Sy Harding: Sharply rising inflation has been a big problem globally for more than a year, causing global central banks to aggressively raise interest rates and tighten monetary policies.And it has begun to wash ashore in the U.S. Inflation at the consumer level, as measured by the Consumer Price Index (CPI), is up 3.6% over the last 12 months, compared to 1.1% a year ago.
And more inflation is coming.
As an article in the Wall Street Journal this morning puts it,
“For more than a decade starting in the early 1990s, U.S. inflation declined as low-wage workers in China and other developing nations joined the global economy and produced a tide of cheap goods that washed onto U.S. shores. The trend made American consumers feel better off and, by restraining the upward crawl of consumer prices, helped enable the Federal Reserve to fuel the U.S. economy with low interest rates.”
“That epoch appears to be over. Prices of imported goods are climbing, becoming a source of inflationary pressure. A wide variety of common products made abroad, from shoes to auto parts to jewelry, are landing on U.S. docks with higher price tags. . . . . a historic shift from their downward drift for two decades.”
“China’s disinflationary forces are beginning to wane and more inflationary pressure is building,” said Alan Greenspan, the former Fed chairman, who predicted such a shift in his 2007 autobiography. He said his successor, Ben Bernanke, is operating in a more challenging environment than Mr. Greenspan confronted in 19 years running the Fed.”
“The Chinese supply 78% of the footwear imported into the U.S.; 71% of the ties; 55% of the gloves; roughly 50% of dresses and baby clothing; and 90% of house slippers, according to Commerce Department data. In contrast to the decades when a flow of Chinese workers from the countryside pushed factory labor costs down, China’s workers now are demanding higher wages and better jobs.”
The article quotes a New Jersey footwear importer as saying, “There’s been a shift in who is holding the cards. It used to be that the retailers would demand lower prices. Vendors like us would demand lower prices from the foreign factories. And the factories would generally acquiesce. The whole thing has now flipped. The bottom line is the American consumer is going to end up paying more.”
That’s not good news. With the U.S. economy already slowing, it brings up the specter of that 1970’s ugly period of stagflation.
Foreign Investors Like Japan Market More than Japanese Do.
A report from Japanese stock exchanges shows that ownership of Japanese stocks by Japanese institutional investors has fallen to under 30% for the first time in history, while investors from outside Japan have been piling into Japanese stocks in expectation that the earthquake/tsunami disaster will be a financial positive through the reconstruction efforts that will follow.
Foreign investors now own 26.7% of Japanese stocks, getting close to the 27.4% level of 2007. Investors outside of Japan were net buyers for a record 29 straight weeks from November to May.
That’s interesting. We had a buy signal on Japan on November 4, and took a 20% position in the iShares Japan ETF (NYSE:EWJ), but then a subsequent sell signal on Feb. 21, taking a 12.1% profit from the holding.
Although watching closely, we don’t have another buy signal yet.
Global Markets Likely to Bottom First.
While we have been telling you to expect a rally in the U.S. off the short-term oversold condition, we expect the eventual correction bottom, and our next buy signal, may well take place in global markets.
They have been leading the way down, and may well lead the way back up when the time comes.
To read my weekend newspaper column ‘Why It’s Too Soon To Buy The Dip!’ click here!
Sy Harding is editor of the Street Smart Report, and the free market blog, www.streetsmartpost.com. The Street Smart Report Online includes research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s. It provides two model portfolios as guides. One is based on our Seasonal Timing Strategy, one on our Market-Timing Strategy.