Tuesday, April 20, 2010

Energy Costs Raid the Village

As I mentioned last week, the Fed has pledged to remain vigilant for any and all signs of inflation and/or excess-specie-driven stock bubbles. Preservation of the value of our currency is, after all, the Fed's primary task, as listed in its own mission statement.

Fortunately, they tell us, there is no such threat on the horizon, and point to the U.S. Bureau of Labor Statistics claim of 0.1% consumer inflation in March as proof of same. If that's not a bald-faced lie, then it is obfuscation of the most blatant sort, intended to placate us re: the danger of the continuation of the Fed's policy of nigh-zero interest rates.

Tell you what: The watchman is asleep at the gate, folks, and the enemy's vanguard is already rambling about our camps.

Inflation Is Already Here!

I will say this again and again, until someone out there heeds the alarm: Inflation is already here, on both the retail and wholesale levels. And it's only going to get worse, until eventually it collapses our recovery in the same fashion as it did in 2000 and 2007.

The Bureau of Labor Statistics' headline claim that the Consumer Price Index for All Urban Consumers increased a mere 0.1% in March depends heavily on the usual sleights of hand, odd-weightings, seasonal and even post-facto adjustments, and exclusion of critical items.

For example, they note that "food" only rose 0.2% in March. Dig a little deeper, and you find fresh fruits and vegetables – food stuffs that cannot be warehoused, and therefore reflect more current circumstances – spiking at almost double that rate.

Down 0.8% – Or Up 44%?

They are particularly proud of the fact that clothing stores sold 1.6% more T-shirts, blue jeans, frocks et al., but charged 0.4% less for same. In a moment, I'll show you why this has the makings of an absolute disaster.

But perhaps most strangely, Washington claims that energy costs actually went down 0.5%, with gas in particular falling 0.8% – a curious thought that particularly caught my eye, what with crude oil scratching the bottom of $90/bbl these days.

Once again, if you dig into the footnotes, you find that this is one of Washington's infamous "adjustments." Sans "seasonal" tinkering, the BLS concedes that fuel costs actually rose 4.5% in March – and 44% since the previous March!

Image: Rising Fuel Costs
View larger image here

The Common Threat

And therein lies the problem. Unless you are prone to wearing hand-knit underwear and dining only on homegrown rutabagas, the stuff we purchase must be shipped from farm and factory to sales floor. Indeed, much of the dross we find so essential to modern life is shipped halfway around the planet before we drop our $20 on the counter at Safeway or Walmart.

This creates a singular common cost for most all consumed goods: fuel, be it kerosene for jets, diesel for ships, trains and semis, or gasoline for local trucks. And as Washington's buried footnotes confess, fuel costs have gone up some 40% over the past year or so.

Now keep in mind, that this was during a period when the dollar was enjoying relative popularity due to the European PIIGS crisis. But now that Europe's failures are no longer providing convenient cover for Washington's abuse of the dollar, the greenback is sagging again.

Indeed, the past 23 trading days have seen the U.S. dollar give up nearly 3% against a basket of similarly prominent currencies. And there are strong technical indications that this trend is only beginning to gather steam.


How to Slip the Coming Blow

Americans have felt this powerful combination punch before: As the dollar falls, it will greatly accelerate the increase in oil prices. We should see $100/bbl shortly, and $4 gasoline is certainly not out of the question.

This will increase cost of goods to most every retailer, be they purveyors of Legos from Denmark or Eggos from Atlanta. In turn, sellers will face the inevitable and unenviable choice of either raising prices to consumers who just paid $4/gallon to drive to the store, or eating that cost increase, and destroying their bottom line.

This is not guesswork, fancy projections or ivory tower economics. Washington cannot revise, alter or in any way "adjust" these facts (although they can – and most probably
will – lie through their teeth about them, while their friends on Wall Street rake in cash).

History (and recent history at that!) tells us exactly how this story ends. You have two choices here: You can protest vigorously come the next election. And you can ride top stocks to buy – particularly energy stocks for 2011 – up to their inevitable blow off top with calls against same, and down the other side via put option contracts. (A ready example of this tactic would be the Chevron calls recently recommended in my weekly WOW column, which are up some 103% as I sit to write.)

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