Sky Is Falling: IMF Converts

[peterbirks]

There are many headlines that we in the financial world know that we will never see. One of them is "IMF urges fiscal relaxation".

Except that, well, fuck me, this morning we did.

This is on a par with Hitler saying in the late 1930s "Actually, the Jews aren't all that bad".

It would appear that the IMF is so convinced that changing the level of interest rates will not be enough to avoid a looming crisis, that it it is urging "countries that can afford it" to relax its fiscal policies. Well, actually, it's also calling on countries that can't afford to -- including the US.

The IMF supporting a fiscal stimulus package in the US, where for donkeys' years it has been calling for fiscal tightening to end the country's chronic budget deficit, is surely the end of civilization as we know it.

The worrying thing about this is that fiscal stimulus can have unintended consequences. You might avoid an impending nightmare scenario, but only by saving up trouble for later. In this case, the "trouble for later" is inflation.

I've long been convinced that inflation will re-emerge within a decade (in fact, within five years, since 2012 was my prediction in 2002 for the date that the numbers would start going up and would not be brought back down by interest rate increases) and if the developed and emerging world has to head into "prime up the global economy" mode to stop the mother of all recessions, then we are quite likely to see a situation not dissimilar to that seen in Ireland for more than 10 years. In that case, the money fed through to a property bubble, but at the moment we are in a property bubble. All the extra money might suport house prices, but it will also feed elsewhere -- particularly into the pockets of the emerging middle classes in China and India.

This will create both demand-led and supply-supporting inflation. In old laymen's terms, too much money, and too few goods. And it won't just be there. Already we are seeing softs increasing in price way beyond "official" inflation. Wheat, corn, etc. Add to that an inevitable increase in energy costs for the consumer and, well, eventually the wage restraint will crack.

PJ

Comments

[jellymillion.livejournal.com]

We already have the BofE controlling the "harmonised" CPI, which bears little relation to the more real-world RPI. For certain I know which of those more accurately reflects the increase in my cost of living and hence which I expect to see reflected in my pay increase this month.

I wonder how far the two could diverge while the Bank continues to "keep inflation under control". Perhaps it might be a good time to take on a bit more debt in the expectation that it'll get inflated away?

[peterbirks.livejournal.com]

I just did :-)

PJ

Hmm

[(Anonymous)]

It's a bit strong to say the BoE "control" the CPI. Perhaps they may have had an influential hand in devising it, but the National Statisticians are a lot more independent minded than you might care to believe. And I would also point out that there looks to be quite a strong relationship between those two indices based solely on that graph. It's just that the CPI is lower.

Ultimately though there will always be people saying that the official figures are fixed by someone. The best riposte to this is the one that the ONS use, namely to say: You don't believe us? Well here are our numbers and here is how we got them. Which bit do you disagree with?

Lurker (ex-ONS employee)

Re: Hmm

[jaybee66.livejournal.com]

I don't like the basket of goods and services. It is more a middle-class CPI representing the average of what well-off people can afford.

If you had a CPI of only what the poor can afford then it would be double the official CPI.

Re: Hmm

[peterbirks.livejournal.com]

Did you ever come across my old mucker Kieron Mahoney in the ONS, lurker? I think he's in South Wales now... But, gawd, that department's been moved around a bit, hasn't it?

PJ

Re: Hmm

[(Anonymous)]

No I'm afraid that name doesn't ring any bells, sorry. My time there was pretty brief though. You're right that the various government "reviews" of the last few years have shunted the majority of ONS employees to Newport. A bit of a culture change from Pimlico, so there was quite a lot of ship-jumping if I recall.

[(Anonymous)]

What effect does inflation typically have on the stock-market?

thanks

f.n.

[peterbirks.livejournal.com]

This is a marvellous question. Increased levels of inflation tend to either follow or lead to higher interest rates, which are traditionally "bad" for stocks in the short term.

This is because listed companies have to have debt on their balance sheets (else their return on capital is not competitive). If that debt becomes more expensive, then earnings drop, so the share price falls. Sensible, yes?

Well, no. In fact, companies that make things and sell them are the best things to get into in inflation-land, because what they really do is take raw goods, add value to them, and sell them on. If the value of money falls, all sides of the equation go up. So, if inflation increases, the stock price should, in theory, rise to reflect this.

Over the long term, this does happen. So, if inflation goes up and interst rates follow, and stock prices drop, it's a buying opportunity.

PJ

[(Anonymous)]

Interesting, thanks for the reply. If you have time could you tell me what you mean by:

'else their return on capital is not competitive (without debt on balanceheet)

Also, we hear a lot of recession proof companies (gambling, tobacco etc) but what of inflation-proof (w.r.t stock-market price)?

thanks

f.n.

[peterbirks.livejournal.com]

Another good question and I was thinking on just this point when I penned the last reply.

One thing I want to make clear about equities. The first principle should be "get into a good company". In other words, a good company in a "bad" sector is better than a bad company in a good one. Perhaps not straight away, but in anything more than the short term, it's the most important point.

Having got that caveat out of the way, what kind of sectors benefit from inflation?

What you really want here are companies that makes things, which people buy (and need) but which are not price-controlled. So, car manufacturers, razor-blade manufacturers, soap manufacturers, sugar manufacturers. The Old PZ Cussons (not sure what it's called now) used to be a great contrarian stock.

I'm not a great fan of supermarkets in inflationary times, but I'm not dogmatic about this. I'm definitely anti the service sector and anti the financial services sector.

Heavily taxed goods do well in inflationary times because governments can't keep up. If bread is costing a fortune and cigarettes are still cheap, then people will smoke more to suppress their appetite. (Remember, we are talking globally here). So, tobacco companies, yes.

Other manufacturing industries do well -- business to government (military stuff). And areas with low labour costs have advantages if they can at least move up their prices a bit without too much resistance.

If I had to plump for a portfolio of sectors, it would be chemicals, bakers and staple-food processors, tobacco, razor-blades, coca-cola, Restaurant groups, Motor manufacturers, and suppliers to the military.

PJ

[peterbirks.livejournal.com]

BTW, gambling is not inflation proof. People "lag" in increasing their stakes to match inflation quite significantly. So, wage costs increase, but profits do not increase at the same rate.

PJ

[(Anonymous)]

Thanks, that was very helpful; given current fears, I suppose the obvious follow up question is which stocks are double proofed against both inflation and recession? I can't see the motor industry or restaurants being so; tobacco obviously is one, government-centred business' another.

[jaybee66.livejournal.com]

Come on Birks.

You accurately observe the symptoms but what is your cure?

I saw Gordon "Is a moron" Brown being interviewed on The Politics Show yesterday and when being told that food and fuel inflation is far higher than CPI he said, "Which is all the more remarkable that this government keeps inflation so low."

[peterbirks.livejournal.com]

Cure? Who said I wanted a cure? Inflation is a means by which wealth is transferred from those who have saved to those who have debt without physically stealing the money from the bank accounts. At the moment it is not in the interests of the ruling classes to initiate this transfer, but as soon as people with student debts and massive mortgages come into power, with no prospect of paying off that debt in "real" terms, then inflation will appear to magic away that debt.

I missed that Brown quote. That's worthy of Peter O Hanrahan O Hanrahan.

PJ

[jaybee66.livejournal.com]

So long as it is inflation and not hyperinflation.

[jaybee66.livejournal.com]

BTW, you haven't mentioned the result from Pop on Trial.

The 1970s won.

Though I still think the decades were out by 5 years so either 65 to 75 for rock or 75 to 85 for the zenith of pop.

I liked both. Hendrix, Doors, Queen, Glam followed by Punk, New Wave and Synth.

Nobody liked the 90s. There are sane people still living on this planet!

[peterbirks.livejournal.com]

Didn't watch it, James. I find these programmes intensely artificial and boring. It all started with "the greatest Briton", didn't it? I mean, not even Martin Luther King as advocate for someone else and Boris Johnson for Churchill would have made Churchill lose that one.

PJ