Son of Stagflation — How Gold Can
Help You Defeat This 21st Century Monster
Kevin DeMeritt
President, Lear Financial
Times sure have gotten complicated. Used to be the reason the economy turned sour was because of too much deflation. Or too much inflation. Comparatively speaking, these two have always been predictable financial predators that, if not pushovers, were relatively beatable.
Then came the 70s and the rise of a scary, new beast: Stagflation. It joined the worst of inflation with the worst of stagnation to torment us between 1973 and 1980. For the most part after that, the creature wandered off, never to be (officially) seen again.
Until 2008. Now, apparently, there’s a “Son of Stagflation” that’s reaching maturity and could be around for a long time tormenting us with its particularly bewildering attacks.
Picture the U.S. economy strapped to a gurney in Dr. Frankenstein’s laboratory. That’s stagflation. It’s got inflated legs, atrophied arms, a scary-looking head that’s a little of both, and, oh yeah, a really mean disposition.
Luckily for us, gold bullets can still kill it.
The Inflation Part of Stagflation
Here’s Wikipedia’s definition: “Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.”
What makes stagflation so strange is that, as mentioned, we’re used to seeing one or the other, inflation or stagnation, an overheated economy or something ice cold. Clearly what we’re witnessing today includes unsettling parts of both. Wrote analyst Robert J. Samuelson, stagflation “signified the simultaneous occurrence of high inflation, high unemployment and slow economic growth; but its defining feature was the persistence of this poisonous combination over long periods of time.”
Some analysts dispute our stagflation status. Newsweek wrote that, “the situation we're in is nowhere near stagflation.” That’s because, “the Consumer Price Index is rising at a 3 percent annual rate, compared with 13 percent in 1979.” Of course… the CPI figures were pretty earnest back in 1979, actually intent on reporting the real rate of inflation.
Today’s statistics can make no such claim, having been bureaucratically fooled with until they’re now just a laughable caricature of reality. A 3% annual rate? Hey, even a 5.6% annual rate (the most recent official figures)? Who’s going to believe that? The receipts you get at the supermarket and gas station give you all the statistics you need on the subject.
Is There Anything Pizza Can’t Do?
Even pizza can shed some light. According to a story by Al Olson of MSNBC, “Pizza makers have seen their cheese costs soar this year from $1.30 a pound to $1.76 a pound. Even worse, the flour used to make the dough has gone from $3 to $7 a bushel to $25 a bushel in less than a year.”
So let’s see…$1.30 to $1.76 a pound for that pizza cheese represents a startling 35% jump in cost. And — let’s be generous here — going from $7 to $25 for pizza flour represents a mind-blowing 257% price hike. Average the two and you get a 146% increase.
Where does that leave us? On the one hand, government CPI stats are telling us that we’re experiencing a barely-break-a-sweat 5.6% annual rate of inflation. On the other hand, the hand that’s holding a slice of pizza, we’re told that we’re suffering an inflation that’s spiking 146% and even higher for some industries.
Who’re you going to believe? Washington or pizza?
The Stagnating Part of Stagflation: “Retail follows rooftops.”
So while inflation is boiling, nobody is buying anything. Here’s one indicator from the San Francisco Chronicle: “Sales at stores open at least a year, known as same-store sales, fell by a record 2.4 percent in April, the worst since the International Council of Shopping Centers started tallying the monthly numbers in 1970.”
There’s more…
- New home sales sank 36% in the first half of 2008.
- Edmunds reports new vehicle sales down 14.4% from August of a year ago; Ford reported a breathtaking 28% drop.
- U.S. commercial real estate sales have plunged by about 70 percent.
- Home Depot sales fell 5.4%.
- Old Navy was down 20%, Kohl’s down 10%, J.C. Penny down 6.5%, Target 6.1% and Walmart down 4.6%; 813 women's fashion stores, posted a full year profit 28% lower than the last time it was calculated.
- Book sales tumbled 7.1% in June.
- Album sales, according to Billboard, are down 11%.
- Magazine sales fell 6.3%.
- Cell phone sales retreated 13% in the second quarter.
The old saying in retail development, “retail follows rooftops” is never more evident than today. And if real estate is miserable, what’s happening under those rooftops isn’t so great, either. The Commerce Department reported that personal incomes fell by 0.7 percent in July, the biggest drop in nearly three years and a far larger decline than what was expected.
So there, in a nutshell, is what’s happening. Nobody’s buying and prices are still soaring. Son of Stagflation is laughing its evil, little laugh.
Got Gold Bullets?
We all know about silver bullets and werewolves, right? Well, the good news is that those gold and silver bullets will work just as well on Son of Stagflation.
Gold is, of course, renowned as an antidote for inflation. There’s the old maxim that, in 1900, an ounce of gold could buy a nice men's suit in London (gold was worth about $20 an ounce back then) and, today, you can still buy a nice men’s suit in London for that same ounce of gold.
Here’s the point, though: What kind of suit can that $20 in greenbacks buy you today? A bathing suit? Maybe at WalMart.
Has gold reacted to this latest insane inflation? Not yet. But think of a rubber band stretched to its limit.
Then there’s the uncertainty that the “stagnating” part of stagflation gives us all. Fortunately, uncertainty is the perfect stage for gold. Why? Because we trust gold, we rely on it, we understand that it can’t be printed by the Fed, wasted by politicians or diluted by bankers. We know that it’s never been among the countless currencies that have ended up in the trash heap of history.
Stuart Schweitzer, global market strategist at J.P. Morgan, noted that gold is “an asset that people want to own as protection for risks they can’t really analyze and get their arms around. That risk has gone up.”
That says it all. Son of Stagflation beware.
Kevin DeMeritt
www.LearCapital.com
August 29, 2008
“Again, that was an indicator that the economy is slowing. In that environment it will be difficult to raise interest rates even though inflation is rising substantially. The Fed has two choices: (1) Raise interest rates and throw the economy into depression; or (2) Keep interest rates low and continue to inflate to try to ease the burden on the financial system. I think there is little doubt they will chose inflation.”
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