October 12th, 2010

Inflation Now, Deflation Then; What to Do?

A subscriber to Alerts asked the following: “There has been some talk that the world economy is on the brink and the United States will soon be devaluing currencies…..what would the repercussions on US stocks be?”

I answered as follows:

“The US government (without explicitly saying so) hoping for and helping the $US drop in value against other currencies (especially, the countries that lend to us). I’ve been anticipating for some time this “rush to the bottom” in international currencies (and the coincidental increase in value of all commodities from precious metals to foods). We want either: the $US to drop or the Chinese Yuan to increase in relative values because that’s the only way we can reasonably pay off the national debt (have more dollars in circulation, make them less valuable, pay off in cheaper dollars). Our cost, in the process, is that our salaries and compensation also devalues against workers in other countries.

The ramifications on stocks and economy is extensive but not necessarily balanced:

  1. Everything we import will increase in cost including: oil, TV sets and electronic goods, cars, steel, food stuffs, clothing, etc, etc. The list is endless. Retailers of these items may benefit in the short run from increased margins but would suffer in the long.
  2. Foreigners will flood the country for companies, houses and real estate, nearly everything else we have of value that they may want to buy.
  3. Companies that export their production should do extremely well because their products will be cheaper around the world.
  4. There could be labor unrest as workers look to get wage increases to offset the higher commodity costs igniting an inflationary spiral.
  5. No one will want to own our debt for a while because of fear that there would be additional devaluations.
  6. Interest rates would shoot up like a rocket from today’s ridiculously levels to ridiculously high levels down the road
  7. Rather than being a creditor to the US Government, now’s the time to become a borrower yourself – if you have a reliable, steady source of income to support it.”

Wasn’t it just two or three months ago that we were told to fear deflation. Know the talk has swung 180 degrees to inflation. There wasn’t much you could do to protect against the consequences of deflation but, with the introduction of commodity ETF’s, you now can lesson the adverse impact of inflation on you. Of course there’s always precious metals and energy. But if you’re anxious about the prospect of inflation impacting your everyday like, take a look at what the following commodities-related ETFs have already down over the past 2-3 months (click on symbol for chart)?

  • KOL (Coal)
  • JJN (Nickel)
  • JJC (Copper)
  • PALL (Paladium)
  • SLX (Steel)
  • SGG (Sugar)
  • DBA (Agriculture)
  • JJA (Agriculture)
  • RJA (Rogers Agricultural Commodity)
  • DBC (Commodity)
  • MOO (Agribusiness)

If you ask which were the best, I would tell you that I’d pick from among the most volatile.

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