Tags: ashish | advani | Inflation | Crush | US | Stocks

Inflation Will Eventually Crush US Stocks

By    |   Wednesday, 19 Jan 2011 09:18 AM

Last week I discussed inflation fears in Asia and how they can deal a crushing blow to the citizens of a country as well as the stock markets in that country. This week I want to show you how inflation sucks the life out of any uptick in the economy or destroys the stock market.

Asia is expected to do well this year with one major unknown. If inflation isn’t kept on a tight leash, we could see a major reversal in Asian stocks. And that is exactly what is happening in India now.

India is a developing country and has a higher rate of growth compared to the United States. Consequently, the inflation rate (normal) in India is around 6 percent to 7 percent, which is acceptable to the Reserve Bank of India (India’s Central Bank). Currently the inflation rate in India is running close to twice that amount, with the food portion of the data running at about 18 percent. It is crushing the average person and making food prices of most staples a luxury item.

If you have had Indian food, you would know that most curries have an onion base. Onions in India are staple food and are priced at about $2 per kilogram (2.2 pounds), compared to the usual price of around 60 cents. The inflation fear has gripped the country and is making the government very uncomfortable.

As the stock market fears a swift and strong response – which would be a strong hike in interest rates — we have seen the stock market take a real hit. Since Nov. 5, we have seen the markets decline by a whopping 11.4 percent. Yes folks, more than 11 percent declines just on fears of inflation soaring and the central bank is raising rates.

Now, let’s talk about U.S. inflation. When the Federal Reserve tells us that there isn’t inflation in this country, I strongly disagree.

This reminds me of the time when the government was trying to mislead us a few years ago when we heard comments like “Deficits don’t matter.” Remember those days?

I tend to agree with the website Shadow Statistics, which tell us that inflation in the U.S. is running closer to 5 percent rather than the less than 2 percent that the government tells us. I know, when I see my bills, they are higher by a whole lot more than 5 percent.

And now with gasoline rising above $3 a gallon (national average, here in Alaska it is $3.47 a gallon for regular), we will start seeing secondary inflation setting in soon. Secondary inflation refers to producers having to pass on higher production and transportation costs to the consumers.

The Treasury bond bubble is another crisis waiting to crush the markets here. As it unravels in the next year and inflation really shows up in the way the Federal Reserve measures it, I am seeing the brewing of the perfect storm for the U.S. stock markets. Rising interest rates due to Treasury yields going up along with inflationary pressures demanding rate hikes won’t only crush the stock market, but also crush any hopes of a sustained recovery while unemployment flounders.

Once again that means stagflation.

It isn’t too late to diversify outside U.S. stocks into commodities, currencies and other assets that aren’t U.S. dollar-denominated.

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Last week I discussed inflation fears in Asia and how they can deal a crushing blow to the citizens of a country as well as the stock markets in that country.This week I want to show you how inflation sucks the life out of any uptick in the economy or destroys the stock...
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2011-18-19
Wednesday, 19 Jan 2011 09:18 AM
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