Inflation! It’s Inflation! Run For Your Lives

“Inflation! It’s Inflation! Run For Your Lives!”

Touchy, touchy…

In yesterday’s Rude, I touched on how the market overreacted to US Treasury Secretary Janet Yellen’s seemingly benign remarks about the US central bank’s policy.  Let’s quickly review her comments, said during an economic forum presented by The Atlantic:

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, it could cause some very modest increases in interest rates.

But these are investments our economy needs to be competitive and to be productive. I think our economy will grow faster because of them.

I’m pretty sure even the most average economics major wouldn’t disagree too heartily with these comments.  But judging by the outrage on LinkedIn – which, by the way, is becoming as big a whiny dumpster fire as Twitter – you’d think she called for the market to discover rates rather than the Fed setting them.

But the whiners would have their way!  Later in the day, Yellen walked back her comments on rate rises at the Wall Street Journal’s CEO Council Summit, saying:

It’s not something I’m predicting or recommending.  If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.

Of course, Secretary Yellen was referring to her days as Chairman of the Fed from 2014-2018.

So why the faux and not-so-faux outrage?

Perhaps because the market believes Yellen inadvertently brought forward all the dire predictions of the past 13 years of money printing.

Paging Robert Mugabe… Paging Robert Mugabe…

When I moved to Singapore in 2009, the first class I taught was Introduction to Wealth Management for a major investment bank.  It was a day-long course that covered the basics of the finance world.  Economics was the first subject we explored that day.

I talked about inflation and made fun of Robert Mugabe, the then-President of Zimbabwe, and his moronic central bank chief Gideon Gono.

I showed the picture above, of a 100,000,000,000,000 Zimbabwe dollar bill, on my PowerPoint presentation.  One of my students raised his hand enthusiastically.

“I’ve got one right here.”

“What are you doing with that?”

“Well, I took a holiday in Africa, and I was in Harare [the capital of Zimbabwe].”

“You kids are far more adventurous than I was!”

Hell, during my college days, I thought driving to the Jersey shore was a trip.

I held the bill in my hands.  One hundred trillion dollars.  In my hands.

At that time, $100 trillion Zimbabwe dollars were equal to about USD 30.  Lunch, basically.

That’s hyperinflation for you.

Reading Andrew Dickson White’s Fiat Money Inflation in France or Adam Fergusson’s When Money Dies is one thing.

Feeling the hyperinflation in your hands, literally laughing at this paper that’s supposed to represent value?  That’s another thing entirely.

Do I think that’s going to happen in the United States to its beloved and formerly almighty dollar?

No.

But that hasn’t stopped some reliable and noted economists from calling an inflation trade.

Some Smart Guys Think Prices Are Heading Up

Marco Kolanovic, the U.S.’s third most famous Croatian-American after Bill Belichick and Nick Saban, is the Global Head of Macro Quantitative and Derivatives Research at J.P. Morgan.

I know sell-side research hasn’t covered itself in glory for much of the century so far.  But trust me, Kolanovic is an intelligent guy.  Like Ph.D. in Theoretical Physics from NYU smart.  Like many, many correct calls about the market smart.

Here’s what he has to say:

…easy monetary and fiscal policies will likely persist for a while. In addition, there are various temporary frictions related to supply chains, reopening, as well as political and business decisions that may compound inflation.

He also mentioned that “most portfolios are now vulnerable to a potential inflation shock” because most of today’s investment managers “have never experienced a rise in yields, commodities, value stocks, or inflation in any meaningful way.”

Kolanvic goes on to suggest these two steps:

  1. First, one should shorten duration and reallocate from bonds to commodities and equities.
  2. Within equities, investors should buy value and short low volatility style. Growth and quality also have a negative correlation to inflation.

Jared Dillian, another intelligent guy and the editor of the Daily Dirtnap (disclosure: I’m a subscriber), wrote last week that he saw inflation everywhere.  He wanted to write about it in his Bloomberg column, but his editor was saturated with inflation pitches!

The Wall Street Journal’s Streetwise column today is titled “Everything Screams Inflation.”

Is This Vindication for Jim Rickards?

My erstwhile colleague, Jim Rickards, has been calling for $15,000 gold for a long time now.  He’s always been a hard money man, and his books are excellent reads.

When I first read Currency Wars, I thought to myself, “This can’t be the way the world works.”

Lo and behold, it was.

Jim has consistently called Bitcoin a bubble.  Now it may also be a national security threat.

While many investors continue to pile into Bitcoin, one commodity is lagging behind the others.  And its time may have come.

Let me show you the gold chart:

After a torrid rise from the March 2020 covid bottom, gold hit $2,063 on August 6th.  Since then, gold has markedly underperformed.

But with all this talk of inflation, now may be the perfect time to re-enter.

Lower highs and lower lows characterize downtrends.  And that was clearly the case from August 2020 to December 2020.

Then gold rallied into January, touching prior highs.

It immediately resumed its downtrend, but then in March, we saw a potential double bottom.  That means gold fell to 1,695, rallied, then fell again to 1,695, and then rallied again.

We’re now seeing a small uptrend.  Whether that uptrend is a countertrend rally in the larger downtrend or the start of a new bull market remains to be confirmed.

But it’s a good bet this is the start of a new bull market, thanks to all the inflation chatter.

And it’s not like there aren’t gold buyers.

In the Rude’s brother publication, the 5 Minute Forecast, Managing Editor Dave Gonigam posted this chart:

Old Pooty-Poot continues to pile into gold.  And why not?  While the Western Sheep sleep, the Russian Bear attacks.

U.S. dollar inflation is just one reason the Central Bank of Russia has been loading up on gold for years. “No one plays the gold market better,” observes our macro maven Jim Rickards.

And if that doesn’t convince, maybe this will:

Sam Zell, anti-gold for most of his nearly eight decades on our rock, is buying gold.  Who next?

Warren Buffett?

Surely not… but we can dream.

Until tomorrow, my fellow Rudes.

Have a fabulous Thursday!

All the best,

— Sean

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