Global Inflation: The Next Major Obstacle
One thing we find truly amazing about the markets is that they're much more than just investments. Markets provide a way of peeking into the future, if you understand what they're trying to tell you.
These lessons are ongoing but it's fascinating and like a giant puzzle.
MARKETS TELL THE STORY
Sometimes the messages are pretty subtle. But other times they're major, signaling massive economic, political or geopolitical shifts.
Most interesting is that the markets lead. So it's important to recognize that whatever a market is telling you, it's not going to be obvious when that market gives the signal. The message will become obvious later.
Let's take gold as an example. It started moving up in a major bull market in 2001, and it's been rising strongly and consistently ever since. Gold always leads inflation, so it was telling us that inflation was eventually going to head higher. That didn't happen for quite a while, but now it's another story. Plus, gold's been telling us much more...
INFLATION ON THE AGENDA
We've been writing about inflation for a long time and why we thought it was coming back in a big way. As the years passed, the evidence became more overwhelming.
But most people haven't been paying much attention. Aside from concerns about high oil and food prices, there are plenty of other things that are more worrisome.
In the U.S., for instance, consumer confidence fell to a nearly 30 year low and a recent poll showed that 81% feel that the U.S. is on the wrong track. This is primarily due to the war, the slowing economy and the housing situation.
And while these conditions remain serious, along with a slew of other concerns, like the heavy debt load, soaring foreclosures and so on, it's important to recognize that this is the current situation. It's not what's coming.
What's coming is higher inflation and it could prove to be more serious than most people think, at least based on what we're now seeing.
NOW IT'S HERE...
Suddenly, there's a lot of talk about inflation in official circles and that wasn't the case before. But over the past couple of months, comments or inflation warnings were made by the Fed, the European Central Bank and the Bank of England. Government officials are speaking out, and so is the press. The International Monetary Fund was the most direct, warning that global inflation has re-emerged as a major threat to the world economy.
As we've often pointed out, inflation has been creeping back and it's gaining momentum. In the past six months, for example, we've seen some huge double digit annualized jumps in U.S. wholesale prices, along with soaring money supply.
But what's happening in other countries is even more interesting and it's intensifying the global inflation concerns, which gold saw coming way back when.
As you know, many developing nations have been booming, thanks to globalization. This is taking place all over the world and this growth is much greater than in the developing countries.
It's estimated that half of the world is leaving poverty behind as standards of living improve. That's especially true of the BRIC countries, which are the emerging market leaders (Brazil, Russia, India and China). It's also true of many Asian countries, as well as many of the Eastern European, Middle Eastern and Latin American countries.
As living standards improve, people in emerging nations are able to buy things they couldn't afford before, like food and cars. This has greatly increased demand, and it's put massive upward pressure on agricultural commodities and oil. It's actually been the driving force behind the commodity boom.
Over the years, we've taken quite a few trips to developing countries and we've seen grueling poverty up close. It's a terrible situation and the fact that millions of people are escaping this lifestyle is a good thing, but like most things, there's a price to pay. In this case, it's inflation (see Chart 1).
As you can see, inflation is picking up in most countries (remember, many countries are not shown on this chart). Aside from Argentina, for example, inflation is above 15% in many more emerging countries like Vietnam, Latvia, Estonia, Pakistan and Egypt. It's more than 10% in a lot of other countries and it's a huge concern in Russia, China and India.
The bottom line is that inflation is at a 10 year high in emerging countries and The Economist says that two-thirds of the world's population will probably suffer double-digit inflation rates this Summer. This is a huge deal and it explains why officials are concerned, but there's more...
SOARING MONEY SUPPLY... GLOBALLY
Global monetary policy is now the loosest since the 1970s and money supply is growing almost three times faster in emerging countries than in the developed world (see Chart 2). As you know, that's the direct cause of inflation.
Plus, as The Economist points out, there are alarming similarities between emerging economies today and the rich world in the 1970s when the Great Inflation took off.
For example, in many emerging countries policymakers view the inflation rises as a short-term phenomenon and they're taking superficial measures to deal with it.
So the causes are similar and the results will be the same for everyone, no matter where you live. As we're already seeing, commodities, food, oil, building materials and so on... they're all going up.
It's still to be seen how this will end. But so far, this inflation rise is coinciding almost perfectly with the 200 year commodity cycle we've often shown. If this continues, and we believe that it will, then there's a lot more inflation to come in the years ahead.
What's currently happening also strongly favors the outlook for gold and the other commodities. It's going to boost demand for gold as a safe haven during inflationary times and these ongoing developments are telling us to stay with our gold and precious metals positions.
In fact, gold's been telling us this all along. Now we're starting to see why.