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Inflation, Energy, Gold & Bourbon

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June 22, 2007 – Comments (2)

My inflation concerns stem from rising energy prices and the way the government figures understate inflation.  As you probably know, in the early ‘70’s the government started placing emphasis on ‘core’ inflation, which does not include food and energy prices.  They did that to smooth out the volatility of the numbers.  Both numbers are reported, but the core number has more influence in monetary policy decisions.  Maybe some kind of moving average would be a better approach, but what do I know, I’m an engineer, not an economist.  Since most of us are not ‘core’ people (we actually buy food and energy), you’re well aware the food and energy costs are climbing.  At some point, those rising costs are likely to start being reflected in the core inflation numbers.

I don’t see energy costs going down any time soon.  In a June 22 Wall St. Journal online piece, Bhushan Bahree reported world oil demand is rising twice as fast this year as last year and that oil companies are having trouble keeping up with demand.

Some may argue that alternative fuels will relieve some of the pricing pressure. However, all the alternatives currently available or on the horizon aren’t economically viable at lower prices.  Fellow foolish blogger Camistocks did a nice job summarizing a Swiss government study that finds biofuels may not be all they’re cracked up to be either economically or environmentally.  The policy of pushing/subsidizing corn based ethanol as a motor fuel may turn out to be one of the stupidest moves in history.  It effectively links food prices to fuel prices by making them interchangeable.  Anyone else see a possible problem with using one of our primary food crops to make fuel?  While in California on business, I even heard a report that tequila prices would be going up because Mexican farmers were planting corn instead of the blue agava used to make tequila.

And, our congress is chomping at the bit to impose some kind of taxes or fees on oil companies.  Good plan – lets increase the cost of doing business for oil companies, that’ll bring supplies up and prices down.  Yes, I know they can afford it; they are also likely to pass those taxes and fees on to their customers (us).  There must be an unwritten requirement for congress critters to have failed Econ 101.

Combined with the inflationary pressures of energy and food, our combined trade and budget deficits don’t bode well for a strong dollar going forward.  Congress is again working hard to increase budget deficits by trying to increase spending for new programs, paid for by higher taxes.  In case you missed it, the tax cuts resulted in INCREASES in revenue, so it’s reasonable to assume tax hikes will reverse those increases.  I’m waiting for some journalist to ask one of the politicians who favor letting the tax cuts expire how they will pay for their tax hikes.  I’m not holding my breath.

Given the above and a pullback in gold prices early last week, I added outperforms picks on Street Tracks Gold Trust (GLD) and a basket of miners in CAPS and added a small position in a mining company (AUY) to my IRA portfolio.  I’d appreciate thoughtful comments on inflation/gold/energy prospects, particularly from those who disagree.

On to bourbon.  You’re probably wondering what bourbon has to do with all this.  Nothing.  On Father’s Day, my Dad, Father-in-Law and I did a blind taste test of two premium bourbons.  Knob Creek vs. Maker’s Mark.  It was a close call as both were very good.  Knob Creek had more flavor and was sharper, but the Maker’s Mark was just soooo smoooooooth.

Thanks for reading and have a great week. 

2 Comments – Post Your Own

#1) On June 23, 2007 at 10:21 AM, Imperial1964 (97.77) wrote:

I think you're right on.  I would like to add that I believe the Fed secretly has a weak dollar policy, judging by the increase in the money supply (see www.shadowstats.com) and how much the dollar has fallen in the past 5 years against the Euro.

Most other currencies are blatently being held low (e.g. China, Japan, etc.), or we would see the dollar even lower.  I believe if the major exporters stop deflating their currencies, we will see the dollar fall and the core inflation rise significantly.

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#2) On June 23, 2007 at 4:32 PM, rd80 (98.26) wrote:

Thanks for your comments.  A couple more links that may be of interest:

Zoe Van Schyndel gives a nice rundown of the gold ETFs in 'The Glitter of Gold ETFs.'

And the Bureau of Labor Statistics May 2007 CPI report clearly shows the difference between overall and core inflation.  CPI for urban consumers is reported at 7.0% yoy, but only 1.6% w/o food and energy. And we haven't even touched on the debate over the correct methodology for calculating the various inflation indices (partly because I'm not up to speed on it). 

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