Inflation Worsens, Crazy Census Stats, Greenspan Forecasts, and More!

by Addison Wiggin & Ian Mathias

  • Inflation rears its ugly head, again… consumer prices skyrocket to 17-year high
  • Chuck Butler with one currency set to go down, down, down for the rest of 2008
  • Census Bureau unveils startling forecast… minorities set to be majority by 2042 
  • Forget Wall Street… an interesting look at what isn’t happening in the stock market
  • Foreclosures still on the rise… Greenspan forecasts the likely end of the housing and credit crises
  • Plus, ready for a rant? Readers and The 5 exchange blows, below

  “Rising prices for food and energy have contributed to inflation,” we heard a commentator on NPR suggest this morning, thus parroting the ignorance of most of mainstream America.

Rising food and energy prices are the result of inflation. Not the other way around. Oy. We’ve said this so many times we get routinely ignored at dinner parties.

The annual rate of inflation in the U.S. climbed to 5.6% in July, a 17-year high. Today’s reading of the consumer price index (CPI) showed a 0.8% leap during the month. That’s double the consensus forecast. Notice a trend developing here?

Food prices climbed 6% since July 2007. Energy prices were up 29% year over year.

Even the Fed’s “core” rate — prices stripped of food and energy — rose 0.3% in July, higher than forecast. The annual core rate is now at 2.5%, well above the Fed’s target of 2%. 
 

  “CPI-W annual inflation jumped to 6.2%,” says government data sleuth John Williams. (The CPI-W is a lesser-reported brother of the headline number.) 

“It’s targeted at the wage earners category,” Williams explains, “where gasoline takes a bigger proportionate bite out of spending. The CPI-W is used for making the annual cost-of-living adjustments to Social Security payments. 

“The 2009 adjustment — based on the July-September 2008 period — remains a good bet to top 5%, more than double last year’s 2.3% adjustment for 2008. Such is not good news for federal budget deficit projections.”

  At the same time, the dollar’s red-hot rise has cooled off. The dollar index started to plateau around 76.4 yesterday, and this morning’s CPI report seems to have traders questioning their recent dollar buying. As we write, the index is creeping lower, to 76.2.

But that’s not enough to reverse the big moves we’ve seen in global currencies lately. The euro still goes for $1.48, and the yen remains a bit depressed, at 109. The pound has been the victim of this dollar rally. The British currency was the dog of the last quarter of 2007, and at $1.87 today, it seems to have returned to its losing ways.

“The pound is melting away,” reports Chuck Butler from the EverBank Trading Desk, “and there’s nothing the Bank of England can do about it. Yesterday, the BOE slashed its growth forecast for the U.K., and that was on a day that saw inflation rise…

“Uh-oh!

“This means stagflation for the U.K., and that’s not a good thing. Of course, I truly believe that’s what’s in our future here in the U.S., too. But that’s for a different discussion, as this is about the pound sterling! The pound sterling is going to be facing an uphill battle versus the dollar, euro and yen this year.”

  A softer dollar is helping push oil back up. Coupled with yesterday’s worse-than-anticipated supply report, we saw crude jump a few bucks, to $116. But today’s data are telling a different story:

  First-half oil demand sank to its lowest level in five years, reported the American Petroleum Institute yesterday. Demand for oil products fell 3.6% year over year during the first six months of 2008. Gasoline deliveries were the real bright spot of the report… deliveries fell more than 2% during the same period, the first significant decline in 17 years.

“We are in the midst of a short- to medium-term correction in the trends for energy and resources,” says our energy analyst Byron King. “Keep this in mind: This is a correction, not a fundamental change in the long-term correlation of things. The long-term trends are still upward, in terms of value and pricing. But for now, the money is leaving energy and resources for pastures that look greener.

“Energy and resource share prices are down, so it’s time to look at your shopping list. You can pick up shares in 2008 and pay 2005 prices. You can build a portfolio for the next five years with some prudent stock picking in the next couple of months.”

Byron, by the way, rattled off his list of beaten-down opportunities in the oil service and mining sectors in the latest issue of Outstanding Investments. “When oil and gold turn around — which they will — all of these companies should do very well.” If you’re not already a subscriber, we recommend you become one, here.  

  The U.S. Census Bureau is also feeling the heat of the spotlight this week. It told us about the sudden and notable decline in retail sales yesterday. Today, the Census Bureau announced some interesting demographic news.

For starters, today’s “minorities” will compose the majority of the U.S. by 2042. In other words, the heyday of the white Western European majority is coming to an end. Check out this chart, courtesy of The New York Times:

The bureau cited higher birthrates among immigrants as the primary reason for the demographic shift.

Also notable is the rising tide of foreign immigration, shifting from 1.3 million this year to 2 million annually by midcentury. It’s also important to note the change in age demographics… the predominately white baby boomers are entering seniority, while the U.S. “minority” population is exceptionally youthful.

Jim Rogers’ “most important advice” to our Investment Symposium attendees this year was to teach our children Mandarin. Heh… might want to start with Spanish.

  The Census Bureau also drastically revised their population growth projections. Nearly 10 years ago, it guessed U.S. population would top 400 million sometime after 2050. Today, they’re guessing that population will exceed 400 million by 2039 and 439 million by 2050.

  On Wall Street today, Wal-Mart’s yet again grabbing headlines. The world’s biggest retailer surprised analysts with a better-than-expected earnings report (not to be confused with its monthly same-store sales data.) The sting of inflation seems to have consumers shopping for the lowest possible prices; thus, Wal-Mart’s earnings were up an impressive 17% for the second quarter.

Up 22% this year, Wal-Mart is the best-performing stock in the Dow.

  The market suffered through another down day yesterday. The bad retail sales number and rising oil weighed especially heavy on blue chips, as the Dow fell 1%. The S&P slipped 0.3%, and the Nasdaq finished unchanged.
 

  We’re more impressed by what isn’t happening in the stock market this week. Money market accounts in the U.S. reached a record $3.5 trillion this week. A staggering $437 billion has raced to the safety of the sidelines already this year.

We’re inclined to think much of that cash will return to inflate the next bubble once there’s a little less blood in the water. Where will it be? Green tech? Biotech? Health care? Commodities? Emerging markets? All of the above?

rspertzel

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