Don't believe the overly bullish global growth estimates. There's plenty of evidence that growth will slow and inflation will continue to accelerate, even if commodities back off their highs.
By Darius Dale, Hedgeye
One question we've been wrestling with lately is: "Where do we go from here?" – particularly as it relates to the commodity inflation you've been reading about for the last few months.
There's a compelling case that the boat has left the dock with regards to global inflation trends. As we've seen with accelerating "Core" CPI readings, particularly in Asian economies like China, Indonesia, and Thailand, companies globally are taking advantage of recent robust global growth trends and bullish growth forecasts to pass price increases through to consumers.
The US, China, Japan, India, Brazil are just a few major economies where consensus growth forecasts for 2011 are much, much too high relative to our models and the current global macro backdrop of accelerating inflation and higher interest rates.
Irrespective of the tired argument between the importance of "Core" vs. "Headline" CPI, the key takeaway here is that even if commodities start to back off their current highs (i.e. if MENA conflict stopped today and crude oil went back down to the $80-$85 range), there is a very high and underappreciated possibility that global inflation readings will continue to accelerate for two main reasons:
Since we all know where consensus is regarding the current lofty global growth assumptions, we'll just skip right to addressing point #2. A few specific examples of the recent global trend of increasing subsidies, transfer payments, and wages include:
Perhaps more so than the other countries, Hong Kong's capitulation on this front revealed an interesting takeaway as it relates this trend with respect to developing vs. developed economies. After Chief Executive Donald Tsang (the highest ranking Hong Kong official) was assaulted amid a wave of public protests earlier this week, Financial Secretary John Tsang agreed to hand out cash, tax rebates, pension injections to the tune of HK$6,000 in each instance. This is in addition to his decision last week to wave public housing rents for two months and provide subsidies for electricity bills while talking up the dangerous inflationary pressures of providing cash handouts.
Addressing the media, Tsang had this to say: "We find this is the best way to respond to demands from residents…"
Given that most regard Hong Kong as a reasonably developed economy, it was interesting to see its government give in to populist demands for additional handouts. It suggests that this trend may no longer be contained to developing nations like those of the MENA region, India, and China.
All told, we've been beating the table on global stagflation since October. Now that consensus has figured out the inflation component as oil trades above $100 per barrel, our task is to figure out how to time consensus' uncovering of the bearish growth factor on the short side of equities. If 2008 is any guide, they will kick, scream, and buy every dip on the way down – provided we're headed there; ultimately, time and space will tell.
Also on Fortune.com:
commodity inflation is a direct result of the deregulation of the derivatives industry. we saw this in 2008 when oil went to $140. once the speculators left, the price of oil plummetted. (recall a barrel of oil was traded, on average, eight times before actually being delivered; 80% of market activity was from speculators.)
as for transfer payments, you've got to keep the natives happy or they get restless. if savings were directed to productive use (i.e. real investment), jobs would be created and there would be no need for transfer payments, etc.
as long as our savings continues to go to support commodity and credit bubbles, we're going to be stuck in this cycle for sometime. in the meantime, it's tax, print or perish.
Financial costs inflation make consumer prices rise, then unemployment doubles, both forever! Financial costs deflation reduce inflation, but prices stay high and unemployment remains... After 20 years of Keynesianism, Germany had reduced jobless from 6 mio to 0,15 mio, then came Friedman's dogmas...(monetarism):
In 1969, Bundesbank inflated financial costs +150%, then jobless doubled to 0,4 mio forever... In 1972, Bundesbank inflated financial costs +133%, then jobless doubled to 1 mio forever... in 1979, Bundesbank inflated financial costs +150%, then jobless doubled to 2 mio forever... in 1988, Bundesbank inflated financial costs +200%, then jobless doubled to 4 mio forever... Then, ECB counted the "discouraged workers" no more as jobless but as "workers", so I had to look at the numbers of new poors in Germany, to have the right numbers of German jobless: In 1999, central bank inflated financial costs +90%, then German poors doubled to 7 mio forever... In 2005, central bank inflated financial costs +100%, but no more statistics give the total jobless numbers anymore!
Every time central banks inflate financial costs, the supermarkets are forced to rise consumer prices! Every time central banks deflate financial costs, consumer prices stay high, but d/dt of consumer prices drops! So consumer prices rise step by step, because central banks make roller-coaster with interest rates! Only central bank Japan has see the light: since 1995, BoJ has biblical 0% lending interest rate, and it did NOT create hyper inflation in Japan, but consumer price stability since 16 years! You see that dogmatic Friedman was a liar, and pragmatic Keynes was a genius! Bible and Koran also are genius: 0% (real) lending rate required!
SOURCE: Bundesbank monthly statistics since 1970: I draw with Harvard Graphics a SEMI-LOG chart of the total number of german jobless AND the maximum lending Lombard rate from the Bundesbank AND the german consumer price index ON THE SAME A3 PAGE...
Massive rate rises made German consumer price rose stepwise forever after 2 years, and German total jobless number rose stepwise forever after 3 years: edifying!
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