The big rise in prices is half way in the door

I don’t know what you see when you go to the supermarket, but I have seen a trail of prices going up.  Food, oil, metals, and most other commodities have moved up.   A lot.  Less than one year ago I paid $.79 for orange juice concentrate.  It is now $1.39.  The price of ice cream is up about 25-30% (which hurts even more).  Everything in the produce department also seems to have taken an oil induced bounce upwards.

Houses have stabilized, but the payment for a basic house still eats up a very large portion of the paycheck of your average American.  Even with the house of prices stagnating or staying steady, most house payments move up as the cost to borrow is moving up.  The price of various building materials have gone up because of the cost of the underlying commodities.  The prices of metals is extremely pronounced, especially copper.  Because my wife and I plan on building a house in a few years, I invested in FCX to protect me against the high price of copper.   The price of some building materials has gone down since the housing bubble has been popped, but demand from the developing world, especially China, has supported higher prices for most metals.  It is just a matter of time until the prices of these materials trickle through the system and result in higher manufactured product prices.  Wages seem to lag other indicators.  That will kill the people who have adjustable rate loans, (inflation brings higher interest rates).   House builders (there will be a ton of excess on the market because of forclosures, and buidling costs will be high), and low income people (they spend a greater proportion of their income on food and lodging) will also help trickle down an economic downturn.

The big question is who wins?  People who have large amounts of fixed interest debt with a steady income will have the real value of their debts quickly decline, but you better make sure you are not one of those who has their income interrupted.   Commodities will also help carry people through, because they have intrinsic value.  Stock markets will be hit, but will try to rise a little more than inflation, although the economic situation will make it difficult.  The biggest winner is the biggest debtor, the good old government.  Then can reduce debts to a fraction of their initial value through inflating the currency, and at the same time, have more of the printed money they can distribute, using the greatest tax ever devised, inflation.

Who loses?  Those who put their faith in the fiat money of a government on a ride to bankruptcy.  Stock markets will be hit, but will try to rise a little more than inflation, although the economic situation will make it difficult.  Those who have bonds will see rates rise, and will be in a race to see whether their interest out paces inflation.  It will be interesting to see what the government does with TIPS (inflation protected bonds).   Grandma and Grandpa will wonder what they should do as the value of their annuity payments keep dropping.

What can we do to get ready?  In my humble opinion, get assets that have some true worth.  A house will keep you warm.  Stocks are partial ownership in a company.  Make sure that company produces things that people need and is well run.    If you have any variable rate debt, get rid of it.  That includes pretty much anything besides a fixed rate mortgage.  If anyone has any good ideas on picking up wreckage from the storm, let me know.  Everyone should invest in commodities.   I am long a case of beans, 15 cans of tuna, a bunch of spaghetti sauce, and some sausage.  When something is on sale at a significant discount, buy more than one weeks supply.  Right now I am making sure I will be prepared to weather it while not reducing my chances of eventual retirement.


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