My 10-year old son just told me the money I gave him was “no good”.
The kids broke up from school on Tuesday.
And I’d given them a bit of money to buy an ice cream at the end of the day.
A pat on the back for getting through the term… and a bit of respite from this ferocious heat.
But when they got home, he moaned that his money wasn’t enough.
It’s not that he’s ungrateful. Or spoilt.
It’s just that he’s figured out what I know already and I’m sure you do already. (No matter what the ‘official’ data you read about in the newspapers are telling us.)
My son’s telling it like it is…
Ice cream inflation
He hadn’t been able to buy his favourite ice cream.
“The shop wanted more money. I could only get this. It’s not fair!” he complained, showing me the “cheapest lolly they had”.
Of course, it’s not news to me.
Prices everywhere are on the up.
I’ve had to increase by monthly contribution to our family groceries account twice in the past six months.
And I might have to pump in a bit more soon.
Because it’s not going as far as it was.
Haven’t you noticed the price of your weekly shopping basket going up, too?
And how about filling the car up with fuel?
Eating at restaurants or takeaway meals…
Electricity and gas…
And clothing and shoes.
It’s all going up…
There may be summer sales on in some places (not usually on the stuff you want).
But that’s just a sign of desperation on the part of the shops.
All this hot weather may have been great.
But together with a World Cup fixation, it kept us away from the shops, meaning less money through the tills.
Slashing prices on a few things may hook people back in.
But behind all that, prices of everyday things are nudging up.
Which is entirely normal, of course.
Inflation is what’s expected and indeed wanted.
The Bank of England’s main aim is to keep inflation at 2%. So that over the year, prices across the economy are 2% higher.
That way, it encourages people to spend.
Just as my son experienced the other day, inflation slowly erodes the value of the money in your pocket.
So, people would rather spend the money now… than wait for prices to go up.
That’s the theory.
And right now, there’s nothing drastic about the level of UK inflation.
But it IS above the Bank’s target of 2%.
When the latest Consumer Price Index (CPI) numbers were released last week, inflation came in at 2.4%.
That’s manageable and it’s not going to suddenly make people stop buying stuff.
Until you consider what could start making prices rise MUCH faster.
Not just here in the UK – but around the world.
And that could have a huge negative impact on the economy, the consumer and the financial markets.
That’s what we should be worrying about right now…
Commodities to spark a raging inflationary inferno
To start with, commodity prices are rising hard.
The oil price is up 61.9% over the past year.
That’s a hefty spike for a commodity like oil in that timeframe.
And the way things are going, that’s a trend that will continue.
OPEC may have opened the taps lately. That explains the pull-back in price over the past month.
But from a chart perspective, the trend is upwards for oil.
And any shock could send the price quickly back towards recent highs at $74.
Like perhaps things getting ugly in the Middle East.
Did you see the slanging match between Iran and the US last weekend?
Iran’s President Hassan Rouhani warned Trump not to “play with the lion’s tail, because you will regret it eternally” and spoke of “the mother of all wars”.
In his usual super-belligerent manner, Trump took to Twitter to reply:
That’s on top of Trump henchman, Secretary of State, Mike Pompeo, likening the Iranian regime to the mafia.
If this gets any nastier… or even turns to war… then we could see that $74 high for crude oil taken out quickly.
And if the analysts at Bernstein Research have got it right, that’s just the next leg in a move that could smash all-time highs above $150.
Bernstein’s position is that energy companies are underinvesting in new production.
“The risk for the oil industry in reducing investment today, is creating a shortfall in oil supply tomorrow.
Oil remains an essential part of our lives. Any shortfall in supply will result in a super-spike in prices, potentially much larger than the US$150/bbl spike witnessed in 2008.”
Meanwhile, Forbes reports that if Iran was to punish Trump (and the West) by choking off supplies coming through the Strait of Hormuz, prices could rocket even higher.
Bear in mind that 20% of oil traded worldwide passes through this strait between the Persian Gulf and the Gulf of Oman.
“Crude Oil Imports and National Security” estimates -0.04 for the price elasticity of demand for crude oil. That is, if quantity supplied to the market is cut by 10%, the price of oil will increase by 250%. With oil currently at $70 per barrel, a disruption in shipping in the Strait of Hormuz would lead to a $175 a barrel price increase, for a total of $245 per barrel.”
We wait with some trepidation to see if this tension escalates or even morphs into supply strangulation… or war.
The point is…
Even a sustained price around current levels of $69 will filter through to high prices at the pump… and potentially other household purchases.
A $150+ spike like the one Bernstein predicts – or $245 as cited in Forbes – will be even more inflationary.
Plus, other important commodities like aluminium and copper are also rising – both up 30% since 2016.
But it’s not just rising input prices that could set-off an acceleration in the inflation rate…
The true cost of the Global Trade War
According to French Bank, SocGen, Trump’s war on global trade could be heavily inflationary.
CNBC reports: “If the $200 billion of tariffs against China are implemented as planned, consumers could see price increases of 20 percent, according to an analysis by Societe Generale.”
And a report in the New York Times says the Fed could struggle to deal with the effects.
“That’s because a trade war simultaneously risks pulling growth rates down while pushing prices up. Anything the Fed seeks to do to cushion the blow on one side of that equation would tend to make things worse on the other side. So if, for example, the Fed held off on further interest rate increases to cushion a slump in investment spending, it would be doing so just as inflation was accelerating above the 2 percent the Fed aims for.”
That description (I bolded it in the above paragraph) might sound familiar…
We touched on it in Monkey Darts a while back.
The rise of the world’s most dreaded ‘flation
The thought of surging inflation is sickening enough.
It’s going to make your money worth even less.
But its ugly brother, another kind of ‘flation, is even worse…
It’s an economic scenario so rare that economists such as John Maynard Keynes once said it could never exist…
As though it was some mythical beast, like a minotaur or chimera.
We’re talking about stagflation.
Here, we’re looking at falling growth rates AND rising inflation.
Keynes’s thinking was that you don’t usually get rising prices in a struggling economy.
But he was proved wrong in the 1970s, when rising oil prices sparked inflation but crippled economic growth.
Stagflation across the global economy, pushing up unemployment and bankruptcies for years.
The reason it’s so feared is that it’s a nightmare for central bank policymakers to deal with. If you raise rates to curb inflation… you kill off growth even more.
And although it was eventually tamed and sent away for a few decades, signs are that it’s about return.
We talked about this as a threat in Monkey Darts in May, when oil prices were rampaging higher, quoting Business Insider:
“To the extent that higher oil prices stokes inflation, it could spur more aggressive action from the U.S. Federal Reserve. More rate hikes would drag down the economy, making the cost of borrowing more expensive. It would also strengthen the U.S. dollar, hurting export industries.
“Citi economists warned that if oil prices rise even further, there could be a “particularly hostile environment” for global investors in the coming months. The investment bank said that President Trump’s decision to withdraw from the Iran nuclear deal “constitutes a major geopolitical shift,” that could bring on “stagflation,” consisting of weak economic growth and higher inflation, spurred on by higher oil prices.”
And Danielle DiMartino Booth, former adviser to the president of the Dallas Fed, warned:
“Investors better wake up to the growing risk of stagflation. The coming weeks promise to deliver the verdict on how they should be positioned.
“By all metrics, inflation is heating up. But it’s not clear the same can said for underlying economic activity.”
Stagflation could be coming.
Not least because of the trade war Donald Trump is hell-bent on propagating with China.
After all, the global economy is basically trade. That’s what fuels it.
The less international trade there is, the less growth.
Here’s how the number crunchers at Royal London Asset Management (RLAM) explain it:
“The geopolitical backdrop also has a whiff of Stagflation about it. A trade war would hurt growth and add to inflation pressures as industrial production shifted between geographies and companies raised prices to cover the cost of tariffs. Similar forces are also at play in the UK where companies are preparing for worst case Brexit scenarios that would increase costs and necessitate a reorganisation of just-in-time supply chains.”
Lately we’ve seen stagflation cropping up more and more in our research.
Most notably, former Fed chairman Alan Greenspan is talking about it.
He told CNBC: “The presumption that we are going up from here — I think is wishful thinking. Most forecasts that I’ve seen, which I find credible, show that while we are currently close to the 3% annual rate, we are not going to stay there.”
Greenspan went on to say: “if nothing is changed, we’re about to go from stagnation to stagflation, with a significant rise in inflation and a wholly significant imbalance in the economy… the outlook is not exactly terrific.”
We’ve been warned.
Here’s the plan…
It doesn’t give me any great pleasure to bang on about all these alarm bells ringing in the background.
But it is my solemn mission to pass on what I see in the hope that you have time to prepare.
And at the same time, Monkey Darts aims to bring you ideas of ways you can both protect yourself… and even profit in the months and years ahead. (The coming financial showdown could have repercussions that last for years…)
On the first, I’m putting together a report that I believe can help you preserve your wealth. What I call ‘escape route’ investments.
These are assets uncorrelated to regular financial markets. When stocks crash, these safe-havens have been known to hold – or even increase – their value.
Right now, these include hard assets like gold and silver. They can thrive in an environment racked by inflation and stagflation. They should provide a solid store of value.
And as we’ve seen before, both these markets are heavily manipulated (supressed). Given the right environment, capital will pour into precious metals and the lid that’s holding prices down will ‘pop’.
I’ll look at the best ways to hold these wealth protectors in the new report I’m putting together.
The point is, if any (or all) of the threats we see on the horizon become reality, your money is at great risk.
So, wealth preservation should be a priority.
And on the second point, it’s not ALL doom and gloom!
You might think we’ve been painting a bleak picture these last few months about what we see coming. And you’d be right!
But that’s not to say there are not still GREAT investment stories out there… if you know where to look and follow the right guys.
That’s exactly why we brought Robert White into the Monkey Darts fold.
I hope you caught his excellent first issue of our new Techtonic Tuesdays – a fascinating story involving Easter Island heads, anti-fungal compounds and the extension of human life.
If not, I urge you to check it out now. It’s an interesting idea. And as you’ll see, there’s scope there for some companies to cash in on the trend Robert’s tracking there.
A story to follow in the months ahead, for sure.
The great news is, Robert will be writing his Techtonic Tuesdays every week.
He’s great at unearthing emerging investment themes that have the potential to create huge wealth in the years to come.
A bit of respite from all the threats we’ve been picking out over the past few months.
So there’s a plan to all this…
That’s to protect your wealth on the one hand. And on the other to seek out potential ways to grow it.
Keep an eye out for Robert’s next story on Tuesday.
And I’ll be back same time next week, looking at what’s going on in the markets… and figuring out how we should be positioning ourselves.