Raymond James strategist Jeff Saut is banging the inflation drum, arguing not just that it’s coming, but that it’s already here.
Well, it’s not here per se, but…
Annualized inflation in India is running at about 15% and China is not all that far behind. In the Philippines, March’s inflation figure was just reported at +4.4%, up from the previous month’s 4.2%, with the cost of Philippine fuel/electricity/water up 14.6% over the trailing 12 months. In our country, since January 2009 the price of copper is up ~185%, crude oil is better by ~118%, and rubber is higher by ~167%. Moreover, from August of 2009 until now hog prices have rallied ~75%, while cattle prices have lifted ~19%. Such actions caused the Reuters CRB Commodity Index to travel above its 200-day moving average in June 2009 and stay there ever since (read: bullish and inflationary). Meanwhile, economists continue to insist there is no inflation because wage inflation is non- existent.
He cites the following note from a US-based importer as being Representative of the situation:
“I am a large volume importer of industrial hardware, mostly out of Asia. I just received my April ocean freight rate update. Container cost up 5% from March and up 21% from April 2009. For my products, the YOY increase represents a 3% increase to cost of goods. Cost of steel as we know is going up significantly and these price increases for us – contrary to what the popular spin may be – are effective immediately. Obviously, as we are replacing fast-turning inventory, we are passing on these increases immediately. About a year ago, I reported to you that our business was extremely slow and our inventories very high. Despite price increases going on offshore, I pointed out that in our world, these increases would take time to trickle through due to the high inventory levels that we and our competitors were sitting on. Our position was that if we had it in stock, we
would sell at basically any price for cash flow reasons. Any new inventory would be sold based on actual current cost. Needless to say, the purchases we made through the year were very minimal as we (correctly) were not optimistic about business looking forward.”
“Now, business is still terribly slow but inventories have been depleted to the point that shortages are occurring. These shortages are exasperated by the fact that no one is buying any significant volume of replacement inventory. Our statistics would show that our purchases in March (for delivery this summer) are up about 400% from any given month last year BUT are still only about 30% of our peak going back before all hell broke loose. Can you imagine how this data can be spun by focusing on the former and conveniently ignoring the latter? We feel that we have hit bottom and have reasonable expectations to survive this debacle simply because we have downsized to about 20-25% the company we once were. Our domestic competitors and vendors overseas basically report the same. . . . (The) bottom line is this: no one is (all that) busy but prices are literally skyrocketing. Smells like stagflation to me. Anyone who tells me that there is no inflation on the horizon is delusional and in for one hell of a shock.”
Like others, Saut sees inflation as the natural response to the mountain of debt the US faces.
Though there is one alternative to that:
Recently, however, in addition to inflation, another “way out” has been proffered as the phrase Value
Added Tax has emerged. Wikipedia defines VAT as “A Value Added Tax (VAT) avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, VAT has been gaining favour over traditional sales taxes.
In principle,VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer and the seller pays this VAT to the government.”
Hey “body politic,” have you not learned ANYTHING about the folly of a VAT tax from the Europeans?! I think it was my beloved France that first introduced the VAT tax over 50 years ago; and, the implementation of that spurious tax spread quickly across the region. It is a politically sly tax because it is embedded into the price of everything you buy. Frighteningly, body politic can raise said tax at their collective will. Accordingly, the government controls the revenue stream, which permits government to do what it does best e-x-p-a-n-d! Hey America, are you listening? Such a tax only aids in lowering an economy’s structural growth rate with a concurrent compression in corporate price earnings multiples. And if you don’t believe me, the only state in this country to ever use a VAT tax has been my home state of Michigan – ’nuff said! Speaking of increased government intrusion into the private sector, there was an interesting
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