increase? I have warned of the stagflationary scenario several times in the past as the most likely outcome of the battle between the deflation camp and the inflation camp. See:

Wednesday, 17 February 2010 18:00

Is That Stagflation That I Hear Coming?

 
From CNBC: 

Both the number of workers filing new applications for unemployment insurance and producer prices unexpectedly surged, dealing a setback to hopes the economy was showing a strong recovery.

 

Hmmm... What happens when wages and earning assets go down in value as input prices increase? I have warned of the stagflationary scenario several times in the past as the most likely outcome of the battle between the deflation camp and the inflation camp. See:

As you recall, my take on the deflation vs inflation debate is much less crystal ball-ish than many other pundits on the web. I never was very much into fortune telling or forecasting the future. From what I observed and researched, if I had to make a call that call would be stagflation.


On that note, here is an interesting note from one of my site's subscribers on how China is exporting to what is amounting to stagflation to the United States, now!

As you recall, my take on the deflation vs inflation debate is much less crystal ball-ish than many other pundits on the web. I never was very much into fortune telling or forecasting the future. From what I observed and researched, if I had to make a call that call would be stagflation.


On that note, here is an interesting note from one of my site's subscribers on how China is exporting to what is amounting to stagflation to the United States, now!

In continuing the rant on the possibility of the US entering a stagflationary environment, as was hinted by Alcoa's quarterly  report (see "Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?"), I have decided to graphically illustrate the historically most successful inflation hedges. Click graphic below to enlarge.

inflation_correlation.png

For those "gold bugs" who have never ran the numbers, gold offers less inflation protection than your house does. The same goes for WTI crude and probably most other categories of oil.

In continuing the rant on the possibility of the US entering a stagflationary environment, as was hinted by Alcoa's quarterly  report (see "Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?"), I have decided to graphically illustrate the historically most successful inflation hedges. Click graphic below to enlarge.

inflation_correlation.png

For those "gold bugs" who have never ran the numbers, gold offers less inflation protection than your house does. The same goes for WTI crude and probably most other categories of oil.

 

 Last year, as the debate between the inflationists and the deflationist was raging, I stepped in with a little empirical research. I try not to make predictions and prognostications, but rather stick to being prepared for the most likely events. I stated that if I had to pick a scenario, the most likely as I was would be stagflation wherein high input costs would co-exist with a deflationary drop in asset values, creating a "worst of both worlds" style environment. Well, Alcoa has given us some anecdotal evidence of the likelihood of such an occurrence approaching.

Alcoa's Quarterly Profit Trails Estimates on Higher Energy, Currency Costs

 Jan. 11 (Bloomberg) -- Alcoa Inc., the largest U.S. aluminum producer, reported fourth-quarter profit that trailed analysts’ estimates as the company faced higher energy and currency costs...

Profit was hurt by higher energy prices and the dollar’s decline against the euro and the Brazilian real, Deutsche Bank AG analyst Jorge Beristain said...

“This quarter was disappointing, especially with the energy costs, and having to buy primary aluminum on the open market,” said John Stephenson, who helps manage C$1.5 billion ($1.45 billion) including Alcoa shares at First Asset Investment Management in Toronto. The miss on earnings was “significant,” he said.

 

 Last year, as the debate between the inflationists and the deflationist was raging, I stepped in with a little empirical research. I try not to make predictions and prognostications, but rather stick to being prepared for the most likely events. I stated that if I had to pick a scenario, the most likely as I was would be stagflation wherein high input costs would co-exist with a deflationary drop in asset values, creating a "worst of both worlds" style environment. Well, Alcoa has given us some anecdotal evidence of the likelihood of such an occurrence approaching.

Alcoa's Quarterly Profit Trails Estimates on Higher Energy, Currency Costs

 Jan. 11 (Bloomberg) -- Alcoa Inc., the largest U.S. aluminum producer, reported fourth-quarter profit that trailed analysts’ estimates as the company faced higher energy and currency costs...

Profit was hurt by higher energy prices and the dollar’s decline against the euro and the Brazilian real, Deutsche Bank AG analyst Jorge Beristain said...

“This quarter was disappointing, especially with the energy costs, and having to buy primary aluminum on the open market,” said John Stephenson, who helps manage C$1.5 billion ($1.45 billion) including Alcoa shares at First Asset Investment Management in Toronto. The miss on earnings was “significant,” he said.

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