Inflation in 2008

What are people missing and how will it effect the markets in 2008? Most Americans don't fully appreciate the true cost of money, housing, food, water and gasoline at the pump. Globally, citizens forget their local governments subsidize energy, electricity, water and food. In 2008, we will begin the transition toward more fully recognizing the true costs of all these key ingredients to daily life.

Why? Because the cost pressures on all the markets will force the recalibration of raw materials, labor, taxes and general expenditures...i.e. EARNINGS ARE GOING TO BE EFFECTED.

1) How will local and federal governments lower their costs? By raising prices of what they subsidize.
2) As global inventories of food and energy get drawn down to levels not seen in a generation...what happens? Prices go up.
3) As the real cost of money in an inflationary environment and a more risk adverse world that may be also slowing because of all these cost pressures....what happens? Interest rates go up.
4) As we remain in a full employment world..the employees become yet more important and valuable...what happens? Wage inflation kicks in..we think people are currently underpaid.
5) When local state and federal governments are over spending relative to tax receipts they have little choice but to slow their spending. What happens? This spending as percent of GDP is material...so the economy slows...so there is less productivity.

In summary: The cost of everything is going materially higher in a slowing economy. People are going to have to cut costs and begin to quickly live within their means. Americans are living well beyond this changing cost structure and the adjustment is going to be painful, years are going to be spent paying down personal debt.

To make money in 2008 will require patience and intense stock selection, just like 2007.
Big companies in leadership positions, that are over capitalized and with the best management will take material market share. It is noteworthy the USA has most of these companies and they look the most interesting/ attractive in the new year in this scenario we are describing.

BK, MSFT, GE, PG, TRN, WMB, CHK, BG, HST, BTU, ITRI, BHP and FCX to name a few..

Our bottom fishing list might include: MFD, KB, UA, PWE, MPEL, CLWR, STZ, JOE,

Careful with all bonds...it feels like a giant bear trap..hard assets feel good...get ready...those with cash and borrowing capacity at reasonable prices will do well. Remember the hedge funds only source of capital is on margin from their friendly neighborhood broker dealer. And they are no longer able to lend......private equity and hedge funds are not where you want to be.....

Barkly seen here (in a now famous photograph), on vacation years ago, loved to run down the ski mountains in Big Sky and play in the snow.