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I got my first taste of inflation in 1973, shortly
after I got my driver’s license. Gasoline was 25
cents a gallon when I first started driving, and I
was busy enjoying the freedom and independence that
an automobile gives a teenage boy.
But that freedom did not last very long. The Arab
oil embargo and 1973 energy crisis made gasoline
very hard to get.
Do you remember the inconvenience of long lines that
stretched so far that gas stations often ran out of
gas before you finally made it to the pump? How
about even/odd days?
And while waiting in line was very inconvenient,
what really killed my joy riding was the
stratospheric increase in gas prices from 25 cents
to one dollar-plus a gallon. That was more than this
son of a poor dirt farmer could afford.
DURING 1970s HYPERINFLATION
I was too young to be in the market for a home, but
plenty of other Americans found themselves priced
out of the game. Reason: The Federal Reserve Bank,
under Paul Volker, raised interest rates to almost
20pc by the end of the decade to combat
inflation. Mortgage rates skyrocketed!
Finally, inflation got so bad that President Richard
Nixon froze wages and prices - initially for 90 days
- and eventually for almost 1,000 days. Even my
father, who rarely complained about anything,
bitterly talked about how the price controls were
vaporising his already-meagre vegetable profits.
I was just a kid, but old enough to know that
inflation was not a good thing. Now, fast
forward 30 years.
The United States (US) consumer price index (CPI)
jumped 0.4pc in January for a 12-month overall
inflation rate of 4.4pc, up from the already-too-hot
4.1pc inflation reported in December. What is more,
this is the third month in a row that the
annual inflation rate has been above four per cent.
Energy prices increased 19.6pc over the last 12
months. And over the last three months, they soared
a whopping 43.6pc. It would be a huge mistake to
blame all that inflationary pressure on energy,
though. After all, it represents just 10pc of the
CPI. Prices for the other 90pc must be on fire, too.
And as Federal Reserve Bank of St. Louis President
William Poole warned, further interest rate cuts may
accelerate inflation to an even more unacceptable
level.
“Taking out insurance against certain risks is not
free. At any given time, policymakers could pursue a
powerfully expansionary policy to all but eliminate
the possibility of a significant recession in the
year ahead, but doing so would come at the cost and
even likelihood of an unacceptable increase in the
rate of inflation.”
To be fair, the US is not the only place where
inflation is picking up.
China’s January producer price index (PPI) jumped
6.1pc to its highest level in three years. The leap
was mainly due to rising oil prices, which jumped
29pc, and raw material prices, which rose 8.9pc last
month from a year earlier.
According to the Chinese National Bureau of
Statistics, consumer prices rose 7.1pc in China last
month, the single largest increase in more than a
decade. But here is the important part about
inflation in China: Chinese exporters are passing on
their rising costs to overseas customers. The price
of Chinese goods leaving factories rose by an
eye-popping 6.1pc in January, the highest rate in
three years.
Note that this does not include January’s
inflationary data, which is certain to be even worse
because the most severe snowstorm in more than 50
years caused prices to skyrocket.
Once those numbers are factored in, I would not be
surprised to see the Chinese inflation rate top
double-digits. According to a Global Sources survey,
a Hong Kong trading company, 80pc of the 709 Chinese
exporters surveyed said they expected to increase
prices in the next six months.
Is it a coincidence that gold has jumped more than
30pc over the last 12 months to a 28-year high of
950 dollars? Or that the price for a barrel of oil
closed over 100 dollars last week for the first time
ever?
Even the metal that does not shine is headed to the
moon. I am talking about iron, of course - since
2001, the price of iron ore, the main raw material
used to make steel, has risen by an astonishing
500pc.
That stunning increase will translate into
dramatically higher costs of producing steel. We are
already seeing this trend play out in the global
marketplace. Japanese and South Korean steel mills
just agreed to a 65pc increase in iron ore prices
from Brazil.
What can you do to protect yourself as inflation
sweeps around the globe? Rather than burying your
head in the sand, I urge you to consider two steps
to protect and grow your investment in a
hyper-inflationary environment.
First make sure your portfolio includes a heavy dose
of hard asset and natural resource companies. I have
said it many, many times in the past, but my number
one rule for successful investing for the next
decade is get ‘long’ whatever the Chinese are
buying.
Nothing captures that strategy better than the hard
assets and natural resources that the Chinese so
desperately need to fuel their growth.
Next, The US dollar is doomed to keep falling as
long as Ben Bernanke and his Fed buddies keep
cutting interest rates. It might sound simplistic,
but do not invest in dollars when the dollar is
falling. In my book, the best way to diversify a
portfolio is with foreign stocks, especially Asian
shares.
Despite rising inflation, many of these firms are
doing a great job of passing on higher costs to
their customers. So not only will your portfolio
have the potential to appreciate from currency
gains, but it will also be hitched to what I
consider the fastest growing and most profitable
part of the world.
Whatever you do, do not make the mistake of doing
nothing! Inflation is a very real threat, and the
time to act is now.
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