 | | The Daily Reckoning | Thursday, May 26, 2011 |
- Bernanke vs. Reality: The battle of the 'flations rages on,
- Three high-flying companies to keep on your radar,
- Plus, Bill Bonner on the futility of maintaining an empire and a proposal for the eggheads in charge of it...
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|  | | | The Hard Asset Protection Plan | | Preparing Your Investments for an Inflationary Future | |  | | Eric Fry |
Reporting from Laguna Beach, California...
Let the boxing match begin!...In the near corner, we find deflation, with its furious fists of debt liquidation and credit contraction... And in the far corner, we've got Ben Bernanke's printing press, with its menacing inflationary uppercut.
Inflation will win this contest eventually, but the match might go the full 12 rounds.
Deflation is no slouch. He packs a mean punch. Borrowers of all types - from single-family mortgage-holders to national governments - are defaulting on their loans...or moving rapidly in that direction. As the weakest of these borrowers fails, asset prices fall and confidence wanes, both of which produce additional defaults. Once this vicious cycle gains fury, all but the strongest - or least leveraged - borrowers endure.
If Greece defaults, for example, Ireland might follow...and so might Portugal and Spain, etc. If Greece defaults, a contagion becomes quite likely, as the folks who are kicking in their tax dollars to the European Central Bank and the IMF begin to realize that their bailouts are futile. Eventually, the taxpayers from relatively solvent nations resist pouring their capital down Greek, Irish or Portuguese rat holes. Eventually, the bailouts end and the defaults - politely known as "restructurings" - begin.
Aware of this grim prospect and fearful of deflationary forces in general, the Central Banks of America and Europe have been counterpunching with various combinations of money-printing, subsidized lending and debt-financed bailouts. In other words, all the classic inflationary responses, plus a few innovations like quantitative easing.
The match between deflation and inflation looks like a draw so far. The global economy is not slipping into a deflationary abyss. On the other hand, inflationary effects are popping up in numerous inconvenient places.
Based on official US data, the Consumer Price Index (CPI) is up 3.2% over the last 12 months, while the Producer Price Index (PPI) is up 6.8%. Both numbers are higher than in recent history, but neither one seems particularly terrifying...on the surface.
When you dig down into the numbers, however, you discover that these inflation rates are accelerating rapidly. During the first four months of this year, the CPI has jumped 9.7% annualized, while the PPI has soared at a 12.8% annualized pace.
Import prices are also rocketing higher - up 2.2% in April, after a 2.6% jump the previous month. Year-over-year, import prices are up a hefty 11.1%. But once again, the trend is accelerating. For the first four months of this year, import prices have increased at a 26.7% annualized rate!
Let's put these facts and figures into a real-world context. Based on the lowest of these various inflation data, the CPI, the average US wage earner has made no progress whatsoever during the last four years...
US average per capita weekly earnings have increased about 12% since the beginning of 2006. But since the CPI has increased the same amount, that means inflation has wiped outall the growth of weekly earnings.
If, as we suspect, the forces of inflation continue to prevail in this contest, hard asset investments should perform well, at least relative to most other options. But this analysis is not new news to faithful Daily Reckoning readers. It's probably not even new news to unfaithful Daily Reckoning readers. (You know who you are!)
We've been singing the praises of hard assets like gold and silver for many, many years. In fact, we've been talking up had assets for so long that our analysis would be growing tiresome by now...if not for the fact that it has been profitable.
Even so, your editor does not wish to grow tiresome to anyone - not to his kids, not to his girlfriend and certainly not to his Daily Reckoning readers. So he will add a nuance to his monotonous "buy hard assets" mantra.
Here goes: If inflation takes hold as we expect, the allocations in your portfolio that are nothard asset investments should, nevertheless, possess hard asset attributes. When allocating to specific stocks, for example, insist that those stocks possess two key attributes:
1) Significant exposure to non-dollar revenues.
2) Significant pricing power, even in an inflationary cycle. A strong balance sheet and solid cash flow also help. In the column below, Chris Mayer shares some tailor-made ideas...
| | | | A Note from Chris Mayer's Capital & Crisis... |
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| | The Daily Reckoning Presents | | An Unstoppable Trend – Three Ways to Play it | |  | | Chris Mayer |
A few months ago, I hopped on a train to NYC to check out Gabelli's 16th Annual Aircraft Supplier Conference. I find these conferences are a great way to learn a lot about the leading companies in an industry in a short amount of time. Among the 14 companies presenting were some industry heavyweights like Honeywell and Boeing.
I have a favorable view of aircraft suppliers in general. And I think this may be a good spot to drop some lines and fish for winners. There are many reasons for my optimism. For starters, the long-term growth trends of air traffic show no signs of slowing down. Since 1977, revenue passenger miles (RPMs) have grown about 5% per year. RPM is an industry measure of air traffic. It is simply the number of paying passengers, times miles flown.
After dipping during the 2008-09 crisis, RPM is on the march again. In fact, it seems to be making up for lost time. More passengers and more miles mean more planes. That's the simplest reason to like aircraft parts suppliers. Secondarily, the industry retires hundreds of planes every year. And there is renewed demand for more fuel-efficient aircraft.
Put it all in a pot and you understand why the backlogs of Boeing and Airbus for new aircraft are very healthy. Over the next several years, these two companies are on pace to deliver more than 1,000 new planes per year. Looking out over the next 20 years, the airline industry as a whole will need more than 30,000 new planes. That's about $3.6 trillion in new business for the aircraft industry.
The main drivers of all this growth, though, are the billions of new consumers from emerging markets, in particular the Asia-Pacific region. Boeing expects air traffic in the Asia-Pacific region to grow more than 7% per year over the next two decades.
So that's a big-picture view of why I like the industry. As to particular ideas, I'm looking over a bunch: Parker Hannifin, Curtiss- Wright and Hexcel. To be clear, I have not recommended any of these stocks to my subscribers. But I am keeping a close eye on them.
Let's start with Parker Hannifin (NYSE:PH). It is more of a conglomerate than a pure play on aerospace. Only 18% of sales come from aerospace, but it does so many important things it's worth talking about. As the senior vice president put it at the Gabelli Conference, "Parker Hannifin is uniquely positioned to address the challenges of mankind." He then ticked off a list of things including food, water, energy and more. PH essentially makes components to control fluids, hence its broad applicability to everything from water to the fluids of an aircraft.
PH gets more than half of its business from overseas markets. It also gets half of its revenues from aftermarket sales - for things like parts and service. These are stable sources of high-margin business. I like businesses like this.
PH is an old American workhorse whose track record I admire. The company began in 1918 when 33-year-old engineer Arthur Parker rented a loft in Cleveland to develop his unique braking system for trucks and buses. From that humble beginning, PH is a $10 billion business today.
At the conference, PH handed out a pamphlet that showed about a dozen different stats - things likes sales, profits, employees, book value, debt to equity - going all the way back to 1945. Those stats had me floored. You could read a chunk of the history of the nation in these fluctuating numbers, like the width of tree rings serve as a record of the fat years and the lean.
PH has boosted its dividend for 54 years. It has a long track record of steady cash flows. At $87 per share, it trades for about 15 times its 2011 earnings estimate. Analysts are looking for a plump 17% jump in earnings in 2012. International sales account for nearly half the company's revenue, thereby providing a nice built-in hedge against future dollar weakness. It's a good company and we may get involved at some point.
Another old American hand I like is Curtiss-Wright (NYSE:CW). The company goes back 80 years when companies created by Glenn Curtiss and the Wright Brothers merged. Lots of people know the Wright Brothers' story, but Glen Curtiss' story is less well known. He was a brilliant inventor who brought many innovations to flying.
Curtiss-Wright makes many mission-critical systems for aircraft. It also makes pumps, valves and motors for submarines, aircraft carriers and more. Finally, the company has a good nuclear business in which it makes parts for reactors. In this, Curtiss-Wright is a kind of picks- and-shovels play on the nuclear power.
The company has been growing rapidly of late. Sales have grown 20%-plus over the last five years. Like PH, Curtiss-Wright is another reasonably priced industrial. At the current quote of $33.35, the stock sells for less than 14 times trailing earnings and about 11 times next year's guess.
Finally, there is Hexcel, which trades on the NYSE under the ticker HXL. Hexcel makes advanced composites made of carbon fibers and glass that make an aircraft lighter, stronger and faster. The company also uses this know-how to make components for the wind power industry.
Hexcel has been growing about 10-15% per year for the last few years. But earnings should grow 20%-plus this year. Hexcel's composites are popular, given the demands for more fuel-efficient aircraft. The new planes have 10 times the composites of older aircraft. And the wind power business is a growth area, too.
The story doesn't seem to be much of a secret, though. Hexcel's shares trade for 16 times next year's earnings per share guess. But it's one to watch. I'll be keeping a close eye on this sector.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: Did you see Chris's brand new presentation yet? Right now he has his eye on a "red-hot energy marvel" that's "making a group of regular Americans a fortune." Turn your speakers on and learn more here.
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| | | | Bill Bonner | | The Mounting Debt of the US Empire Business | |  | | Bill Bonner |
Reckoning from Paris, France...
Not much was revealed in the markets yesterday. Everything went up. The Dow rose 38 points. The price of oil rose above $100. And gold rose too - up $3.
More evidence came in, showing that housing is weak. But no more evidence was needed.
Want to make some easy money? Buy a house! Get a DEEP discount on a distressed sale. Then mortgage the house for 30 years at a fixed rate. As big a mortgage as you can get.
The house will probably become even cheaper...but some time between today and 2041 your mortgage is sure to turn into a gift. The feds are trying to undermine the value of the dollar. Sooner or later, they'll succeed...even beyond their wildest hopes.
Yesterday, the politicians debated proposals to stave off national bankruptcy - see below. All that was revealed was more evidence America is governed by fools and knaves; there too, no more evidence was needed.
But we have a proposal. A brave, bold proposal that will solve America's dollar crisis and protect the integrity of America's public finances in a single stroke.
To put it in perspective. We begin with a news item.
Robert Gates, America's top military man, says the US will "lose influence" if budget cuts are made.
We suspect Mr. Gates is 'talking his book.' That is, he's got a book the size of War & Peacewith the names of people and companies that benefit from Pentagon spending. Cutting back would certainly be a bad thing from their perspective.
But would it be bad from the taxpayers' point of view?
We will take the question in two parts. First, we wonder what, specifically, does America's 'influence' do for it? We spend billions on garrisons in various remote and inconsequential parts of the world. We send troops to fight various 'wars' for no particular reason other than they are available to us. Presumably, we 'influence' people in direct proportion that we are able to give them money or spend money protecting them from rival groups.
But what good is this 'influence?' No explanation has ever been offered.
America's empire has always been a catastrophe from a financial point of view. The business of empire is essentially a protection racket. The empire establishes its pax...and demands tribute in return. It makes war often...to extend its market share and loot the losers.
The US has never got the hang of it. It tortures a few people. It murders one or two. It invades. It occupies. It spends. But where is the payoff?
Some analysts claim that the imperial objective has always been the same - to keep the oil flowing at low prices. America's civilization, such as it is, depends on it. But wait. Japan, Germany, and every other country on earth gets to buy oil too - on exactly the same terms. The US provides protection. But it gets no advantage from it.
Influence, schminfluence. This is a bad business model. The sooner the US abandons it, the better.
Now to the other part. Not only is 'influence' worthless...it can be maintained only so long as the US doesn't go broke. That was bin Laden's insight; he realized that he could reduce America's influence by suckering it into spending money it didn't have on a war it couldn't win. He was right. If the US continues spending at the present rate, it will be soon out of business.
You can do the math yourself. Add a few more $1.5 trillion deficits to the national debt. In 5 years you add debt equal to 50% of GDP. Add that to the existing debt and round off at $20 trillion. Now figure an interest rate of 5%. Presto! You've wiped out two thirds of tax receipts on interest alone.
Even Members of Congress can see this train wreck coming. They're talking about throwing some switches to move some of this debt to another track. Here's the latest from The Wall Street Journal:
WASHINGTON - White House and congressional officials said Tuesday that they were moving closer to a budget deal that would make a "down payment" of more than $1 trillion in cuts to federal deficits over the next decade.
But Vice President Joe Biden said he told Republicans that they would have to back down from their position that the deal avoid tax increases.
"I made it clear today...revenues have to be in the deal," Mr. Biden said after a Capitol meeting with congressional leaders trying to negotiate a deficit-reduction agreement. Members of both parties say such a deal is needed to win support for an increase in the federal- debt ceiling.
House Majority Leader Eric Cantor (R., Va.), a member of the bipartisan group, agreed that more than $1 trillion in cuts were within reach, but he said he remained at odds with the White House on taxes.
"This House will not support tax hikes," Mr. Cantor told reporters after the meeting. Hey, how do you like that? Talk. Talk. Talk. The feds claim to be getting serious about cutting spending, right?
But one trillion over 10 years? How serious is that? When you are running trillion-dollar plus deficits EVERY YEAR? If deficits were to continue at the rate of the last three years, this proposal would mean additional debt of only $14 trillion rather than $15 trillion.
Serious? Not at all.
And the most likely way the feds will finance these huge deficits will be with some version of "QE" - that is, by printing money. Which is why a 30-year, fixed-rate mortgage may be the best investment you can make.
And back to our proposal...
Switch to the euro! The US should abandon the dollar and take up the euro as its currency.
Sounds crazy? Un-American? But think of the advantages.
First, the euro is more colorful. It's more fun to look at and use.
Second, the euro is worth more than the dollar; you don't have to carry around so much currency.
Third, when you travel to Europe, you won't have to convert your money.
Fourth, Europe is the world's largest economic unit. Having a currency in common with it will make it easier for the US to trade.
Fifth, the Fed doesn't control the value of the euro. Instead, it is controlled by European bankers who, generally, are made of sterner stuff than Bernanke et al.
Sixth, European bankers will not readily print euros just to help the US continue its program of reckless spending.
Seventh, unable to fiddle its own currency, and inflate away its debts, the US will have to cut spending.
Eighth, the whiners, chiselers and something-for-nothing crowd in the US can moan all they want; Jean Claude Trichet won't give a damn.
Regards,
Bill Bonner,
for The Daily Reckoning |
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