Corporate America Hints at Stealth Stagflation

Friday, 22 Jul 2011 07:55 AM

By Andrew Packer

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The bookstore chain Borders is closing its remaining 399 stores as it proceeds through bankruptcy, throwing thousands out of work.

That’s not all. In the past few days, Cisco and Lockheed Martin have announced plans to lay off thousands of workers. If the debt ceiling isn’t raised, government furloughs could also add to unemployment numbers, likely sending the official rate beyond 10 percent.

This is occurring when we need to create over a quarter million jobs per month for the next five years just to get back to the historical “average” rate of unemployment.

While the job market is taking a turn for the worse, other recent business developments reveal the effect of money-printing mayhem on the economy.

Consider Netflix, which announced pricing and product changes a few weeks back. Customers now have to pony up to enjoy both streaming content and mailed DVDs, or drop one for the other.

Elsewhere, burrito-chain Chipotle announced that rising food prices are cutting into its earnings. The chain stated that 80 percent of its restaurants will raise prices by the end of the year, if not sooner.

When two companies reporting rapid growth and have shares trading at all-time highs warn that the party won’t last, investors should take note.

Rising prices and rising unemployment are a sign of a broken monetary and political system. This is akin to the stagflation of the 1970’s, when low growth and robust inflation led many to wonder if economic growth was even possible again.

But this time around most businesses aren’t drinking the Kool-Aid. It’s no surprise that as politicians bicker over the debt ceiling and as central bankers decide how much and when to print more money, companies are sitting on record piles of cash.

In fact, 29 companies have more cash on hand at the moment than the U.S. Treasury! Perhaps our elected officials can learn a lesson from the private sector.

As for individuals, fighting stagflation comes in a different form. First and foremost should be the protection of one’s job. Learning new skills and staying nimble in exceeding the expectations of management are a must. For rising prices, consider stockpiling durable goods at today’s prices.

If inflation is hitting 10 percent, as some estimate using old methods of calculating CPI, then stockpiling useful goods today for use a year down the line is the equivalent of giving yourself a 10 percent return. This includes things like paper towels, razor blades, clothing, and some foodstuffs.

For a more traditional investment, buy shares in companies that can raise their prices with inflation.

The message being sent by corporations right now is to avoid risk and be prepared for the unexpected. It would be wise to heed their call.

 

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