Inflation has led to political revolutions since Medieval times and we may be witnessing the fifth such great revolution in history unfolding in the Middle East and in our own country right now, said Dr. Ed Yardeni, president and chief investment strategist of Yardeni Research.
Yardeni cites the work of historian David Hackett Fischer, who described civilization’s first four major inflation cycles in his 1999 work The Great Wave: Price Revolutions and the Rhythm of History. The first price change wave was during Medieval times, culminating with The Black Death. The next three occurred in the 16th century, the 18th century and the turn of the last century. Each wave lasts about 100 years, according to Fischer’s work
“During the past four price revolutions, food and fuel led the upward movement in prices, followed by manufactured goods and services,” said Yardeni, a widely-followed strategist on Wall Street who’s held positions with the Federal Reserve and the U.S. Treasury. “The relevance of the history of previous inflation waves to the present situation is downright eerie.”
Yardeni, referencing Fischer’s work, describes the waves as beginning with rising inflation and then followed by governments printing money. Changes in prices then begin to occur more rapidly in response, causing income inequality as the elite resist tax increases. The slighted, especially the younger generation, get desperate and angry, mobilizing in groups to spur a political revolution. The wave ends with tremendous financial volatility and ultimately a deep collapse in prices and interest rates.
Compare this to what’s happening today. Many commodity prices have more than doubled in less than a year. The political revolution is happening first to young Egyptians and Libyans because of their sky-high unemployment rates and lack of resources and freedom to do anything about it. The rising prices for basic sustenance give them no choice but to revolt. Their revolution is accelerating inflation for the globe by pushing oil prices over $100 on Wednesday.
“This feels a little like the fall of Communism,” said Tim Seymour, hedge fund manager and founder of Emergingmoney.com. “If you have a military transition and then uncertain leadership, elections and evolution, this will take months if not years.”
In our own country, Federal Reserve Chairman Ben Bernanke has kept interest rates in negative territory, theoretically, by lowering the central bank’s benchmark rate to zero and then buying Treasury bonds on top of that.
The stock market has doubled because of Bernanke’s actions, creating our own income inequality as the wealth of the top earners rebound and President Obama extends their tax cuts, while higher gasoline prices hit lower-income earners, notes Yardeni, whose financial blog you can read by clicking here. While on a smaller and less violent scale than the Middle East, the fight over union benefits in Wisconsin fits the description of social unrest because of these great price revolutions. The conditions could worsen in this country if the states aren’t able to fund themselves in the municipal bond market.
It begs the question: why is this price revolution happening so quickly after one just ended in the 20th Century with the tech bubble burst?
“The rate at which this price revolution is taking place may be a byproduct of the global interconnected age we live in where price shocks travel faster,” said Yardeni. “I believe this is the fifth price revolution, but I’m not sure Fischer would agree or not.”
It would make sense that these revolutions would happen more rapidly in this technological age. After all, Facebook and Twitter seem to be facilitating these revolutions from region to region.
Yardeni has been recommending commodities and stocks based on this price wave theory, but is now getting nervous that we may be entering the stage of the revolution with extreme financial volatility. Meaning, a correction could be near so he’s thinking of taking some money off the table.
A call and e-mail to Dr. Fischer, now the Earl Warren Professor of History at Brandeis University, was not yet returned. His book on price revolutions sells for $19.98 on Amazon.com.
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Trader disclosure: On Feb 23, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Seymour owns (AAPL); Seymour owns (BAC); Seymour owns (F); Seymour owns (FXI); Seymour owns (INTC); Seymour owns (STP); Seymour owns (TSL); Kinahan owns (BAC); Kinahan owns (C), is short (C) calls; Kinahan owns (CSCO); Kinahan owns (F); Kinahan owns (GE); Kinahan owns (MSFT) puts; Kinahan owns (NFLX) puts; Kinahan owns (WFC); Kinahan owns (YHOO); Finerman's Firm Is Short (IWM); Finerman's Firm Is Short (SPY); Finerman's Firm Is Short (MDY); Finerman's firm is short (XRT); Finerman's firm is short (IJR); Finerman's Firm Is Long S&P Puts; Finerman's Firm Is Long Russell 2000 Puts; Finerman's Firm And Finerman Own (AAPL); Finerman's Firm Owns (BAC) Leap, Finerman Owns (BAC); Finerman's Firm Owns (BBY); Finerman's Firm And Finerman Own (BP); Finerman's firm owns (FCX) puts; Finerman Owns (GOOG); Finerman's Firm And Finerman Own (HPQ); Finerman's Firm Owns (IBM); Finerman's Firm Owns (JPM), (JPM) Leap; Finerman Owns (JPM); Finerman's Firm Owns (M); Finerman's Firm And Finerman Own (MSFT)’ Finerman's Firm Owns (WMT); Jon Najarian owns (CHK), is short (CHK) calls; Jon Najarian owns (DTV), is short (DTV) calls; Jon Najarian owns (BP), is short (BP) calls;’ Jon Najarian owns (NBR), is short (NBR) calls; Jon Najarian owns (KWK), is short (KWK) calls; Jon Najarian owns (HPQ); Jon Najarian owns (MOS), is short (MOS) calls; Jon Najarian owns (ATML), is short (ATML) calls; Jon Najarian owns (LLTC), is short (LLTC) calls
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