Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Buy (Speculate) Now to Save Later?

Over the last several weeks, we have been beating the dead horse of inflation gone wild, with the expectation that economic disorders will be just around the corner. Thus we were perplexed to see strength across the board in the ISM manufacturing number released on Tuesday. New orders jumped from 62.0 to 67.8, backlogs increased from 47.0 to 58.0, and imports jumped from 50.5 to 55.0. Prices paid (the inflation gage), the only negative component, rose from 72.5 to 81.5. That increase aside, why the jump in orders?

Digging a little deeper into the story behind the numbers, we found that business owners are buying in advance to avoid price increases in the future, a dynamic reminiscent of 1970s inflation. In Thursday’s Wall Street Journal, there was an article headlined “Fearing Inflation, Firms Stocking Up.” We were intrigued to see business owners going so far as to mortgage their homes to buy next year’s (instead of next month’s) supply of cotton, or other such things, ahead of the next price increase. Everyone should read this article; it’s an eye opener. What troubles us is the level of risk some are willing to undertake in testing the theory’s veracity.

Of course, the strategy may make some sense. If one can borrow at extraordinarily low rates to buy a commodity vital to one’s business that is expected to rise in the double digits, why wouldn’t one take advantage of the opportunity ahead of time? It may help one save some money (if prices rise) and make one a lower cost producer than one’s peers.

It’s not likely the Fed will spoil the fun, either. Several articles appeared this week in both the Wall Street Journal and the Financial Times citing Bernanke’s ongoing denial of any sign of “unmanageable” inflationary pressures.

Passing these price increases on to the consumer – who’s still suffering from high unemployment, slow wage growth, and massive debt – will prove to be difficult. Instead, the self-perpetuating nature of this dynamic will ultimately serve to squeeze the consumer further – draining profits from the economy and causing systemic damage to the bond market as credit risk intensifies.

It’s obvious that, given Bernanke’s indifference to the rapidly growing risk of runaway inflation, greater volatility and destabilization is on the horizon for our economy and markets. People and businesses are definitely catching on, which should be bullish for the metals and ultimately bearish for the middlemen (those stuck between commodities and the consumer) trying to make a profit.

This brings us to the animal spirits presently animating the broader stock market. That we have so quickly forgotten the resent crises experienced at the hand of monetary excess is still surprising to us. We still feel the current market madness is more a response to money printing than folks believing it’s a good idea to chase overvalued stocks. But, for the moment, it is what it is.

Have a good weekend,

David McAlvany
President and CEO

David Burgess
VP Investment Management