Storm Clouds over Corporate America and the Fed

With increased consumer confidence, spending and sales are up, but included in this seemingly positive turnaround, is inflationary pressure. Corporate America has yet to pass the increased cost in commodities to consumers for fear of losing them again, the end line being that it has begun hurting small and large companies. Even mega corporations with flexible allowances to negotiate excellent rates from suppliers are feeling the squeeze.

It’s a short term scenario that cannot continue indefinitely. Commodity prices will continue to rise rapidly as they did last year. Crude oil was up 17.6%, sugar 25.8%, wheat 50% and most industrial metals almost doubled. Eventually this inflationary pressure will seriously dig into corporate profits. Either the revenues will start increasing rapidly over the next few quarters offsetting higher costs or profits are in-line to take a hit.

The Federal Reserve unleashed an unprecedented effort in quantitative easing, an additional $600 Billion has been placed into Treasury purchases in an attempt to stave off deflation, an early warning sign to be conce
ed about, storm clouds are gathering. By having the Federal Reserve pump in so much liquidity to boost the economy, it could quite possibly send inflation in overdrive, something that American consumers can do without.

The real issue is to steady the rise of inflation, to ensure that it does not happen too quickly. Right now, the Fed’s seems more conce
ed about lowering unemployment and stimulating the economy. Admirable but it could seriously backfire. We will see in March if they will continue their quantitative efforts in the face of an ‘improving’ economy.

Bill Gross, founder of Pacific Investment Management which runs its $250bn flagship fund, Pimco Total Return mentioned at Forbes last annual investment roundtable “I don't know if the U.S. has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation. We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential.”

George Haligua Cohen, CEO of Traders Group, a multibillion dollar private investment firm, mentioned on MSNBC “With the latest unrest in the Middle East, there are going to see strong reactions in the markets. With oil rich Libya possibly facing the same fate as Egypt, oil prices will continue to increase taking inflation along with it, combined with that the Fed’s continual printing of US dollars. I have a genuine worry that this dilution of the US Dollar will impact seriously the global economy”. Both George Haligua Cohen and Bill Gross represent the general mind set of unease currently spreading through the financial community.

It remains to be seen whether the Federal Reserve will succeed in its latest quantitative easing efforts, but one point remains certain, the latest developments in the Middle East combined with the continual dilution of the US dollar and rising oil prices is paving way for rising inflation rates.