'RealMoney' Radio Recap: Whither Inflation?

Updated from 4:01 p.m. EDT

With the appointment of Ben Bernanke to replace Federal Reserve chairman Alan Greenspan, the outlook for the economy appears to be one of higher inflation and rising commodity prices, Aaron Task told "RealMoney" radio show listeners Wednesday.

Task, co-executive editor of TheStreet.com and stand-in host for Jim Cramer, said Bernanke seemed to downplay concerns about inflation in comments last week in a Times of London article, saying inflation is mostly confined to energy and raw materials. Bernanke has also been a supporter of the Bush tax cuts and hasn't appeared overly concerned about the deficit.

In March, Bernanke blamed the U.S. current account deficit on "a global savings glut," said Task, meaning that Bernanke's solution for the U.S. deficit might not be higher interest rates and higher savings rates in the U.S., but rather more spending and less savings by nations such as China and Japan.

What does this mean for investors? Task said that in the short term it should be positive for economic growth and for stock prices, especially financials and tech stocks.

In the longer term, higher inflation could result in weakness in the dollar. Indeed, gold has risen and treasuries have weakened recently.

Ultimately, in an environment of faster-rising inflation, cash is trash and commodities may be the best play, said Task. Task would look to invest in companies that produce those commodities for which China is a heavy importer and sell the stocks of companies that produce commodities for which China is a heavy exporter.

In areas where China is a heavy importer, Task recommended coal stocks such as Peabody ( BTU) and Massee Energy ( MEE); copper and gold producers Phelps Dodge ( PD) and Freeport McMoran Copper & Gold ( FCX); and iron ore produces BH Billiton ( BHP) and Rio Tinto ( RTP).

In other areas, he recommended Norsk Hydro ( NHY) as a way to play China's need for both fertilizer and energy; Tiffany ( TIF) for diamonds; Cisco ( CSCO), Juniper ( JNPR) and Alcatel ( ALA) as beneficiaries of China's demand for telecom switching and related equipment; and Canon ( CAJ) as a way to benefit from the country's demand for copiers.

Task would avoid steel, aluminum, cotton, synthetic fibers, air conditioners, paper, paper board, sugar, and elevator equipment, areas in which China's demand has fallen in the past year.

Commodities funds Task likes include the ( QRAYX) Oppenheimer Real Asset Class Y fund, ( PCRIX) PIMCO Commodity Real Return Strategy fund and the ( PSPFX) U. S. Global Investors Global Resources fund.

Also, if higher inflation and commodity prices are in store, Task said the much anticipated real estate bust isn't going to happen. That would be good for homebuilding stocks, he said, citing St. Joe ( JOE) as a favorite.

In response to a question about retail stocks, Task said retailers' stocks are seeing a bounce on hopes the Fed, with Bernanke as chairman, may halt interest rate increases. Task likes the retailers for a trade, but would look to sell the stocks into the holiday season.

In response to other callers, Task was bullish on Southwestern Energy ( SWN) and Conoco ( COP), but expressed caution about LSI Logic ( LSI) ahead of its earnings report and Lucent ( LU) in the aftermath of its results.

John Rutledge, RealMoney.com contributor and chairman of Rutledge Capital, joined Task by telephone. Rutledge said he believes that incoming Fed Chairman Bernanke understands the Federal Reserve's role to manage demand and prices in the economy.

He said prices ought to be going up for energy and natural resources because it is the market's way of signaling scarcity. When resources become more scarce, we're poorer than we were, he said. The Fed can't print more oil to make up for it.

On China, Rutledge said corporate profits in China were up 21% in the first nine months of 2005, twice the growth rate of corporate profits in the U.S., he said. He believes that China needs to maintain 9% to 10% growth rates for the populace there to remain content with the current Chinese government.

Rutledge said with that kind of growth in China, we're looking at "stiff prices for a long time" for oil and gas. He said the best way to play China is not to invest directly in Chinese companies because Chinese laws and accounting standards make it too risky.

He would recommend investing in funds of countries that sell resources to China such as the iShares MSCI Australia Index Fund ( EWA) or the iShares MSCI Pacific ex-Japan Index Fund ( EPP).

Task added the iShares MSCI Emerging Markets Index Fund ( EEM) would be another fund to consider.

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