Is Inflation Tamed ? -- Stock Market Analysis (29)

Is Inflation Tamed? Stock Market Analysis (29) If you have a stake in the stock market, you should pay attention to the signs of inflation in the economy. The following are the main factors of inflation: • Demand and supply interaction. • Economic competition and transparency. • Government policies on interest rates, deregulation, taxes, etc. • Market structure, public/private ownership, labor supply, cartels, etc. • Nature of product, scarcity, substitution, technological change, etc. The stock market is most sensitive to interest rates. In general, when interest rates fall, it signals less inflation, more investment, and better economy ahead. Stock prices tend to go up. The reverse is true when interest rates rise. In fact, the fall in interest rates causes more money to flow into the stock market because bank deposits or bonds no longer yield a good return. Remember the high inflation of 1970s? It was brought about by the OPEC oil cutback and commodity shortage. It had a devastating effect on the stock market. That period is described as stagflation where economic stagnation and inflation coexisted. When oil prices began to tumble in the early 1980s, inflation receded and has never come back so fiercely since. The rise of oil prices in 2008 only brought about a milder and temporary inflation being cut short by the financial meltdown and worldwide recession. Has inflation been tamed? Definitely. The reasons are as follows: Due to the rise of the high-tech industry, the world economy now has higher electronic contents, as shown in banking, finance, publishing, retail, autos, telephones, household goods, etc. The electronic parts tend to fall in prices even with better quality and productivity. Overall, the higher the share of electronics in the economy, the greater is the downward pressure on prices. Generally speaking, over 50 per cent of production cost comes from labor. In the electronics industry, labor union is almost non-existent. That means labor cost is most competitive in high-tech, as opposed to auto, health care, or education. The supply of cheap labor worldwide is plentiful. In China and India, millions and millions of unemployed or under-employed are eager to work for low wages, not to mention other countries in Asia, South America, and Africa. The temptation is great for Western companies to relocate their production overseas, especially in labor-intensive industries. The overall picture is that workers are losing their bargaining power. This has a dampening effect on wages, hence on costs, prices, and inflation. The explosion of Internet commerce adds to the downward pressure on prices because people shop and compare online. Companies also advertise and compete fiercely online. This increases transparency and competition in the marketplace. Globalization acts as an inflation damper, too. More and more firms now compete worldwide rather than in a protected region, Employers go around the world seeking new markets and lower labor costs. All of these contribute to more intense competition and higher productivity that in turn will lead to lower inflation. On the other hand, the causes of high inflation are still with us. Nowadays, they mostly originate from commodity or material scarcity, because the earth has limited natural resources. Oil is a good example. Fresh water, food, and some metals are next in line. However, as alternative energy sources are developed, oil scarcity will become a less disruptive force. In addition, the new technology of material science is producing new alloys or composite materials, thereby substituting or reducing the need for scarce metals. Another source of inflation is health care services. Health care is a unique industry dependent on medical technology, a specialized labor force, peoples lifestyle, and cultural values about life and health. All these tend to exert upward pressure on prices. It is very difficult to contain health care costs as described in my previous videos #27 and 28. Finally, there exists a wild card affecting future inflation. It is the effects of climate change due to global warming. If more droughts, floods, hurricanes occur as predicted, the production of food will be disrupted leading to higher prices that will have widespread consequences for the global economy. In addition, water supply to agricultural areas and major cities will be curtailed if a drought persists for a long time. For further information, please email to stockfessor@comcast.net

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YouTube | January 6, 2009

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