Enzio's Clock

Background

1. What is the Economic Time™?

According to the Economic Clock™, it is characterized by an

• excess demand for money (commercial banks won't lend), and thus an
  
• excess supply of goods (people are scared, unemployed or both, so they won't spend)

So how can inflation rise when the excess demand for money is creating an excess supply of goods?

2. Why cost-push stagflation?

Many investors believe that we are in the middle of deflation. Well, if you believe in our Economic Clock's ™ "excess supply of goods", then we certainly can expect that less demand will lead to deflation.

But there is another type of inflation, and this is of the "cost-push" nature. Here are some forces that will drive costs up:

• weaker non-dollar currencies drive up import costs. If you are not dollar-based, then you have to pay more local currency for imports, particularly if these imports are dollar-denominated (e.g. commodities, parts needed for further processing;
• higher unit labour costs. With output sagging due to an excess supply of goods, the output/worker ratio declines. All of which depresses productivity, thereby propelling unit labour costs, and
• reduced capacity. Another nasty result of an excess supply of goods is that people cut back on capacity. This is happening particularly in the commodities world. So if it is cut enough, then the price of such goods has to rise later on.

 

3.Investment road map

From previous research we know that

• the lending cycle will bottom after four years, i.e. in February 2011 (it last  peaked in February 2007),
• the stock market will fall another 20% stabilize in "L" during the second half of next year.
  

We also have suggested that bond yields will rocket once the market

• understands the gravity of America's burgeoning fiscal deficits,and
• grasps that we are firmly on the road to cost-push stagflation, something that I have brayed on about since Spring, 2006.

A client half my age and very bright recently remarked that bubbles always are in the making. Perhaps we are moving into a dollar bubble? Just something to keep an eye on, i.e. "what bubble trouble lies ahead?"One bubble in the making: long-dated bonds?

4. Make Money Off This Idea

1. Always consult your financial adviser first.
2. We gave you ideas at the end of yesterday's piece.
3. Political unrest is going to rise, as will desperation. So buy well-run, quoted companies specializing in personal safety - either as a security service, or as makers of security equipment such as monitoring systems. Any ideas please share with us!
4. People are going to stay more at home, so buy makers of things like barbecues, cutlery, do it yourself (DIY) equipment. Any ideas please share with us!
5. With inventories bulging courtesy of an excess supply of goods, buy into well-run, quoted companies that specialize in warehousing and storage. Any ideas please share with us!