The fear of runaway inflation in the U.S. has taken hold of the market.
Last week Chairman Jerome Powell announced the Federal Reserve would keep its benchmark short-term rate near zero while allowing inflation to run hotter than normal. Powell said, “With inflation running persistently below 2%, we will aim to achieve inflation moderately above 2% for some time, so that inflation averages 2% over time, and longer term inflation expectations remain well-anchored at 2%.”
But there are many who doubt the Fed’s ability not to let inflation get out of control.
Jim Paulsen, Chief Investment Strategist of The Leuthold Group, told CNBC’s Trading Nation last week, “I would put decent odds that it could get out of control and require the Fed and other policy officials [and] the bond market to kneejerk in order to shut down the overheat.”
Several others have echoed Paulsen’s comments since, including billionaire Jeff “The Bond King” Gundlach and BlackRock’s bonds chief Rick Rieder.
On inflation, Powell said at the FOMC announcement, “During this time of reopening, we are likely to see some upward pressure on prices… but those pressures are likely to be temporary as they are associated with the reopening process.”
Powell continued affirming those pressures are “not likely to lead to persistently higher year-over-year inflation into the future — inflation at levels that are not consistent with our goal of 2% inflation — over time. Indeed it is the Fed’s job to make sure that that does not happen.”
If inflation were to move significantly over 2%, Powell says, “we would use our tools to bring inflation and exceptions down to mandate consistent levels.”
What tools is Powell talking about?
Interest rates.
As explained by economic writer Jean Folger, “Under a system of fractional reserve banking, interest rates and inflation tend to be inversely correlated. This relationship forms one of the central tenets of contemporary monetary policy: Central banks manipulate short-term interest rates to affect the rate of inflation in the economy.”
Yesterday, Treasury Secretary Janet Yellen said interest rates will need to rise in order to prevent the economy from overheating. Yellen commented, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”
Yellen later walked back that statement clarifying she was not making any recommendation or providing advice to the Federal Reserve, which she no longer works for.
Nevertheless, the “tools” Fed Chairman Powell is referring to when he says the Fed can bring down inflationary pressure is mostly raising interest rates.
So the Fed isn’t lying when it says it has tools that can fight inflation. But what the Fed isn’t being direct about is the efficacy of those tools. Nor do they estimate whether political pressures would even allow them to use those tools.
None of the government branches have total control over the Federal Reserve’s interest rates policies. However presidential and congressional influence over the Federal Reserve is well-documented.
To his credit, however, what Powell also seems to admit is that runaway inflation is not completely impossible.
Powell said the Federal Reserve is well aware of their own history, and knows of its own failures in controlling inflation during the 1960s and 1970s.
Of course the Fed’s stance on comparing U.S. monetary conditions of the 1960s and 70s to today is basically “it’s different this time.”
And they’re not wrong.
What’s different, however, is that never in the history of the United States has new money been printed so fast and at such a degree.
In the nine weeks between March 9, 2020 and May 11, 2020, the Fed added $2.3 trillion dollars to the money supply as measured by M2.
That’s the equivalent of creating $425,000 in new USD every second…
… every second for nine weeks straight!
And that was just nine weeks of last year. In total the Federal Reserve added more than $4 trillion to the supply of USD. This increased the total supply of USD by more than 25%.
I think it’s important to recognize the Federal Reserve’s role. The Federal Reserve does not exist to provide raw facts to the market. The Federal Reserve’s mission is “to foster the stability, integrity, and efficiency of the nation’s monetary, financial, and payment systems so as to promote optimal macroeconomic performance.”
If achieving that mission means spinning facts, clever rhetoric, or downplaying things like substantial inflationary pressures, that’s what they’ll do. The job is to promote America’s financial system to better the economy — not to service retail investors like you and me. We’re on our own.
At Berkshire Hathaway’s annual shareholder meeting last week, Warren Buffet said the conglomerate is already seeing significant inflation. Buffett told shareholders, “We are seeing very substantial inflation. It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.”
“We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country,” Buffett continued, “So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up.”
It’s important to note, however, that Buffett is talking about the increasing costs of building materials, which is not a part of the Consumer Price Index the Fed uses to measure inflation.
CPI is a measure of consumer expenditures — things like food, housing, clothing, transportation, healthcare, recreation, education, communication, and other goods and services. It doesn’t measure the price of steel, lumber, or other commodities needed to make those goods — although many would argue it should.
However Buffett’s comments are still very important. Rising material costs for building and manufacturing will, no doubt sooner or later, translate into higher prices for CPI goods and services.
At the end of the day inflation is already here and/or soon heading higher, depending on who you ask. And the best traditional hedge for inflation has been gold.
Over the past several months, I have been positioning readers of my Junior Mining Trader newsletter in gold stocks aiming to take advantage of the inflation that’s happening right now (or soon to come). And already we’re seeing big gains. Two small gold stocks we bought just two weeks ago have jumped 60% and 20%, respectively. And we’ve just crossed a 100% gain in another gold explorer I’ve called “the most exciting gold stock on the market.”
And I think we’re only getting started. To learn more about how you can get in on the action today, click here.
