Windchime Capital Inflation

Posts Tagged With 'Inflation'

What do you think about US Inflation rate in a year?

Posted by admin Jul 13, 2009 No Comments »

Inflation increase for May 2009 on a seasonally adjusted basis was 0.1% and on the annual basis it has fallen by -1.3% over the last 12 months. Core inflation, which excludes food and energy, increased by 0.1% in May whereas energy index increased by 0.2% and food index decreased by -0.2%.

I believe that going forward core inflation numbers would see small increase as housing costs stabilize or increase a little further. Also, energy prices may see continuing increase while coming off their recent lows. As you can see from the graph below, we have seen a roller coaster of a ride in the price of gasoline. From the highs of $3.5/gallon in the middle of 2008 to lows of $1.0/gallon at the end of 2008 to now around $2.0/gallon, gasoline prices are crucial to the inflation numbers. It is apparent that gasoline prices have crept up, and, I believe, that they would continue to increase staying between $2-$2.5/gallon the next year and increasing inflation marginally.

gas prices
Additional factor to consider is the money supply relative to the GDP. M2, which is readily available funds, has been increasing at a faster pace than the US GDP.

m2-gdp

This relative increase would continue to put inflationary pressures on the US economy as more money chases same amount of goods and services. Considering both of these factors, I believe, that by the end of 2009, we may see inflation of around %1.0-%1.5 on a 12 month basis.

Will ADM benefit from increasing food prices?

Posted by admin Jun 22, 2009 5 Comments »

Q: What do you think of ADM as a stock pick given food prices are going up?

A: Stocks, such as ADM, can be good inflation hedges if those companies are able to pass along their own costs to the consumers. On the other hand, supply/demand dynamics can influence the price of a company’s product without much change in the cost of production.

ADM is in the right place to capitalize on this supply/demand imbalance which has seen grain prices shoot up. As China is still stockpiling grains to shore up supply for its vast denizens as well as to diversify its portfolio, we can expect the grain prices to hold up. Of course, the risk is that it is only a short term strategy.

Apart from China factor, the US Dollar has devalued resulting in higher commodity prices. I dont foresee, Dollar regaining its value in the short term.

Combining these factor, I believe that ADM might be a good buy for the short term. You should be vigilant against risk factor, such as China stops its stockpiling, US Dollar strengthens, or acreage under cultivation increases. These signs will tell you that its time to sell.

Is Gold a Good Hedge Against Inflation?

Posted by admin Jun 18, 2009 No Comments »

Paul: Is gold a good hedge against inflation? Do you see inflation picking up as the government spends Ts?

Generally commodities are considered as good hedges against inflation. Gold is definitely one of those commodities.

I must caution you though that not all commodities are inflation hedges. Only those commodities that have the following two characteristics are inflation hedges.

1) Commodity should be “storable”. Gold, industrial metals, precious metals etc. can be stored. Agricultural products such as perishables (corn, wheat) can not be stored for too long and thus are not good inflation hedges.

2) Commodity’s demand should be relatively constant even in the face of rising/falling supply. The idea is that a steady demand will result in ability to pass on the rising costs to the consumer. Commodity with a seasonal demand is not a good hedge, e.g. heating oil. Heating oil’s demand goes up during winter time but the producers build up huge supply balancing out the two.

Government is definitely issuing a lot of Treasuries to finance its TARP/TALF and all other kinds spending programs designed to kick start the economy. What I suspect is that foreign investors, such as China and Japan, might get increasingly concerned about their Treasury investments and stop buying more Treasuries.

This shunning of Treasuries might devalue the dollar, raising the price of imported good and putting an overall upward price pressure on all goods and services in the US.

So, I do see some inflationary environment due to continued selling by the Treasury and accompanying deficit concerns.