Inflation (or a close-enough facsimile) Just Ahead?

Earnings season is finally in full swing, and giving us a clear picture of a global economy that is most emphatically on the mend. Monday’s S&P-induced swoon notwithstanding (I had the good fortune to be blissfully disconnected among the pelicans and redfish when that little bomb went off), it’s been a tough time to be of the bearish persuasion. Particularly amusing was yet another collective humiliation of the 47 or so estimate-posting analysts who purport to follow Intel. For about the sixth time in the past seven quarters, INTC blew away the consensus estimates of sales and earnings. Had I not been engaged in this game as long as I have, I would find it unbelievable how so many supposedly smart, driven professionals can be so consistently off the mark. It’s getting to be like a tired, old joke. In a sense, it is not unbelievable at all. It is probably a case of a malady that afflicts every analyst from time to time, and I”m not talking about those strong hints that seem to emanate from the banking side of that proverbial “Chinese wall” or from the prop trading desk. It is the all too human tendency to fall in love with an idea. Not “idea” in the sense of the stock recommendation itself, but the construct that makes a stock attractive or unattractive in the first place. In this instance, it is the notion that the new “must be seen with” toy that goes by the name of tablet is ushering in the demise of the incumbent forms of personal computing. One suspects that the ability of these analysts to assess the value proposition of these accessories is not unlike a journalist of a few years back, a long time resident of the Upper East Side, who famously couldn’t imagine that the Republicans might win an upcoming election, because none of the people she knew voted Republican. As Intel’s results have once again demonstrated, the global roll-out of Web 2.0 is alive, powerful and beyond the ken of the cosseted know-it-all’s who seem unwilling or unable to apply independent thought to the commercial reality of the enterprise that is Intel.

As gratifying as it has been to see the preponderance of earning releases confirm our bullish stance, I am increasingly ill at ease with what perhaps I am only imagining to be a jarring speed bump just ahead. That would be the likelihood that what looks for all the world to be inflation heating up is going to unsettle investors. In the months ahead, continued global recovery is going to take much of what’s left of slack out of industrial capacity and expose at least a few more pinch points. The slow motion erosion of $US versus other currencies continues, as does the tail-wagging-dog phenomenon of the speculative interests driving the price of commodities (the day-to-day fluctuations, abetted and explained away by a thoroughly corrupted media, make it so obvious.)
The only missing ingredient, the one that made the 1970s so dreadful, has been pricing power on the part of labor (excepting, of course in that what we have all gotten used to considering the world’s sweatshop that is China). As such, the vicious cycle of true inflation is not quite in place, but a reasonable facsimile, one that could suffice to get the panic mongers started, could very well make an appearance sometime soon.

It doesn’t have to be this way. This run-up in the price of oil has an all too familiar, seen-this-movie-before, quality to it. It’s more than a little tempting to go with the conspiracy theorists here. Indeed, if I wanted to script a plot for “How to Jazz the Price of Petroleum Without Really Trying”, it wouldn’t require imagination much beyond what we’ve seen play out in the last few months. The belated spread of the Bush Doctrine coursed its way around the south shore of Mediterranean until it found a particularly benighted venue that happened to be the world’s 17th largest oil producer. This place had been run for the past 40 years by a thug whose murderous exploits, at home and abroad, were such that if there were a once in a decade election for “dictator most deserving to be terminated with extreme prejudice”, he might have been a repeat winner. An opposition, largely centered around tribal animosities, laps up the kool-aid spilling over from Tunisia and Egypt and decides that enough is enough. Demonstrations beget crackdowns which beget an armed response, and a civil war is underway.

Here is where the temptation to suppose a cabal at work kicks in. Rather than adroit and determined effort to run off, eliminate or otherwise strong arm His Exalted Strong Contender for Global Public Enemy Number One, we get the most feeble and dilatory of responses. The “no fly” zone and accompanying (but not so well executed) close air support was not forthcoming until after interminable dithering and the near collapse of the rebel forces. This has been followed by weeks of inconclusive skirmishing, as if unorganized, untrained rebels were going to somehow gain control of country that is nearly three times the size of Texas (but without the highway systems). It is only in the last few days that we hear about advisors being sent in, but they are from Italy and France of all places, so how helpful can that be? All this ineffectual posturing simply begs the question, “Is the western world serious about seeing this conflict come to a favorable resolution, i.e., winning?” The answer is that no we are not, but someone, some powers that be, seem quite serious about perpetuating a protracted irresolution, the sort of low boil mess that keeps everybody on edge for as long as possible. The unserious way that the putative “free world” (as we once had the confidence to call it) is the main reason that the price of oil has tacked on an extra couple dozen $/bbl. above production costs.

So is this a rant against the evils of Big Oil? Not really. They certainly benefit from the premium price, and without a doubt have lobbied and contributed in ways have have bent energy policies in ways that have benefitted them. But who else might join into such a cabal? Those venture capitalists who thought that the crazed sex poodle who used to be Vice President was going to use his influence to bail out their alternative energy investments come to mind. They need us paying a whole lot more for energy if they are ever going to get whole. It also stands to reason that practically anyone well heeled enough to own an interest in a hedge fund, which certainly includes the most of policy makers in the Western World and all of the leadership immediately east of Europe, would be a likely suspect. This is not overheated conspiracy mongering by any stretch. It is a mere variation on what H.L. Mencken famously observed about 100 years ago,

“The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.”

As such, The Libyan conflict is a phony conflict, one that would not be dragging on the way it is if “grown ups” looking out for the best interests of their constituents were calling the shots. Instead we have a massive premium in the price of oil that is getting passed along into the price of practically everything else. This insidious “tax” is slowing an economic recovery that needs all the help it can get. Not so much that the economy can’t keep growing, but at some point no one is clever enough to predict the drag induced by this massive “tax” just might overcome whatever has thus far propelled the economic recovery. At some point none of us can see from here, the specter of “stagflation” just might cross a plausibility threshold. Of course, this will be an opportunity and not a problem for the too-influential pools of speculative capital who always seem to be a half step or so ahead of the hobgoblins. Expect the crowd to get spooked out of its wits sometime during the hot months just ahead.