By Keith R. McCullough, Hedgeye





“Poverty wants some things, luxury many things, avarice all things.”-Benjamin Franklin

Yesterday, one of our young Jedi analysts at Hedgeye, Kevin Kaiser, sent me a highlight from The Grocer (an industry trade rag) that inflating food prices are making ordinary breakfast items like orange and apple juice a “luxury.”

Now a Wall Street analyst at a sell side investment bank would find a way to dress this data point up with a pig’s lipstick and call it an “affordable luxury.” Someone working for Federal Reserve Chief Ben Bernanke probably calls something like breakfast “non-core” or “free.” But we simpleton, non-recipients of government bailout moneys, just call it what it is – inflation.

Six months ago we didn’t have global inflation accelerating. We had a US dollar index that wasn’t being debauched (7.7% higher at $83), a CRB Commodities Index (19 commodity basket) that was 30% lower in price, and we didn’t have Quantitative Guessing Part Deux either. Back then, free markets pricing in a strong U.S. dollar and low inflation was a bullish signal to buy U.S. equities. Today, the  latest big government intervention scheme is debauching the dollar and perpetuating higher inflation. Back then, I dropped my cash position to 46%. Today, I’ve raised it to 67%. (And understand that I’m not one of these perma-bulls who needs to be invested trying to get back to a 2007 high-water mark gone bad.)

Yesterday, we saw a new high-water mark established in the real-world inflation reading. With the U.S. dollar getting burned at the stake (down 1% on the day, making a move towards a 6-month low), the CRB Commodities Index was hitting a freshly squeezed 6-month high. All luxury things considered, if you are one of the 44 milllion Americans who lives on food stamps, how do you like them apples?

Now setting aside the inconvenient truth that there’s never been a global economic powerhouse that has devalued its way to prosperity, let’s give the Bernanke a little something to bring to his dance with America’s new chair of the US Financial Services Sub-Committee on Domestic Monetary Policy, Ron Paul, on February 9th. Here are the 6-month price percentage moves in some of the things people need to live with:

  • Cotton = +125.7%
  • Sugar = +82.6%
  • Corn = +59.0%
  • Coffee = +41.4%
  • Rice = +40.5%
  • Oats = +36.6%
  • Copper = +36.1%
  • Lumber = +33.8%
  • Oil = +25.1%

Yeah, I guess for the sake of professional policy makers in DC who get dinner for free and a car service to work, I should stop there. To make the Top 10 things that may or may not be considered “luxury things,” you really need to have inflated on the order of 25% or more. Pork bellies are only up 10.7% in the last 6 months – so go have yourself some powdered Keynesian Kool-Aid with some sausage links for lunch and like it.

Over that same 6-month period the dollar has droppred almost 6% and now has an inverse correlation to the price of rice and wheat.

So where does that leave the almighty American Consumer? That’s easy, pull up some charts of U.S. consumer stocks – and pull up some big ones like Procter & Gamble PG , McDonalds MCD , and Target TGT .

Sure, since most people in this business read points of view in terms of how it directly addresses their personal positioning, I’m sure you can find me some US Consumer stocks that used to look like Coach COH — before the man-purse idea didn’t take  CEO Lew Frankfort to the moon — but overall, Consumer Staples XLP and Consumer Discretionary XLY are the 2 worst sectors in the entire US stock market all of a sudden for a reason, down 1.84% and 0.97% in the last 3 weeks of trading, respectively.

On a more positive note, Hosni Mubarak turned on the internet. So now all of our Egyptian friends can start tweeting Hedgeye’s 6-month table of real-world inflation to their friends again. Social networking tools are going to continue to revolutionize the transparency and accountability standards that the people of this world hold their governments to. That’s a luxury thing

of personal liberty that I can believe in.



Hedgeye 6-month commodity index