Friday, May 27, 2011

Inflation? I spit in your face!

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Before I dive into today’s controversial topic, I want to say goodbye to one of the true pioneers in business television, Mark Haines from CNBC’s Squawk on the Street who passed away suddenly this week at the far too young age of 65.

From his FNN days in LA to the CNBC merger to the host of Squawk Box to creating all of the popularly used on air nicknames to his final spot hosting from 9am to 11am, Mark Haines was the consummate professional. 

Never shy or intimidated by a guest, Mark would not hesitate to challenge your view and force you to defend your position.  With his unique eating habits and flair for the dramatic, Mark Haines was one of the faces of the network.  You can Google some of his more interesting moments, like cutting his tie in half, donning an Army helmet during the Dotcom collapse and calling for a stock market bottom in March 2009. 

When I started marketing to the media to build my profile in the mid 1990s, one of my long-term goals was to be interviewed as the stock market opened by Mark Haines.  Thankfully, I achieved that goal several years ago and have enjoyed every interview with Mark ever since, especially the one where he challenged my view about using different analysis in deflationary times than inflationary times. 

I never met Mark Haines in person, but he is someone who has been part of my business life for decades and will be sorely missed.  May he rest in peace…

And now to the topic at hand.  With so much attention paid to commodity inflation lately, I thought a good item to discuss inflation in general. 

Longtime readers have known that since 2007, I have been in the deflation camp, not believing for a minute that serious, structural and systemic inflation was anywhere in our immediate future.  And I still share that view today.  Comparing this period to that of the 1970s, or Argentina, Zimbabwe or the Weimar Republic is just plain absurd in my opinion.

YES, we have commodity inflation.  I agree!  But I side with Ben Bernanke that it is more transitory than structural.  Real inflationary problems usually have certain DNA markers, such as money velocity in the financial system.  Essentially, that means banks take in money and create many, many more dollars from that single dollar.  Today, we still see record amount of cash held at the Fed on behalf of the banks.  Add to that, more than $1T on corporate balance sheets and you can easily conclude that companies are in no rush to deploy their capital.  In other words, a dollar is worth more tomorrow than it is today.  That’s the opposite of inflation where a buck is worth more today than tomorrow!

Other systemic items include capacity utilization.  While those numbers have climbed from almost depressionary levels below 70, they are nowhere near the 85%+ that would be worrisome as you can see from the St. Louis Fed graph below. 

Look out of your window at the housing and job market.  With housing stable at best and the average person’s largest asset, you would be hard pressed to offer that there is even the slightest of inflation here.  And the employment picture, while much better than in the heat of the crisis, continues to show more than 9% of the workforce unemployed, 10% if you trust the Gallup poll below. 

But digging a little deeper, the “real” unemployment rate, taking into account the underemployed and discouraged (U6) is almost 20%, according to Gallup.  I am not sure anyone can use this data to support the inflation argument.

Turning to one of the most important measures of systemic inflation, wages and wage growth, you can see below further evidence that supports my thesis that structural inflation is not a problem.  Think about what happens when everyone makes more money than last year and the year before.  Most people spend it!  More dollars chasing the same number of goods and services.  So prices rise.  When wages fall or stay flat, like they have most of the past 11 years, you have fewer or the same dollars chasing the same number of goods and services.  Prices stay flat or fall.

Remember, inflation is measured by price changes on year over year basis.  If oil goes up 100% in 2011 and remains at that same level in 2012, inflation is actually 0% in 2012 even though prices are high.  It’s the year over year change that signals inflation.

In the end, while it is painful at the pump and at the grocery store, I do not believe that consumer commodity inflation is here to stay and will be a long-term, systemic problem.

FYI, I will be on CNBC’s Squawk on the Street at 9:35am on May 31.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

Follow us on Facebook at and on Twitter  @Paul_Schatz

1 comment:

  1. I am fascinated by your article.
    I admire your optimism and learn alot from you.
    I don't understand, however, how our National Debt factors into this equation when combined with your information.