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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (64771)	3/24/2007 1:09:54 PM
From: Haim R. Branisteanu	Read Replies (1) \| Respond to of 116555

Subject - Inflation or Deflation – do not keep your breath we will witness stagflation in the US and Old Europe coupled with higher unemployment and all the ills connected to it. The FED will be between a rock and a hard place as the economy will slow but inflation will stubbornly edge little by little higher. The housing crisis will simmer for much longer than any one imagine until all mortgages will go from variable rate to fix rate. Sub-prime problems will be corrected as the $$ value of houses - now under water - will recover due to inflation, and the mortgages will be worked out, but the “Housing ATM” will diminish substantially due to a increase in interest rates. Many speculate of a repeat of Japan disinflation after their real estate boom in 1989/90 but the environment is completely different. When Japan economy started to slide into recession world markets moved toward globalization and cheap labor and raw materials from Asia, S. America and Africa flooded the markets. This time IT IS DIFFERENT !! yes many will raise eyebrows at this statement but in a nutshell those are the reason I foresee for a global inflation wave and stagflation in the industrialized nations. First raw materials are catching up to their real prices due to labor cost and demand as the most populous nations in Asia and S. America are soaking up industrial raw material like a sponge. As an example 2/3 of the population Indian subcontinent including Pakistan and Bangladesh do not have electricity, running water, not to mention a fridge, gas oven, air conditioner or a car or modern shelter / housing. The infrastructure in those countries is in dire need of modernization or upgrade and lag far behind China which in turn used most if not all of their natural water resources which will limit the amount of food they can grow to feed their own population. On the same theme the water table in India is falling rapidly even that this is a fact not so popular in the financial markets. Prolonged draught in the Amazons resulting form deforestation and yes the controversial climate change do not improve the picture. Add in the Sub-Sahara countries and parts of Central Asia and we have a perfect cocktail (best example - see the Aral Sea now and 30- 50 years ago). Total population affected by upcoming water shortages a mere 2.5 to 3 billion people Those are one set of reasons why a slow and stubborn tick by tick global inflation will follow. The US and EU pressure on Yuan appreciation will also add to inflation of imported goods – in a way I would tell the US Congress be careful what you wish for. In another vein is the issue of unit labor cost. In most countries even those with substantial pools of unemployed people the rise in wages is overshadowing local inflation. Average wages in Eastern Europe former USSR and rest of Asia are rising at an average clip of 8% to 10% a year. In most cases average wages went from around $80 to $120/40 a month or more in the last several years. Those countries which in the past exported disinflation and cheap goods are witnessing inflation and stabilization of their work force. The automatisation and modernization of manufacturing procedures can not compensate any more the wage inflation which is now reflected in the price of goods they produce. Due to the globalization effect, Tourism, TV Internet, there is a broad pressure on improving the standard of living all around the world with a direct result in pressure for higher wages. As such consumption of higher energy / protein foods will put further pressure on agricultural commodities. All those factors will add to a creeping inflation pressure which will not let the FED and ECB lower interest rates any time soon, except some cosmetic adjustment. What we will witness will be higher interest rates within 2 to 3 year at the level we had 20 years ago. The bull market in debt instruments is over and at a turning point edging higher – the net result will be that those entities or nation in debt “over their head” will suffer most. US is one example but Old Europe states like Italy are in worse situation, as are other Western Nations. What will result of this within 10 years I would not like to speculate. Deflation may occur in real terms in certain sectors of the economy but this is nothing new for 20 years we had deflation in high tech products textiles and other intermediate products/materials but many of those are stabilizing and rising in price (meaning confetti money prices). Those are my 2 cents for this week