Use access key #2 to skip to page content.

People keep talking about deflation, but inflation is everywhere you look

Recs

24

September 21, 2010 – Comments (19) | RELATED TICKERS: CAG , GIS , KRFT

I have been in the camp of people who don't believe that we are in any immediate danger of the rapid inflation or even hyperinflation that so many people have been talking about for a while now.

Having said that, everywhere I turn I see signs of inflation...particularly in the world of commodities. Take a look at these headlines: 

Global shortage sees cotton reach 15-year high 

...Coffee Prices Soar

Corn prices hit highest levels since 2008

It's not just cotton, corn, and coffee prices that are soaring...prices of palm oil, cocoa, wheat, sugar, beef, and a whole host of other agricultural commodities are sitting at levels that are significantly higher than they were a year ago.  While the prices of most of these items are nowhere near as high as they were during the great commodities explosion of 2008 the year-over-year increase that they are experiencing will likely begin to act as a major headwind for the earnings of any company that uses them as an input.  

Just look at what happened to the food producer ConAgra (CAG) when it published its quarterly results this morning:

ConAgra Profit Falls 12% Amid Discounting, Rising Costs

Many packaged-food makers are striving to attract frugal consumers with discounting, but sales of pantry staples like soup and cereal have been tepid. For years, consumer packaged goods companies offset pressures from commodity costs by raising their own prices, but with consumer spending weak, increasing brand prices has become harder despite recent spikes in raw materials like grains and proteins.

Food companies' input costs are rising and the new, more-frugal consumer is fighting price increases.  That doesn't bode well for the bottom lines of many companies, perhaps including Kellogg (K), General Mills (GIS), Kraft Foods (KFT), and Sanderson Farms (SAFM). Some of these companies, particularly General Mills and Kraft are fairly well run and would make solid long-term investments, but I personally would lean towards staying away from them now and adding shares on any weakness.

Back to the inflation question.  Even the gold bugs' beloved yellow metal continues to set new records:

With the prices of so many things skyrocketing, black gold curiously continues to flounder:

One would think that oil would move in tandem with the prices of other commodities.  Seeing the fundamentals for oil, in terms of supply vs. demand and a slow economic recovery, and always looking for an opportunity to short an ultra-long anything I gave the old thumbs down to DIG in CAPS a little while ago.  I just find it curious that everything in the world seems to be getting more expensive other than oil and natural gas.  Perhaps their weakness is reflective of peoples' impression that the economy is still extremely slow.

Deej

19 Comments – Post Your Own

#1) On September 21, 2010 at 3:12 PM, Valyooo (99.36) wrote:

Ding ding ding!

Also, the reason oil is probably lagging is because of the green movement in part, and just a divergence for the most part.  Coal is rising in price isnt it? 

Usually I jump onto rallies, but I think oil is a buy opportunity. But I dont know enough about that to throw money in.

Report this comment
#2) On September 21, 2010 at 3:16 PM, outoffocus (22.84) wrote:

Sounds to me that we're smack dab in the middle of stagflation.  Its just that since the inflated items are removed from CPI, all that is reported is deflation.  I'd argue we've been in stagflation since the NBER declared the recession is "ended" and we're going to be here for quite some time.

Report this comment
#3) On September 21, 2010 at 3:24 PM, starbucks4ever (97.66) wrote:

Inflation is coming all right. But we still have at least 3-4 months of calm before the storm. No need to worry before the New Year.

Report this comment
#4) On September 21, 2010 at 3:29 PM, Valyooo (99.36) wrote:

I'm with zloj here, although most of my holdings are still PM's.  Gonna wait for a small pullback in the market, go all in on some equityies and calls, sell around january, and then hop back into gold

Report this comment
#5) On September 21, 2010 at 3:58 PM, portefeuille (99.61) wrote:

The price of crude oil to some extent is coupled to that of natural gas (to calculate the "equivalent" (in terms of "energy content") quite a few people apparently usually use 1 boe = 5.8 mcf (=10^3 ft^3) ≈ 6 * 1.027 * 10^6 btu.

wikipedia states this.

------------

The barrel of oil equivalent (BOE) is a unit of energy based on the approximate energy released by burning one barrel (42 US gallons or 158.9873 litres) of crude oil. The US Internal Revenue Service defines it as equal to 5.8 × 10^6 BTU.[1] The value is necessarily approximate as various grades of oil have slightly different heating values.

5.8 × 10^6 BTU59 °F equals 6.1178632 × 10^9 J, about 6.1 GJ (HHV), or 1.7 MWh.

------------

(from here)

http://www.cmegroup.com/trading/energy/natural-gas/natural-gas.html

http://www.eia.doe.gov/oog/info/ngw/ngupdate.asp

 



enlarge

 

So the price of one boe of natural gas is currently (depending on which futures contract you look at) at around $4 * 5.8 ≈ $23 ...

Report this comment
#6) On September 21, 2010 at 4:12 PM, portefeuille (99.61) wrote:

The price of crude oil to some extent is coupled to that of natural gas (to calculate the "equivalent" (in terms of "energy content") quite a few people apparently usually use 1 boe = 5.8 mcf (=10^3 ft^3) ≈ 6 * 1.027 * 10^6 btu.

The price of crude oil to some extent is coupled to that of natural gas (to calculate the "equivalent" (in terms of "energy content") quite a few people apparently usually use 1 boe ≈ 5.8 * 10^6 btu.).

For the volume part see this.

How to Measure Natural Gas

Report this comment
#7) On September 21, 2010 at 4:23 PM, portefeuille (99.61) wrote:

http://en.wikipedia.org/wiki/Natural_gas#Energy_content.2C_statistics_and_pricing

okay, done, hehe ...

Report this comment
#8) On September 21, 2010 at 4:31 PM, TDRH (99.65) wrote:

Not intelligent enough to comment on the formulas above, but oil prices seem to move the same direction as the perceived health/direction  of the US economy.  With the Fed intervention in the banking industry pumping huge amounts of dollars in the US economy I anticipated relative loss in the USD  buying power and an inflationary  increase in dollar based commodities that never occured with the price of oil.   Gold flourished, but oil has remained flat.

Report this comment
#9) On September 21, 2010 at 4:42 PM, Dow3000 (< 20) wrote:

Just want to add that supply and demand also affect prices...having nothing to do with the overall inflationary or deflationary environment.

 Also, the technical definition of deflation is the decrease in money + credit...if this is used we are deflating and it will accelerate as the banking system is completely destroyed by bad debt.

Report this comment
#10) On September 21, 2010 at 5:08 PM, BillyTG (29.25) wrote:

One of my favorite articles on oil and gold, still relevant a year later.

I've got my money in oil AND precious metals right now, as they are likely hedges of one another. It is unlikely that both will perform poorly over the long run. 

Report this comment
#11) On September 21, 2010 at 5:33 PM, Entrepreneur58 (36.05) wrote:

More debt = rising standard of living.

Rising standard of living = Incomes rise > cost of basic needs.

Since 1982, debt growth > historic average = higher standard of living.

Today, credit crisis causes decline of debt growth = falling standard of living = Cost of basic needs rises > incomes.

Remember that rising cost of basic needs causes less income left over for other things and a drop in wages and employment.  This is why printing money won't help the economy.

Report this comment
#12) On September 21, 2010 at 11:45 PM, JakilaTheHun (99.93) wrote:

It's not just perception ... oil is the fuel that drives the American economy.  Oil demand has actually been going down over the past half-decade; which might suggest that Americans were starting to change their habits to some extent once prices started reaching to the $4/gallon range.

Then, there's also the fact that we'll never use as much oil as we would otherwise in a recession/economic downturn, because there's not nearly as much economic activity. 

 

I'm relunctant to jump aboard on many commodities right now.  Maybe a few metals like copper, palladium, platinum, etc.; but otherwise, I would rather buy the companies that can benefit from better technologies and falling prices. 

 

I will say one thing --- perception on commodities has radically changed in the past two decades.  Commodities are long-term losers when it comes to investing.  People are increasingly viewing them as can't-lose bets.  Long-term, it makes much more sense to invest in commodity producers than the commodities themselves (except with gold, maybe). 

Report this comment
#13) On September 22, 2010 at 12:01 AM, BillyTG (29.25) wrote:

JakilaTheHun, interesting perspective, and your opinion has proven true as much I can tell, with low-cost retailers doing quite well recently, as people are turning away from the more expensive competitors.

The distinction you make about commodities versus commodity producers is insightful. Thank you. I think it was Deej that recently posted an article about Michael Burry being bullish on "productive agricultural land with water on site."

What kinds of commodity producers are you eyeballing? Any companies or industries look attractive to you right now?

Report this comment
#14) On September 22, 2010 at 12:37 AM, portefeuille (99.61) wrote:

1 boe = 5.8 mcf (=10^3 ft^3) ≈ 6 * 1.027 * 10^6 btu.

1 BOE = 5.8  10^6 BTU (5.8 MMBtu) <-> around (see 1,2,3) 5.8/1.027 Mcf of natural gas.

I just noticed that the "spread" is shown in this chart from this articles I linked to comment #5 above.



enlarge

 

I guess this is a nice "arbitrage" opportunity ...

Report this comment
#15) On September 22, 2010 at 12:39 AM, portefeuille (99.61) wrote:

this articles

this article

sorry, early morning over here ...

Report this comment
#16) On September 22, 2010 at 4:49 PM, camistocks (< 20) wrote:

And if the CPI would still be calculated like back in the 1970s we would be at around 8% inflation...

 

http://www.shadowstats.com/alternate_data/inflation-charts 

Report this comment
#17) On September 27, 2010 at 2:35 PM, metoo105 (28.61) wrote:












Report this comment
#18) On September 27, 2010 at 2:36 PM, metoo105 (28.61) wrote:












Report this comment
#19) On September 27, 2010 at 2:37 PM, metoo105 (28.61) wrote:

I am inclined to agree with you. But watch these videos for a contrary view from a guy with a record you have to respect.

Report this comment

Featured Broker Partners


Advertisement