The word “inflation” is appearing in the headlines
more and more. For emerging markets, inflation is getting a bit scary.
China is expected to show 5% inflation for the first two months of the
year. That’s clearly a big problem for China. And the situation is
similar in other emerging economies, like Brazil and India.
Each of these three countries has raised interest
rates to fight inflation. They will certainly have to do more. Especially
China. China’s currency is undervalued, kept that way by an artificially
imposed exchange value known as a “peg.” China pegs its yuan to the U.S.
That means that the U.S. Fed’s monetary policy
affects China. And right now, Fed policy is not helping China. In fact,
it’s making the inflation situation worse for China. But I don’t feel bad
As Bernanke said last week at the National Press
Club, foreign central banks have the same tools to fight inflation as the
U.S. does. Sure, China can raise rates. But it needs to end its dollar
peg. That’s the only thing that’s really going to change the inflation
The U.S. and Chinese economies are very different.
We’ve seen prices rise for food, but nothing like what China has seen.
And there are structural reasons why, barring natural disaster, the U.S.
will likely never see the kind of food inflation that China is seeing
The U.S. has the most productive agriculture in
the world. We are exporters, not importers (unless you count organic
Peruvian blueberries and other seasonal produce). Even with the recent
rise for some food prices, the percentage of a household budget that goes
to food is a fraction of what it is in China.
*****When we look at the inflation problem in
China, it’s important to understand exactly what’s driving prices,
especially food prices. China is the biggest wheat importer in the world.
It’s also experiencing a drought that has affected 42% of China’s own
wheat crop. That means even more imports.
And as we know, rising demand usually means rising
prices. China is in need, and things get more expensive in free markets
when there is need.
This is the dynamic that forces imbalances to be
addressed. And in addition to raising interest rates, China is also
investing $2 billion to improve wheat and grain production.
*****We can make see a similar situation for oil
prices. As I said yesterday, part of the reason that oil prices are
rising is that supply is limited. The only supply that can increase is
unconventional, like oil sands and deepwater. These supplies require a
price above $65 or so a barrel to be viable.
*****We could argue whether the current prices for
food energy conform to the traditional definition of inflation: that is,
“too much money chasing to few goods.”
It’s not a very productive argument. Higher prices
mean consumers have less money to spend on other things.
*****The U.S. dollar has likely put in an
important bottom for the foreseeable future. When you compare the dollar
to other currencies, well, it’s the most attractive. That may not be so
much an endorsement of the dollar as an indictment of other currencies.
But with inflation threatening growth in many of the faster growing
economies, the U.S. is looking pretty good right now.
Economic data has been steadily improving, and
interest rates are not likely to rise for another 12 months. GDP
estimates are moving higher, I’ve heard 4% for the year.
For stability and strength, there’s no better
investment than U.S. stocks. And that will mean a stronger dollar and
lower real interest rates.
*****Stocks are actually in the red today. That’s
been pretty rare lately. But as Jason Cimpl told his TradeMaster Daily Stock
Alerts members this morning:
“…the bears are pathetic, and have let
opportunities handed to them on a silver platter slip away
Still, Jason recommended a few downside positions
in anticipation of a move lower like today’s. But given his thoughts on
the bears, we’ll probably hear about another round of profits for
Daily Stock Alerts members later today. Jason is
clear that the bears have not shown the resolve needed to start a more
significant correction for stock prices.