July 2012 Index

August 30, 2012

As we wrote two weeks ago, warning signs of coming inflation are more evident. The most obvious canary in the coal mine for upcoming price increases is commodity prices. Global energy prices are elevated as a result of supply concerns and continued growth in demand. Food prices are rising due to marginal-to-poor crop production around the globe. Real estate prices appear to have bottomed in many developed markets and remain elevated in some emerging markets.

There are those who are convinced that inflation will not be a problem for a long time. They point to slack in labor markets, stagnant consumer demand, and deleveraging in the developed economies. Our view is that the same items they cite indicate that governments will respond by introduced more monetary system stimulus.

The printing of money continues to provide wind to the sails of asset prices around the globe. When prices rise, not all assets rise commensurately. Assets that are more likely to rise in price include those that are either in limited supply, or that represent basic, essential needs. These are the prices that our Guild Basic Needs IndexTM tracks.

We believe that the world will experience price rises in the future as increased global money supply and liquidity find their way into commodities which are fungible and which represent a store of value for the citizenry. If a commodity can be eaten, used for apparel, shelter or as a means of adornment people will acquire and hoard such assets in times of economic distress. This is even more true if the commodity has the attributes of a currency and can be used as a medium of exchange. It does not matter whether the distress is caused by inflation or deflation/ depression commodities with currency attributes will be in demand.

Higher prices for basic needs are the result of: more liquidity ( money printing), improved diets in many countries, improved ability to buy apparel, upgraded living conditions, and the use of more energy to sustain their lifestyles. Our expectation is that the inflation rate of basic needs will continue to substantially exceed the rate of inflation published by official sources.

August 16, 2012

The Cost of Eating is Headed Higher — But you will probably see it at the checkout stand before you see it in the CPI data

Drought, bad crop data, and rising grain prices around the globe have put food inflation on the front pages, raising alarm in many circles. Consumers are concerned, food producers are concerned, businesses are concerned, and governments are concerned. While food may not be a huge percentage of the daily budget for those in the developed world, it is in the lesser developed countries. Food inflation can erode the standard of living in the emerging economics rapidly and when food prices go up too much, governments fall.

No Inflation in the U.S. — Says the BLS

Even though we have seen huge moves in grain prices recently, thus far the increase has failed to show up in the U.S. government’s inflation data. This week, the U.S. Bureau of Labor Statistics released its July Consumer Price Index (CPI) inflation data, saying that prices were unchanged in July. The CPI is designed to track prices based on consumer spending patterns. In our opinion, it is not a good gauge of whether the cost of living is rising or falling. The Guild Basic Needs IndexTM focuses on certain food, clothing, shelter, and energy (used for cooking, heating, cooling, and transportation) components to give a truer measure of where the underlying costs of living in America are headed.

As expected, recent moves in certain commodities are pushing our GBNI higher. The unique aspects of the GBNI are that it is not seasonally adjusted, and the components within the index (and their weightings) are not managed or manipulated. The GBNI monitors the cost of the basic necessities of life. It ignores the cost of electronics, video games, computers, grooming services, and other non-basic items. The GBNI is designed to reflect the underlying prices of four basic items that one needs: food, shelter, clothing, and energy (for heating, cooling, and transportation).

Today, the index is putting us on notice by flashing a yellow light that higher prices are on the horizon. The cost of food, energy, clothing, and shelter are beginning once again to move upward after a hiatus created by the melt down in housing prices, the decline in energy prices, the fall in the price of certain fabrics used to make clothes, and the moderation the cost of food as a result of the economic crisis that began in 2008.

After the banking crisis and global economic slowdown that began in 2008, the price of basic needs declined for a few years. Now, we are seeing the effects of the money printing by many countries in order to stimulate the value of assets and counteract the deflationary effects of the crisis. This effect, combined with increasing demand from China, Brazil, Eastern Europe, India, and other countries where standards of living are rising is increasing the prices of basic needs.

Today, the raw costs are increasing. Over the next few weeks and months and continuing into the future you will see higher prices at the checkout stand as these costs filter into the prices of the goods that you and your fellow consumers purchase.