Inflation and Food for Thought

I have been saying it for almost a year now, China's next great export is inflation. The British media picked up on it 3 to 6 months ago and now the U.S. media is slowly picking up on it.

http://www.marketwatch.com/news/story/chinas-inflation-its-spillover-whole/story.aspx?guid=%7B804FFB25%2DBA02%2D4737%2DB3C7%2D0E57DB5F4AEE%7D

For most of this decade, outsourcing to ultra-low-cost China has been a magic trick, enabling higher productivity and greater profits and consumption. This strategy has avoided the textbook downside of extended growth cycles -- an inflationary hangover followed by a recession.

While it is widely recognized that China has been behind rising prices of oil and other commodities, by supplying the world with mountains of ever cheaper toys, electronics and clothing the country has been a source of deflation.

But this could now be changing. Concern that China is now emerging as a source of higher, not lower, prices is emerging. The Times of London last week cited new figures showing that at the end of last year the cost of China's imports to the U.S. started rising sharply. The U.K. may soon follow.

And if China accedes to pressure to revalue the yuan substantially upward, the chances that those rising prices will be sharply felt increase as well.

The current looming recession will slow it down briefly but I think anything short of a depression won't change the end outcome. We are still in the batters circle taking practice swings before the game. The next big cycle I think is upon us.

Food for thought. Could a return to inflation actually be good for Japan? Think about it, they have been stuck in a deflationary funk for almost 17 years now. Inflation is running above 2.5% (above 4% if you don't just look at core) in most of the world. If Japan got caught up in it and inflation went to 2% from 0% could that be a good thing? Japanese stocks are cheap cheap cheap. I wonder if investors in Japan are seeing what is going on in the United States bringing back memories of 1990 and selling because of that memory. This is a United States problem not a Japan problem. It is the United States whose real estate and the collateral that will be in decline for years, not Japan. I have been spending some time on Japanese securities. No purchases yet but I have a feeling Japan's markets will greatly outperform the U.S. markets over the next 5 years. You have a tailwind with the currency. Like I said food for thought.