Inflation Makes it Way Across the Globe

Let me emphasize that luckily, inflation does not cross American borders, so we have nothing to worry about. But as we look across the globe at other countries we need to make a mental checklist of all those unfortunate areas that do not have such excellent government reporting as we do. [Apr 10: NYT - Inflation Spanning Globe] Further keep in mind, unlike many countries - especially Europe - whom when inflation ramps - their workers get higher wages (sort of like what happened in the United States in the late 70s/early 80s) we are in a "new era" - this era is called the "corporate era" where workers are told to "shove it" when they ask for wages that rise with inflation. If there was any inflation that is. Since there is no inflation in America, its a moot point. But I'm just saying...

So as we categorize the world into pockets - we now see slow growth (ex exports to Chindia) for Japan. We see slow growth in most of the Western Eurozone as they fight inflation, and specific to countries which followed the US policy of "regulation stinks, let financial innovators run amuck" we have housing busts forming (Spain, UK, Ireland). The Middle East is awash with inflation [Feb 26: Rising Inflation Creates Unease in the Middle East] because most peg their currency to the dollar so when the Federal Reserve lowers rates, they must do the same, creating a flood of paper currency into already hot economies flush with petrodollars.

The weakening U.S. dollar is another source. Not only is it pushing up prices of American imports, it is transmitting inflation to the dozens of economies that link their currencies to the U.S. dollar, from Saudi Arabia to Hong Kong to Mongolia. Because of their currency pegs, these economies are forced to track Fed rate cuts even if they aren't facing recession.

Isn't that strange that in every country PEGGED to our dollar, when the Fed floods the system with liquidity - every country tied to us gets more inflation, but we do not? Almost ironic isn't it, but I trust the government reports - and if they say no inflation - they no inflation it is! [Mar 16: A Picture is Worth a Thousand Words] In China we are now seeing nearly 9% inflation. In India, white collar wage inflation is sometimes in the 20%+ range. Most of South America has central banks raising rates to try to fight inflation, as is Australia. So all in all, it appears America, Canada, and Antarctica are immune to the scourge - no inflation zones! But we'll focus today on some more unfortunate areas that do not have excellent ways to make inflation disappear such as Eastern Europe.

• Rising inflation is severely hurting Ukraine and other Eastern European nations, while the global credit crunch will slow growth in those countries dramatically in coming months, the European Bank for Reconstruction and Development said Sunday.
• "Inflation, now in double digits in many countries, (but not in the US since we are immune to it) is the region's most pressing current problem. If left unaddressed, inflation could risk price-wage spirals, (but not in the US since our workers have no bargaining power) exchange rate realignments, or could force a belated and sharp response by monetary policy," the bank said in a statement.
• Neighboring Russia, meanwhile, will continue its rapid oil- and gas-fueled economic expansion, with growth expected to reach 7 percent this year, the bank said.
• The EBRD is the largest financial investor in Ukraine, investing up to $1.6 billion annually into projects ranging from banking to infrastructure.

So the path is pretty simple - if you are a country with natural resources (Canada, Australia, Brazil, Russia, Middle East) you will have inflation but you will still have good growth. If natural resources is a smaller part of your economy - your going to get the inflation, but not so much of the benefits.

And as I will say every month, and will say for the future - this flattening globe is going to flatten a lot of Americans with it (*much of it* is simply unavoidable) - a high inflation environment will be much worse now that it was in the 70s/early 80s because the one thing the Federal Reserve does fear, wage inflation, is going to have a tough time happening here. That is great for Fed policy; that is great for corporations which can keep their #1 cost (labor) low, and increase prices, but it is not good for 1 cohort. Workers; especially those in the bottom 60-80%. But frankly, the major components of the US stock market do not need these people anyhow - there are plenty of emerging middle class throughout the world to offset the pooring of America. [Dec 8: Do the Bottom 80% of Americans Stand a Chance] However, this won't be such a good story for smaller and mid sized companies without international exposure since they are reliant on said group who is going to be punished the worst in this new era. We are heading to stagflation - I'm not the only one thinking it - some bright minds like Wilbur Ross and Maestro Greenspan [Mar 10: Wilbur Ross on Stagflation and Possible Bank Failures]

But this scenario would only work out if there were any inflation that faced the US worker/consumer. And since there is none.... nothing to worry about. Conclusion: Buy stocks.