The misery index is the unemployment rate added to the inflation rate. Currently the unemployment rate is 8.9% and inflation is essentially zero. This makes sense given the wealth destruction we have seen. However, the money supply has exploded and the government is spending trillions of dollars they currently don’t have. High unemployment will be a fact of life for a while sadly as I do not believe the governments actions will create jobs, so the only question now is whether the trillions will trigger inflation. What makes this so amazingly bad is that we could very well go from a deflationary spiral right to an inflationary one. This is truly a unique period. I think more inflation is a safe bet as is higher unemployment which means a higher misery index. It isn’t hard to see the misery index back at 15 or higher. All we need is unemployment at 10%-11% and inflation and 4%-6%. That is doable in the next few years.
I am buying commodity based stocks. That is, stocks that react positively to rising commodities prices which will happen as the dollar is devalued. Stocks like John Deere (DE) and Transocean (RIG) will benefit as agriculture and oil increase in price due to the weak dollar and demand increases as well. I would not be surprised if either missed earnings short term, but would use that as an opportunity to get in cheaper. I am also buying gold (GLD) on dips. I view my gold as an insurance policy. If I am wrong, it will drop some or stay flat but I will be able to sleep better knowing I have it. If I am right, it could be a huge gain as the misery increases.
If inflation does return in a big way, we better pray those trillions we spent at least reduce the unemployment rate. If not, the misery index could return to 1970′s levels. I am glad I was born in 1982 so I missed that debacle. Ronald Reagan rescued us and crushed the misery index from 20 that he inherited to 9 using real tax cuts, sound monetary policy, sound fiscal policy, sound trade policy, and spending money on things that worked. Winning the cold war didn’t hurt either.
No one in power today at the federal level has the intelligence to deal with this misery that is barreling towards us. Incredibly, we still have time to stop it, but these people won’t. They will thrive on this misery and use it as further justification to grow government, but they won’t tell you that’s what caused it in the first place.