High Inflation and Slow Growth: The Elephant-Sized Roach

Fear of inflation appears to be the only fear that can get in the way of the share markets making new highs. This is ironic because it's inflation itself that's driving up prices in the resource sector (along with the usual suspects on the demand side.) High prices for things like uranium, copper, and other base metals are what make resource stocks so tempting. How can inflation be both feared and illicitly loved?

The U.S. Federal reserve has an answer!  "Further policy firming might prove necessary to foster lower inflation," spake the Fed in the minutes from its most recent meeting. By the way, who writes this oracular crap? Does one really "foster lower inflation?" In any event, global stock markets took a breather, trying to figure out if the Fed's state of mind was good for stock prices or bad.

It all depends on how much growth there is in the U.S. economy. At least the Fed and the IMF would like us to believe that. "In light of the increased uncertainty about the outlook for both growth and inflation, the committee also agreed that the statement should no longer cite only the possibility of further firming," the Fed added.

Hmm. We have turned that over while sipping three cups of coffee at the Old Hat Factory and still can't honestly say what it means. We turn to Art Hogan at Jefferies & Co. who told Eric Martin from Bloomberg that the Fed fears a "worst case scenario," where the American economy faces a "period of heightened inflation and slowing growth, known as stagflation."

Aha.

"That's the 800-pound elephant in the room that no one likes to talk about,'' Hogan said. ``You're fighting two things at the same time and monetary policy is rendered useless while that's going on." Nothing is worse to a bureaucrat (and central bankers are, after all, very rich private bureaucrats) than being powerless. But when you're face to face with an 800 pound elephant in your room, there is not a lot of room to move, from a physical or policy perspective.

Stagflation, however, seems more like a cockroach to us than an elephant. True, stagflation is large and implacable, like an elephant. But inflation is characterized by prices on everything scurrying up in a frantic dash to keep ahead of declining purchasing power. The stag is the elephant. The flation is the roach. An elephant-sized roach!

All musing aside, here's a novel idea, maybe the status of the American economy is not as important to the global economy as it was, say, ten years ago. For example, ten years ago, the U.S. accounted for 21% of global copper demand while China accounted for just ten percent. Today, those positions are reversed, with China grabbing 22% of global copper demand and the U.S. just 13%.

Don't get us wrong, at a GDP of $14 trillion, the U.S. economy still very much matters, especially to China, for whom the U.S. remains the largest export market. But a slowdown in global growth need not mean a sell-off in Australian stock prices, especially when many Australian companies are more leveraged to Chinese resource demand than American retail demand.

Dan Denning
The Daily Reckoning Australia

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