Do You Need to Sprint to Outrun This Inflation?

  • Inflation hits a 30-year high.  The last time it was this high, Dubya’s Daddy was President.
  • It’s great to own assets right now.  Even – perhaps, especially – stocks.
  • But crypto and real estate have much more room to run, despite the Zillow kerfuffle.

It’s Thursday!  Nearly there…

While the Journal is in an uproar over inflation – and it’s definitely an issue – it’s not time to hit the panic button yet.

In fact, if you’ve been exploring that second passport, buying crypto, building your online company for cash flow, and getting in shape, you’re already in the perfect position to profit from this coming storm.

But before every storm, there’s the calm. That’s where we are right now.  So, hold fast.

“The World is on Fire!”

Ok, it’s not on fire, but practically every economics article on WSJ.com reads that somehow The World is falling apart. 

Yesterday I accused The Wall Street Journal of straddling a political fence because it’s pretty, socially liberal, but occasionally sounds conservative.

And today’s is one of the more conservative editions of the paper.

“Price Jumps Awaken Caution in The Markets” reads one headline.

“Inflation Hits 30-Year High” reads another headline.

In the opinion section, “Inflation and Building Back Worse,” and that’s from the editorial board. 

So, there’s a lot of “the-sky-is-falling-Chicken-Little” attitude today.

I’ll take you through a couple of stats.

But first, I agree that inflation is insidious and central bankers cannot turn it off when they choose to.

I ridiculed central bankers earlier in The Rude over saying that they could just turn off inflation when they want to.

Sure, they can stop printing money, and that would quell monetary inflation.

But the price inflation is already out of the bottle, and that’s *the* big problem for most people.

If you look at the inflation numbers, most of them exclude food and energy.

Why?  Because those prices are allegedly too volatile for the statisticians.

The real reason is that food and energy prices rise the most when governments print too much money.  And that’s what they don’t want anyone to see. 

If you look at this chart of the CPI for all urban consumers, you’ll see that from 1982 to 1984 (when the index is set to 100), prices have increased nearly three times (to 281).

Again, I remind you this doesn’t include food and energy.

We know wages haven’t increased this much, so disposable income in households has declined markedly.

That’s terrible for people in the lower-income brackets whose disposable income gets spent primarily on food and energy. 

The World Bank just printed its Commodity Markets Outlook for October, and it’s expected that energy prices will be 80% higher in 2021 than 2020.  Energy will remain at elevated levels in 2022, according to the report.

But the Bank thinks prices will start to decline in the second half of the year as supply constraints ease. To them, the high commodity prices are not caused by monetary policy but the supply chain bottlenecks.

To the Bank, supply chain bottlenecks should ease by then. To me, that’s just conjecture.

The Bank’s agricultural price index slowed its meteoric rise in Q3 this year, but it’s 25% higher than a year ago.

Maize prices have increased 64%, soybeans have been up 47%. That’s a significant increase for consumers. 

Why Isn’t This the End of the World?

One, The Fed, even though they’re talking about tapering, will not stop printing money.

If you look at the 10-year break-even inflation rate, it’s up a bit.

Right now, we’re at 2.70%, but it is not at a level that will cause any panic in any central bank.

Just to make sure: the break-even inflation rate represents a measure of expected inflation that comes from the 10-year treasury constant maturity securities and the 10-year inflation-indexed constant maturity security.

So, it’s the difference between the treasury inflation protection securities and the standard fixed coupon 10-year bond.

That’s what the markets expect inflation to be in the next ten years on average. It’s elevated, but nothing that would cause any stress in the Eccles Building. 

The St. Louis Fed Financial Stress Index is also low; it’s below average right now.

The stress index considers a bunch of different metrics, such as the treasury yield curve, 3-Month LIBOR, JP Morgan emerging markets index, and the VIX, among others.

It isn’t showing that much stress at all. So, I don’t think the central banks are going to change policy all that markedly.

What Does This Mean for You?

If you’ve been doing the things we’ve been talking about, like getting a second passport and buying cryptocurrencies.

Cryptocurrencies are doing very well right now.

What I’ll add to that is if you own equities, you’re doing fine as well. However, tech stocks will start feeling a bit of pressure, thanks to inflation.

Real estate is going to be soaring, despite the panic over Zillow.

Excellent markets commentator and Rebel Capitalist George Gammon thinks this is the first stage of failure in the real estate market.

I think we’re nearer to the end of the bull real estate market. But I don’t think this is the end.

Monetary policy has an enormous effect on that market’s performance, and it will climb for the foreseeable future.

In the Stansberry Digest this last evening, another good friend and colleague, Kim Iskyan, also pointed out the similarities between the ‘99-’00 NASDAQ rally and the ‘20-’21 NASDAQ rally. You can see the resemblance from the charts:


From this standpoint, tech stocks don’t look like they’re ready to fall apart yet.

Although I think they’ll start feeling pressure from inflation soon. But they’re not at the turning point yet.

So, the message today is to sit tight, keep doing what you’re doing, and just ride that wave of money-printing. 

Until tomorrow.

All the best,

Sean

 

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