Two Best Investor Cures for Rapid Inflation

rapid inflationThe growth in manufacturing in the U.S. has been flat. Despite this, the Empire State Manufacturing Survey noted that input costs—oil and commodity prices for manufacturers—has risen steadily over the last few months, with February’s high level not seen since the summer of 2011…more rapid inflation (source: Federal Reserve Bank of New York).

Import prices of goods to the U.S. rose 0.4% in February and, although higher oil prices can be blamed, goods and services imported from overseas also contributed to the rise. From a year ago, import prices have gained 5.5% (source: U.S. Labor Department)! More rapid inflation.

In China, their latest Purchasing Managers’ Index for March showed that their input costs (cost of goods) were flat, but that inflationary pressures remained high (source: Markit Economics). The index noted that input costs—oil and commodity prices—have been rising over the last half of 2011; rapid inflation.

In India, their latest Purchasing Managers’ Index for February revealed that their input costs—oil and commodity prices—are rising at a historically rapid inflation rate. The rapid inflation rise in input costs has persisted for the last six months. As with China, both countries are increasing their prices to compensate, which is why import prices in the U.S. or these goods and services are higher.

In Europe, their March Purchasing Managers’ Index revealed the steepest rise—again, rapid inflation—in input prices since the summer of 2011 (sound familiar?). The inflation rate recorded matches the highest long-run average in its 14-year history!

Just so readers don’t get the wrong impression that it is just the troubled nations in Europe experiencing rapid inflation,Germany’s Purchasing Managers’ Index also reported input costs that have accelerated—i.e. rapid inflation—for five straight months to reach levels not seen since the summer of 2011.

Countries like England and Hong Kong have also experienced rising input costs when they reported their respective March Purchasing Managers’ Index. Hong Kong has been experiencing persistence rapid inflation in its input costs for manufacturers for over 30 months now!

It is easy, dear reader, to blame oil for the rise in input costs and therefore conclude that the rapid inflation is temporary. However, as the reports clearly illustrate, oil is only part of the acceleration in the inflation rate. Almost all commodities that manufacturers use are increasing in price, which places margin pressure on manufacturers and pushes them to pass on those higher commodity prices to consumers.

These higher input costs—say it with me: rapid inflation—are global in nature and have been persistent, on average, for the last six months. This is not temporary, as they show no signs of abating and, in many cases, the inflation rate is accelerating. (Also see: Will the Real Inflation Rate Please Stand Up?)

Watch that stock market rally and remember, dear reader: (1) inflation leads to higher interest rates, which are bad for stocks; and (2) one of the best hedges against rapid inflation is gold bullion and those beaten-down gold mining stocks. (Also see: Central Banks Pile into Gold on Price Drop.)

Michael’s Personal Notes:

So much for “muddling” along when it comes to economic growth worldwide…

China reported its fifth consecutive month of contraction when it released its March Manufacturers’ Purchasing Managers’ Index. During the past five months, the rate of acceleration in the economic slowdown has been increasing for its manufacturers (source: Markit Economics).

Within the numbers, new orders, which are a gauge of future economic growth, were at a four-month low. Also, the accelerating economic slowdown has pushed the index for manufacturers from an economic slowdown mode to actually contracting over the last two months.

As I’ve been reporting about China, there is clearly an economic slowdown occurring in the country. Not only is export growth slowing, but consumer demand within China is slowing as well—not a good combination.

The European Union reported its March Purchasing Managers’ Index as well, which showed a continued economic slowdown and came in below estimates. Manufacturing is shrinking at an accelerated rate. In the last two months, manufacturing in Europe has actually gone from an economic slowdown to contracting (just like China).

This is not a surprise when new orders within the index—a measure of economic growth—have been contracting for eight straight months. Unemployment has been declining for three straight months and that decline is—wait for it—accelerating.

Just to show that this is not symptomatic of just the weak countries in Europe, economists were hoping that Germany was going to escape the economic slowdown and post strong numbers. But this wasn’t meant to be.Germany’s Purchasing Managers’ Index for manufacturers for March came in at the lowest level in three months!

Germany’s index reported its first contraction in over four months. The report noted that new export business—a measure of future economic growth—slowed considerably. This is indicative of a continued economic slowdown going forward.

Since the Czech Republic and Hungary ship over half of their exports toEurope, their economies have been hit hard.

With China slowing as well, Australia, New Zealand, South Korea and Malaysia have all reported weaker economic growth numbers.

There is no question that the economic slowdown is gaining momentum and is prevalent around the world.

Can the U.S. escape this barrage of weak economic growth? Not a chance. It may take time to reach our shores, but it will eventually land, exacerbating the economic slowdown that already exists in this country.

So watch out for that stock market rally, dear reader; it is very vulnerable to this economic slowdown.

Where the Market Stands; Where it’s Headed:

As I have written above, inflation is getting out of control and economies around the world are going from slow growth to contraction—a lethal combination. Rapid inflation leads to higher interest rates. Slowing economies lead to weaker earnings for most public companies.

Stock markets do not rise when inflation and interest rates rise while economies contract—this gives more credence to my theory that we are simply witnessing an ongoing bear market rally the sole purpose of which is to bring more investors back into stocks before the next leg of the bear market starts.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.