Tags: inflation | Fed | banks | money

Barron's: Is Inflation Lurking In The Wings?

By    |   Friday, 09 May 2014 12:07 PM

The fact that energy stocks are up in 2014 while retail stocks are down may be a harbinger of inflation, according to Barron's.

Wall Street sees little evidence of rising prices and may worry more about deflation, but Brendan Conway said there is insight to be gained from the fact that the Energy Select Sector SPDR is up 8 percent in 2014, while the SPDR S&P Retail ETF is down 7.5 percent.

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“Retail stocks should be highly sensitive to weaker consumer spending, whereas the energy sector should weather it. And it’s true that some retailers have cited margin pressures in their recent earnings reports,” Conway wrote. “No, there’s still no indication of broad-based inflationary pressures, but investors’ sector positioning seems to suggest a degree of doubt that this situation can last.”

He cited a recent client e-mail from Marketfield Asset Management’s Michael Shaoul on the topic.

“Retail is the ultimate terminus for all input cost increases in an industrial (or agricultural) economic chain, and thus aggregates numerous small increases that can take place at any step along the way. The question is always whether the retailer can then pass on these costs to the consumer, in which case it results in higher consumer inflation, or has to absorb them internally at the expense of margins (of course a combination of the two tends to be the outcome),” said Shaoul.

“The sudden deterioration of retail equity valuations would therefore be consistent with the early stages of an inflation cycle, and we note that a number of earnings calls this quarter have mentioned margin pressures as a reason for muted earnings.”

Like energy prices, gold prices also tend to go up in a rising inflation environment. Gold prices, at $1,291 per ounce in Friday morning trade, have recently levitated in a narrow range.

Sam Stovall, chief equity strategist at S&P Capital IQ, said on Twitter this week: “Gold has been moving lower, but has failed to move down in earnest since the break back below 1300.”

So where does gold go from here? Even experts have trouble with the answer.

Peter Munk, former chairman of Barrick Gold, told Bloomberg News before he retired last month, “I really have no ability to forecast gold prices. I have been in the business for 30 years, and it occupies my mind day and night.

“I don’t care if you are Einstein,” Munk said. “It’s impossible to forecast for a week from now and a year from now.”

Bill Conerly, a Forbes contributor and corporate economist, said the Phillips Curve, a traditional forecasting tool that plots employment rates with inflation rates to predict future inflation, has not been as reliable in recent years as it was in the past.

Using fluctuations in the money supply to forecast inflation has also not worked well of late, Conerly said.

Conerly’s prediction is for 2 percent inflation over the next two years, but concludes the risk of error is likely to the upside.

He predicts “an explosive growth in the money supply if banks start lending out their excess reserves in a big way.”

“Whether that leads to explosive inflation depends on whether the Fed succeeds in draining reserves from the banking system at exactly the right time, in exactly the right magnitude. Thus, there’s substantial upside risk to the inflation forecast. And if inflation starts accelerating sharply, the Fed will tighten, sending us into another roller coaster.”

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The fact that energy stocks are up in 2014 while retail stocks are down may be a harbinger of inflation, according to Barron's.
inflation, Fed, banks, money
Friday, 09 May 2014 12:07 PM
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