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Lately just about the only things not
soaring in price are US houses and electronics beginning with "i". Raw materials, for instance, have had a good week
based on the price action of this commodities ETF:
Those higher raw material costs seem
to be finally working their way through to restaurant results:
Inflation on McDonald's Radar
With inflation on everyone's radar,
it comes as no surprise that McDonald's will feel the pinch. Operating margin
fell to 17.7% at the Golden Arches, as input costs began to put serious
pressure on profits. While McDonald's doesn't give an official inflation
outlook, its SEC filing reveals that "With about 75% of McDonald's
grocery bill comprised of 10 different commodities, a basket of goods
approach is the most comprehensive way to look at the Company's commodity
costs. For the full year 2011, the total basket of goods cost is expected to
increase 4-4.5% in the U.S. and Europe." (Read Why World Food Prices
Will Keep Climbing).
Oil and gasoline are inching up:
Crude futures break through $112 a barrel
SAN FRANCISCO (MarketWatch)
-- Crude-oil futures regained some footing Thursday, inching higher on a
weaker dollar and resuming their upward trajectory after recent sharp gains.
Crude for June delivery CLM11 +0.15% added
5 cents to $111.50 a barrel on the New York Mercantile Exchange.
Gasoline Extends Gains After Report Shows Decline in
Inventories
April 20 (Bloomberg) -- Gasoline
futures extended their gains after the U.S. Energy Department reported a decline
in inventories and an unexpected drop in crude oil inventories.
Stockpiles of gasoline dropped 1.58
million barrels to 208.1 million, the report showed. The median forecast of
14 analysts surveyed by Bloomberg
News was for a decline of 1.75 million barrels.
Crude oil stockpiles fell 2.32
million barrels to 357 million. Analysts had expected a gain of 1.3 million
barrels.
Gasoline for May delivery rose 1.94
cents, or 0.6 percent, to $3.2525 a gallon at 10:33 a.m. on the New York
Mercantile Exchange.
Precious metals and the US dollar
continue to move in opposite directions:
And home prices are soaring in
countries to which the US is exporting its inflation:
Housing Bubbles Percolate Far From Crises Elsewhere
Housing prices are rising rapidly in
Australia, Canada, China, Hong Kong, Israel, Singapore, South Africa and
Sweden. Housing prices are flat--or falling--in Britain, France, Germany,
Ireland, Italy and the U.S.
Welcome to the two-speed global
economy.
When most observers talk about a
"two-speed economy," they are contrasting slow-growing mature or
advanced economies (the U.S., Europe, Japan, etc.) with fast-growing
developing or emerging-market economies (China, India, Brazil, etc.). Philip Suttle of the Institute of International Finance, a
bankers' association, calls it "a two-and-six world." In mature
economies, growth and inflation are at around 2%; in emerging markets both
are around 6%. Whenever anything nudges them off that course, he says,
something else nudges them back.
But there's another way to divide the
world: Some economies had a big banking crisis. Some didn't. And the ones
that didn't are the ones where housing prices are shooting up. Slow growth in
mature economies is leading them to keep interest rates low and credit
conditions easy. Because they (so far) dominate world financial markets, that
means global credit is easy, too easy for emerging markets where
inflation--in wages, prices and asset prices--is the worry.
In Canada, for instance, commercial
banks were hardly shaken by the crisis but the Bank of Canada has been
holding its key rate at just 1% to foster economic growth. The consequence:
Housing prices in February were up nearly 9% from year-earlier levels, the
Canadian Real Estate Association says. The worry in Canada and elsewhere is
that what goes up might come down, and history amply illustrates the economic
harm done when housing prices plunge.
In Israel, banks were spared the
worst of the crisis; they hadn't invested much in U.S. subprime mortgages.
But Israel wasn't immune from shock waves from abroad so its central bank cut
rates all the way to 0.5% in 2009. That made mortgages cheap. Over the past
year, the house prices are up 16.3%.
In this (and perhaps only in this)
respect, Israel isn't unusual. The average house price in Hong Kong rose more
than 20% in 2010 following a 30% increase the year before. In the first two
months of this year, prices rose another 7%.
Then there's this from Brazil, with
one very interesting passage (bold added below):
Brazil Raises Key Interest Rate; Move is Smaller
SAO PAULO -- Brazil's central bank
raised its benchmark interest rates by less than what many economists say is
needed to keep inflation in check, in a gamble that soaring global food
prices helping drive inflation higher will eventually ease off by themselves.
Brazil's central bank raised its
benchmark interest rate a quarter of a percentage point to 12%. That was a
smaller raise than two previous hikes of half a percentage point earlier this
year.
"They are
capitulating in terms of their inflation target for this year and are going
to let inflation run through system," says Alberto Ramos, an Latin
America economist with Goldman Sachs, who called for a hike twice or three
times as big. "The risk is that inflation becomes entrenched."
Fast rising inflation, pushed in part
by soaring global food and fuel prices, has put Brazil's new central bank
President Alexandre Tombini
in the difficult predicament of seeking to balance the country's need to
fight price rises with a desire to avoid hampering Brazil's extraordinary
growth story by pushing rates even higher. The dilemma is set against real
questions about how effective local interest rates are in fighting inflation
caused by global trends like soaring food and fuel prices.
Mr. Tombini
is not alone. Last week's jump in inflation and rate hike in China coupled
with rising inflation in India, illustrate how quickening inflation has
suddenly emerged as a potential speed bump-and key test for policy
makers-across the fast-growing emerging markets.
The stakes couldn't be higher for Mr.
Tombini. For starters, Brazil already has the
highest interest rates of any major economy, and its leaders are wary about
pushing them higher.
At the same time, inflation is the
historical bete noir of the Brazilian economy. The
South American giant battled four-digit inflation as recently as the early
1990s, and its success in bringing it down to the single digits in recent
years is seen as central to its economic success of recent years.
What's driving concern is that an
already tricky inflation scenario worsened in recent days. Brazil said
Wednesday that its benchmark inflation rate, which is broadly similar to the
U.S. consumer price index, quickened to 6.44%-its fastest rate in more than
two years. Meantime, central bank surveys say that inflation expectations are
Brazilians are deteriorating.
And Brazil's decision on how much to
raise rates is complicated by its other big macro economic
headache: An overvalued currency.
Like some other emerging market
countries, Brazil is letting its currency appreciate in order to stem
inflation. But the Brazilian real has already soared around 40% since early
2009 as global investors pour money into the financial system to profit-at
least in part-from Brazil's high interest rates. Brazilian businesses are
grumbling that the strong currency is making them vulnerable to competition
from countries with weaker currencies.
A bigger rate hike could exacerbate
that trend by pulling more foreign capital into Brazil.
Some thoughts:
·
Obviously this can't go on. See Seeds of Their Own
Destruction for some reasons why.
·
Because home prices are still falling in the US and the
other countries that had banking crises, they're reluctant to tighten, lest
housing really tank and pull the rest of the economy back into recession. So
the tightening -- and the attendant suffering -- will begin overseas.
·
You have to feel for the Brazilians and Chinese.
They're behaving correctly, saving and investing and building up capital, and
their reward is a tidal wave of destabilizing hot money flowing from a
desperate US Federal Reserve. Our inability to deal with our own problems
leaves Brazil in particular with two unpleasant choices: tighten until they
choke off foreign capital flows, which would probably send them into a
recession, or "capitulate" and simply let inflation rage through
their society, destroying savings and making life literally unlivable for
people at the bottom of the economic ladder.
·
Continued ease in the US and more tightening abroad
means increased pressure on the dollar -- at a time when the dollar is
already falling against pretty much everything. Even the pound is at a
17-month high of 1.66 dollars. Logic says that the dollar's decline will
soon become a political liability and/or a source of immediate instability.
But logic is an unreliable guide in bubble-land.
John Rubino
DollarCollapse.com
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