Interesting article from the Wall Street Journal yesterday. The piece describes in some detail how US companies are buying up raw materials in anticipation of prices rises in the immediate future.
Some bits from the WSJ:
McCormick bolstered its purchases as spice prices spiraled upward. Dehydrated garlic powder more than tripled and black pepper more than doubled since March 2009.
John Anton, Anton Sport’s founder, saw the price of cotton shooting up, and decided to act. Mr. Anton typically has about 30 boxes of shirts on hand at one time, but now has more than 2,500.
“It just kind of clicked that I can borrow at 2.45%, and if cotton is going to go up between 10% and 12%, why wouldn’t I do this?”
There are more examples provided in the article. You get the drift. Companies are stockpiling stuff because they think prices are going to rise. Not surprising at all. Cheap money is the fuel for commodity price increases. This is what the Fed has said time and again that they want to see happen. Bernanke is delighted to read that some guy is stocking up on shirts with ZIRP financing. It “proves” that his policy is working. It also proves that his policy is stoking food/commodity inflation. That crosses a very big line when countries are falling.
The article drifted from just the facts to some editorial connections between the Fed and inflation. The author made reference to a recent WSJ interview with J-C Trichet who made a thinly veiled threat to “central bankers” who are pursing monetary policies that have “second-round effects” on domestic prices. That arrow was a clear shot in the direction of Ben Bernanke.
The WSJ has been over the top in its support of Bernanke and QE. I think the paper let itself be used by the Fed on numerous occasions in the past half year. A significant part of the Fed’s QE2 propaganda sell job was delivered through the pages of the WSJ. But now the WSJ is publishing a steady stream of news how inflation/inflationary expectations are rising fast. And the pain/turmoil that this is causing.
The Editors of the paper are not dopes, and they read their own newspaper. The dots between ZIRP/QE and global commodity inflation are firmly in ink. I wonder when the editorial page will pose the question: “Is QE backfiring? Should the Fed continue?
I doubt that the Journal will be the first MSM to criticize Fed policy. That editorial will come from either the NYT or the WAPO. The WSJ can’t be too far behind. After all, as of today the editors are as aware as Bernanke and the other Fed members that QE was a poorly timed/executed policy. One that could now bring devastating consequences.
Note: An interesting interview today with Jim Rogers and the Swiss newspaper NZZ. Jim does connect the dots and blames Bernanke for food inflation. This is no surprise. What is surprising is that NZZ is asking the questions. It is just a matter of time before all of the press starting asking this question.
It’s quite important, especially when investing in small margin companies, to have an understanding of how they purchase their materials. Some of these companies actually make money off of their investments in futures. For me, big margins = margin of safety.