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Thursday, March 10, 2011

 

Inflation is here, there and Everywhere

Sorry for the long lapse between posts, but we were traveling last week to Albany and Washington D.C., frequent haunts for those of us who get paid to educate legislators and regulators about issues important to our businesses. Of course, world events continue apace, lately moving so fast that the picture seems to be changing before I can even set pen to paper (figuratively, that is). A review is in order.

When last we posted, the GOP Governors, and even an enlightened Democrat or two, were busily trying to rein in, and even reverse, public employees, their unions and their unaffordable benefit packages, particularly pensions. Most important, as we strained to point out, is the political imperative to break down the mandatory requirement of public employees to join those unions and provide a significant amount of cash in the form of union dues. Those dues eventually become cash campaign contributions, perpetuating Democrats and union leaders in their positions where through "collective bargaining," the taxpayers are victimized by the farce of a negotiation between two parties who want the same thing - more and more government workers and cash to keep the cycle going.

The tools chosen by Governors in Wisconsin, Indiana and Ohio have been direct restrictions on collective bargaining, with the ultimate goal of passing "right to work" laws allowing public employees to work without joining the union. The former enables local governments to control their expenses; the latter curtails the campaign cash cycle. Both are ultimately necessary, and that's why in Wisconsin this week, Republicans found their way around their State Senate's quorum technicality by removing the expenditure provisions from the proposal and simply holding a vote on the collective bargaining provisions. Ironically, this was the opposite approach, though similar in method, to that used by US Senate Dems to pass the health reform bill last year, by making it part of budget reconciliation. In both cases, the normal process was legally, and perhaps spiritually circumvented. Predictably, the progressive left has been howling like stuck pigs over the Wisconsin tactic, which was somehow OK when they used reconciliation to get what they wanted.

The left believes they, and the President will have a campaign issue over this next year, but if things go as they have in Indiana, where Governor Daniels fixed his budget mess last year by reining in public unions, the Dems will have a problem on their hands. What the public will remember is that Wisconsin Dems left town (actually, left the state) and were not part of the solution. The fact is that though public unions have grown as private unions have shrunk, only about 13% of Wisconsin workers will be impacted and many of them have had it with union dues too.

So we're pretty happy with this denouement.
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There is a less happy outcome looming in Libya where, due in part to the inability of this Administration to take effective action, or even make a decision, the long time dictator "Khadaffy" is gradually putting down the rebellion that threatened to send him on a permanent vacation in beautiful downtown Caracas. This will predictably lead to a purge perhaps as bloody as the one that Bush 41 allowed to happen in Iraq in 1991. For those who only know history as reported by progressives, the body count in that one was in six figures, compliments of the late unlamented Sadaam.

There are lots of blameworthy people in the Administration but the one person I might absolve, pending more facts of course, is one Hillary Clinton, who from the beginning has provided the only adult supervision in this administration. I am sure she has learned, as did Colin Powell, that the career bureaucrats in the State Department are all but unmanageable. If she has in her pronouncements often sounded like she is off her boss's message, and the last to get the memo on the policy prescription of the day, I would ascribe that to her propensity to say the right and honorable thing, a trait no one else in authority seems to possess.

All this may seem strange coming from this blogger, especially given my low opinion of her during her husband's administration and again in the 2008 campaign, but we try to call them straight and true here and give credit where it's due. I think a lot of us on the right thought (because of Hillarycare) that she was a phony New Dem, but we were wrong. Hillary has done a good job as Secretary of State, and would have done a significantly better job as President than the current incumbent.

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Elsewhere in the Middle East, everything seems to be gradually coming apart, with the result that oil prices are skyrocketing, and gasoline pierces $4 a gallon in the US, perhaps headed for the $10 routinely paid in much of Europe. The Obama administration relented and issued the first permit for an oil well in the Gulf since the Big Leak, but just one. So we have no oil wells coming on stream, no nuclear plants being built, and we wonder why we are dependent on foreign sources. The latest shot fired by the environmental lobby is to cast doubt on the methods by which oil and gas are extracted from shale, though doubt is all they have - there is no evidence yet of any contamination the process actually causes.

As if this wasn't enough to stifle the nascent recovery, we also face the prospect of inflation, evidenced by increases in the prices of virtually everything except homes, which continue to go down in price (the one thing the economy needs to go up!). No surprise there, since the Fed has had inflation cooking in the oven for over two years and redwavemusings has been sounding the alarm for at least that long. Now, there are inflation alarms going off in China, South America, virtually everywhere, since currency is being debased virtually everywhere. As sovereign debt goes up, central banks crank out inflation to reduce the value of those debts - governments' solution to debt crises since Roman times or even earlier. It's just amazing that Bernanke can go before Congress and simply obfuscate (a fancy word for lying) the truth about the inflation reality, but that's what he does. Hopefully, he will be heading out the door right behind Obama. I don't think we will be able to ride out his full term with him in charge at the Fed.

For investors, this presents a quandary since in the short run, stocks don't like inflation and bonds always hate it. So do preferred stocks. But in the long run, common stock prices reflect inflation - hence the name equities - so they are a decent inflation hedge. Precious metals are the best. Currency is the worst. Being in some cash is not so terrible now while you wait for better stock market entry points and for interest rates to go up (when you can commit cash for a longer period). But as a long term investment, your cash will lose its value in the coming inflation.

I know this is 180 degrees from the oft quoted (here) Bob Prechter, who is still predicting a deflationary bust. If only Prechter were as good at economic forecasting as he is at writing and at selling newsletters!

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On March 1, we sold 100 shares of Gulf Island Fabrication (GIFI) from the IRA at 31. We bought this as one of our Tulane portfolio stocks on 3/6/2009 for 9.04. If you don't believe that, you can find the post in the archives where we reported the purchase. Anyway, two year triples are good inflation hedges. On March 3, we bought 100 shares of Graham Corp (GHM) for the IRA at 20.96, a "zero buy." On March 7, we sold 100 shares of Xilinx (XLNX) from the IRA for 35.15. We paid 19.80 on 8/11/2006. Yesterday, we bought 100 shares of MetLife preferred (MET.PR.B) for the IRA for 24.89. Why do we continue to buy preferred's in an inflationary environment? There are several components to managing a portfolio beyond stock picking and timing (and I don't try to time). Asset allocation is awfully important. After a certain age, there has to be an allocation to fixed income. The only thing Keynes may have been right about was his conviction that in the long run, we're all dead. For me, and for many individuals, preferred's are a better alternative than individual bond purchases. Of course, for the vast majority of investors, insured CD's and bond funds are better than trying to pick any individual issue.

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