The price of just about everything under the sun is rising, and Martin has asked me to tell you why, plus how you can start to profit immediately from the trend.
I first met Martin about a dozen years ago, at the Weiss School in Palm Beach Gardens, Florida, where I had put my own three young children.
Martin was running his research and ratings company on the east side of their building, while his wife, Elisabeth, was running the school, on the west side of the building.
I don’t know how Martin found time to do it, but in between all his writing and speaking engagements, he taught Japanese to the children, and my daughter was one of his students.
After class one day, she gave him one of my old papers from years ago, predicting the boom and bust in the stock market. He was impressed with my timing about the actual events that had subsequently unfolded. And a few days later, he invited me to join his firm.
Today, I contribute to his Safe Money Report, and I edit my own Real Wealth Report.
And right now, almost every commodity and investment I write about — food, precious metals, energy, even water — is soaring.
The cost of a 5-ounce can of pistachios I bought yesterday is up 12% in a month. A large size bag of Lay’s potato chips is up another 14%.
Corn and wheat prices are up 13% and 11% respectively since early May. Soybean prices are on a tear, UP 23% in barely four weeks. The price of cocoa is up 10% in a week. Sugar is up 10% in three weeks. A loaf of bread is up 8.9% since the first of the year. A head of lettuce is up 13%.
An evening at a typical, three-star hotel will now cost you at least 10% or 20% more than a year ago. Transportation costs are up 11% so far this year.
This tells you inflation is already on a roll. You know this, though. Like me, you go to the grocery store. You go to the gas pump. You travel and you go to hotels.
What’s driving prices so rapidly higher? And why doesn’t the government-issued Consumer Price Index show that inflation is sharply rising? These are two questions that I think are on everyone’s minds, so I’ll answer them right now …
Why Prices Are Surging
First, it now takes nearly $59 to buy a barrel of oil, its highest dollar price in history. If you’re living in Europe, in terms of the euro, you are now paying the highest price ever for a barrel of crude oil.
Oil and petrochemicals are major components of virtually everything manufactured. So when their price rises, it drives up costs in just about every industry in the world.
Oil and petrochemicals are found in rubber tires, gloves, shoes … in the manufacturing process for clothing items, medicines, in every plastic made, even in cosmetics. It is the one commodity that is almost universally used in products from A to Z.
That’s just oil’s use in products. It does not include the amount soaring energy prices are costing us to heat and air-condition our homes, run our cars, lawnmowers, and more. Oil is used EVERYWHERE.
So don’t let anyone convince you otherwise: Rising oil prices are inflationary. Period. They are driving the prices of just about everything much higher.
Second, the Consumer Price Index is essentially a sham. It’s manipulated lower because it’s the index the government uses to adjust Social Security, welfare, and Medicare payments. The lower the index — or the slower its rise — the more the government saves.
In my opinion, the Consumer Price Index is conveniently designed to mislead you. No taxes of any kind are accounted for as a cost of living. Not personal taxes. Not sales and local taxes. Not consumption taxes. Not even property taxes. For some reason, the government does not consider these items to be “a cost of living.”
But the biggest manipulation in the CPI is the way the government calculates the cost of housing. It uses rents as a substitute for the actual cost of buying a home. But with millions of Americans dumping their rentals and rushing into home ownership, rents are actually going down in some areas. Does that mean it’s now cheaper to buy and own a home? It’s a joke!
Here’s what I see coming next …
Inflation is already here, it’s going to move substantially higher in the months ahead, and the government’s CPI won’t pick up more than a small fraction of the rise.
A. The price of oil is going MUCH higher. Just last week OPEC finally admitted it doesn’t have enough oil to stem rising prices. If they don’t have enough oil, who does? Answer: No one!
OPEC also acknowledged that EVEN IF there were enough oil to go around, prices would probably STILL be rising. Reason: There aren’t enough refineries in the world to clean the raw crude oil and get it to the market quickly enough.
Meanwhile, demand is off the charts — in the U.S. … in Europe … in South America; and it’s going ballistic in Asia, especially in India and China.
Add these forces together and there’s little room for doubt about their consequences — oil is going through the roof.
How high? The current price of oil is now at or near all-time highs in terms of dollars. $58 per barrel. But that’s today’s dollars. That’s not an inflation-adjusted price of oil, because today’s dollars are worth much less than yesterday’s dollars.
In fact, although the current price of oil is at an all-time high, after adjusting for past inflation, oil is still far cheaper than it was at its peak.
The price of oil would have to increase by nearly 50% from its current price of $58 to return to the equivalent of its 1981 levels. Put another way, we’re talking about $78 – $80 oil. For unleaded gas, we’re talking an easy $3 a gallon, perhaps even $3.50.
I think that’s a good, conservative target for oil and gas prices within the next 6 – 12 months. But given the dreadful supply/demand situation and the constant threats of terrorist interruptions of supply, I would not be surprised to see oil above $100 per barrel.
B. Productivity levels are falling. During the late 1990s and even into the first few years of the millennia, labor productivity levels were rapidly improving as a result of many of the new technologies in computers, robotics, the Internet, and more. For every dollar spent on labor, the amount of goods and services produced was rising substantially. This helped keep inflation at bay.
But now, productivity measures are leveling off and even beginning to show signs of falling. If this continues, as I expect it will, labor costs as a percentage of the final cost of products and services will begin to rise substantially, adding more fuel to the inflationary fires.
This should not be underestimated. Rising labor costs are a major source of inflation. And when coupled with rising energy prices, the mix can make for some very powerful rocket fuel to propel inflation.
C. Companies are beginning to pass on their increased costs to consumers. You just saw it when I told you about the 5-ounce can of pistachios whose price has jumped 12% in the last month. And in the other examples I gave you at the outset.
But that’s just a few products here and there. As oil prices continue to rise and as productivity levels fall, more and more companies will be forced to pass on their increased costs. Retail price inflation will take off to the upside. I would not be surprised to see inflation of 8 – 10% in the not-too-distant future.
What to do? Stick with assets that benefit the most in inflationary environments. Just like my Real Wealth Report is designed to do.
In my Real Wealth Report, I concentrate on hard assets — not those dinky paper asset like dotcoms. In this environment, I think everyone needs to have some real assets on their books, including natural resource companies that benefit from inflation. Just two examples:
1. Right now, subscribers following my Real Wealth Report recommendations own Pioneer Natural Resources (PXD), a solid natural resources fund that’s rising sharply and headed much higher, in my view.
2. And they’ve got ITT Industries (ITT), the world’s largest maker of water pumps and night-vision goggles. The company recently stated that its second-quarter profit will come in at the high end of its forecast. Growing demand for aircraft systems and combat radios as well as robust sales of desalinization and water-treatment systems are boosting revenues.
Plus, on some closed positions so far this year, I figure they have 69% gains on Ionics, 52% gains on Permian Basin Royalty Trust, 76% gains on Evergreen Solar and 39% gains on Knightsbridge Tanker.
Not to mention the combined gain of 34.6% on Yanzhou Coal Mining … 14.5% on Teekay Shipping … 18.3% on Anadarko Petroleum … and more. Total dollar value of the pre-commission gains roughly (losers included): $12,263.72.
Lastly, I want to make a very important announcement on gold: Even if you’re not a gold bug, keep your eyes on the price of gold.
Gold is one of the best barometers of inflation around. And it’s headed much higher — for many of the above reasons: Rising oil prices, declining labor productivity, rising inflation and more.
I expect to soon see gold make new highs, above $460, and then go on to $475 an ounce, perhaps even hit $500 by year’s end.
Be sure you’re on board.
Best wishes for your health and wealth,
Larry Edelson,
Editor, Real Wealth Report
About MONEY AND MARKETS
MONEY AND MARKETS is written by the editors and financial analysts at Weiss Research. To avoid any conflict of interest, our editors and research staff do not hold positions in companies recommended in MAM. Nor does MAM and its staff accept any compensation whatsoever for such recommendations. Unless otherwise stated, the graphs, forecasts, and indices published in MAM are originally developed and researched by the staff of MAM based upon data whose accuracy is deemed reliable but not guaranteed. Any and all performance returns cited must be considered hypothetical. Contributors: Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, David Dutkewych, Larry Edelson, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Anthony Sagami, Julie Trudeau, Martin Weiss.
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