-- Posted Friday, 2 August 2013 | | Disqus

The monthly ISM manufacturing index is the best number in two years at 55.4. As our friends at Agora Financial put it: ‘Nothing ugly buried in the report’s internals, either. New orders? Up big. Production? Up huge. Jobs? Back in expansion territory.’

Anything above 50 indicates expansion in US manufacturing; below 50 is a contraction. From what we heard in Vancouver last month the cheap energy revolution of hydraulic fracking is proving a renaissance to US industry and this is the start of this process.

Fracking revolution

The US has already drilled 110,000 new wells. Billions have been invested. Fracking produces gas at a third of global prices and oil. Hello Qatar? This cheap energy can be used to power any industry and as feedstock for nitrogen fertilizer and much more.

Saudi’s Prince Alwaleed is warning that oil prices may be under threat. That could be a premature conclusion as fracking is confined to the US at the moment where the plan is to hit 3.5 million barrels per day by 2020. That’s significant but not overwhelming for the oil market.

Other countries have not even started. Besides fracking technology is unproven and yields may be poor for all that investment. If oil was to go below $70 a barrel the whole industry would be bankrupt. Perhaps the Saudis might arrange for that to happen, but it would cost them too in lost revenues.

Inflation, inflation

However, for investors this might be the moment to concede that the US recovery is for real. It still has a very nasty sting in the tail to come, all the same and that is inflation.

You can’t have the Federal Reserve pump up the volume of dollars like it has over the past four years without inflation. All that has been holding it back is fear over the US economy. The new money has sat in bank accounts.

If a recovery is happening then all those new dollars will come out of the bank and enter the economy. Prices will go up and up. It won’t just be US stocks that go up 150 per cent. It will be food prices and just about everything, including oil which will at least protect the fracking industry.

What should investors do to survive an inflation? Well you need to buy things that go up with it, and preferably even higher. Gold and silver are the obvious candidates and selling cheap now after the recent central bank price intervention in April.

Dow 20,000?

Share prices already look a bit on the high side in the US but the Dow could shoot to 20,000. Real estate ought to go higher where it has not gotten back to pre-crisis levels, though interest rates will continue to move higher in a recovery and surge with inflation. Bonds will be the biggest losers.

Still the global headwinds of a crashing Chinese economy and European recession will present major challenges to US expansion, although this will help to keep inflation somewhat in check. The main question is whether the US really can do this on its own, and on that the jury is considering its judgement.

If you listen to the respected Economic Cycles Research Institute then its data still suggests the US is actually in a recession right now, and this month’s manufacturing data is a freak show.

It could be that inflation is distorting the US growth figures as it does in China that continues to post the lie of 7.5 per cent GDP growth which is not properly adjusted for rampant inflation.

-- Posted Friday, 2 August 2013 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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