Monday, April 30, 2007

Falling Dollar = Inflation

Another WSJ article highlights the link between a weak dollar and inflation:

Overall import inflation has moderated because oil prices aren't rising as fast as they did a couple of years ago. But other signs of import inflation are out there. In March, prices for imported consumer goods, excluding automobiles, were 1.8% higher than they were a year earlier -- the biggest gain in 11 years, points out Morgan Stanley economist Richard Berner. The risk is that this could make it harder for the Fed to cut rates in the presence of economic weakness. Calling it stagflation -- the coupling of economic weakness and skyrocketing prices -- is overdoing it, but there's a whiff of it in the air.

However, there are some positive effects as well:

Last Friday, the Commerce Department reported that gross domestic product grew at its slowest pace in four years in the first quarter. The Dow Jones Industrial Average advanced, nonetheless, as it has most days in a month that's so far seen it add 767 points.

The big factor in the rally has been that, thanks to the combination of strong growth overseas and a weak dollar, overseas sales have pushed profits higher at many companies. Among the companies whose first-quarter strength has come as a surprise to investors: Whirlpool, 3M, Caterpillar and Coca-Cola.

It is this effect that has been the source of my bullishness on large cap stocks over the last six months. That is starting to pay off now. Smaller companies are more dependent on the domestic economy while the big multinationals benefit at least as much from strong overseas economies.

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