Stagflation Alert

by: Pring Turner

The summer rally arrived in full force. The stock market did "climb a wall of worry" last quarter in spite of the slowing U.S. and European economies and contrary to investor concerns and expectations. In last quarter's newsletter we stated our goal was to position portfolios to take advantage of an anticipated up move. However, the rally has moved too far, too fast. Investor sentiment, following the stock market gains has become excessively optimistic. We measure investor psychology closely and current readings advise us to expect a pullback or sideways drift for stocks. Current tactics focus on protecting your profits and income. The markets will continue to move in fits and starts, just as the business cycle continues to cautiously move ahead but on an uneven path. We do not yet see the end of this 43 month-old cyclical bull market, but only a temporary breather before heading higher still.

Commodity prices are firming... is a third new uptrend since 2002 beginning?

One very interesting observation from our tactical decision viewpoint is commodity prices are rising and getting stronger. Commodity prices, climbing above their 12-month moving average triggered a preliminary buy signal from one of our proprietary inflation models. Even though it is unusual to experience higher inflation and commodity prices during a cyclical global economic slowdown, we maintain the world is in a secular (long-term) bull market for commodities and most surprises will therefore be for higher prices. This secular trend of inflation is covered in depth in chapter 4 entitled, "Inflation, Inflation, Inflation!" of our new book "Investing in the Second Lost Decade." The question in our minds: Is this a temporary blip or is this the beginning of a more sustainable upswing in commodity prices? The answer to this question is significant in how we allocate your portfolio in the period ahead.

Printing Money And Unintended Consequences

Commodity strength could be reacting to the concentrated global tidal wave of central banks' money printing process. One controversial tool central banks are using is called "Quantitative Easing" (QE). An important fact is whenever you hear the term "quantitative easing" purchase programs; keep in mind there is no deep pool of savings our Federal Reserve or other central banks can draw from to make these purchases. Rather all "quantitative easing" programs are undertaken by simply printing dollars to purchase assets central banks are attempting to support. Our Federal Reserve has fulfilled prior QE1 & QE2 purchases by creating $1.8+ trillion of new dollars out of thin air since 2009. The new QE3 announced last month promises to create another $40 billion (or $40,000,000,000) new freshly printed dollar bills each month indefinitely or until monetary authorities see "sufficient" economic growth.

Federal Reserve chief Dr. Ben Bernanke in a 2002 speech made reference to "a helicopter drop" of money into the U.S. economy to fight economic slowdowns, hence his nickname 'Helicopter Ben.' He stated, "The U.S. Government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost." Pring Turner takes exception to Bernanke's comment "… at no cost." No country can print endless dollar bills without a significant cost… we just do not know exactly what it is or when those costs and unintended consequences will strike. There will be consequences! One possibility is the return of 1970s type stagflation, a combination of slow or no economic growth coupled with very high inflation. Martin Pring recently wrote a timely article on this very problem, "Green Shoots Being Spotted from Bernanke's Helicopter" which poses the inflationary potential as a result of the Fed's QE actions and its consequences.

Investment Implications

Stagflation would be an investment game-changer since it is a scenario not yet experienced by most of today's investors. Investors need a game plan to address new risks and opportunities that will surface. We are following commodity price movements and developments very closely and will adhere to the disciplines signaled from our business cycle and other forecasting models to guide portfolio decisions. Our proprietary Barometers and other decision-making tools are battle hardened and have stood the test of time. As the business cycle changes, so will we change and adjust portfolios to best reflect business and market conditions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Investment decisions formulated by Pring Turner Capital Group, Inc. are based on proprietary research and methods developed since 1977 by the owner/managers of the firm. None of the material contained herein is intended as a solicitation to purchase or sell a specific investment. Readers should not assume that all recommendations will be profitable or that future performance will equal that referred to in this material.