Inflation, oil on their way back: Rubin

Energy prices and inflation will make a swift return, according to CIBC World Market’s chief economist and chief strategist, Jeff Rubin. Rubin is calling for triple-digit gains for oil in the near future, as inflation spikes and supply drops.

A new report from CIBC World Markets says the U.S. government is starting to resemble misguided emerging economies like Zimbabwe and Argentina, by simply creating more money to fund its plans.

“Already U.S. money supply is growing at a nearly 20% rate in the last three months, and the printing presses are just warming up. And there’s no shortage of more troubled assets to monetize along with $1.5 trillion-plus federal deficits to keep money supply growth chugging along in the future,” he says. “As it buys up spread product, the Fed will leave Treasuries to be mopped up by foreigners. Since outsiders like the People’s Bank of China now own over 50% of America’s debt, there has never been a better time to reflate. Why default on your taxpayers when you can default on someone else’s?”

Rubin says the U.S. dollar could sink 40% against the yuan over its term like it did against the yen between 1971 and 1981. It this would cause huge inflationary run-up.

“The huge World War II deficits saw inflation peak at almost 20% in 1947,” Rubin says. “When the printing presses were turned up to pay for the Korean War, inflation moved from negative territory to over 9% within the space of nine months in the early 1950s. And when Arthur Burns greased the Fed’s presses after the Vietnam War, inflation soon made a triumphant return back to double-digit territory.”

Rubin believes that with this latest round of printing, headline CPI inflation will increase dramatically.

“Headline U.S. CPI inflation will grab a negative handle in the next few months but it will be running north of 4% in less than a year.”

Rubin expects a comeback in oil prices to also fuel inflation, because supply has dropped faster than demand.

“The IEA [International Energy Agency] recently estimated that the industry will have to spend well over half a trillion dollars annually to meet future demand and counter depletion,” says Rubin. “No one is going to finance those money-losing mega-investments at oil prices anywhere near $40 per barrel. If yesterday’s record-high prices haven’t spurred supply growth, what chances do oil prices a third or a quarter of those record levels have?”

Rubin notes recent announcements of project cancellations and postponements of new energy projects not only cancel out the expected two-million-barrel-per-day increase in global production by 2010, but they are likely to actually drive production down a million barrels per day below last year’s levels.

“Global oil prices will once again spike. That may well reverse some of the supply destruction that is currently taking place, but not before world oil prices print triple-digit levels again,” he says.

(01/23/09)