Mainstream media has outdone themselves this time … This article sent me over the top. Seven paragraphs and they literally said … NOTHING. Why? Because they truly don’t understand the market, the Fed, or Fiscal and Monetary policy and how that affects the REAL economy. Here is the truth … It is fairly unlikely that the soaring inflation rates we see today will slow much at all next year and far more unlikely they will reverse; so prepare your portfolio.
Here is why I say this, in as simple a way as I can put it. First, the chief weapon to fight inflation in a centrally planned economy is for the central planners (The Federal Reserve) to raise the Fed Funds Rate (aka interest rates). And in the Fed’s defense, they have said recently they plan to do this. However, this is the reality … Mr. Powell and his friend Janet are in a corner and there is no way out.
As the Fed attempts to raise rates the most likely outcome will be that the market will react violently, stocks will drop significantly, corporations will tighten already extremely tight operating margins, and consumer spending will contract. To put it another way … real interest rates are currently at roughly -5% and inflation is roughly +6% this means that interest rates will need to climb well North of about 7% to even begin to combat inflation. What do you think will happen to our economy built on sand if we bring interest rates to 7%? Yes, I agree … destruction. And maybe that is their plan, but we can discuss that later.
|To give a more recent example from the 1970s … Inflation was hovering around 4% when Nixon implemented price controls. This gave the illusion that inflation was under control, and when the government lifted price controls inflation soared to over 15%. And that’s when the then-Fed chair Paul Volcker had to jack up rates to 20% just to get a hold of inflation! That was about 400-500 basis points higher than real inflation at that time. With the same math applied today, it’s entirely possible the Fed may need to raise rates even higher than 7% … possibly as high as 12%! And that is all assuming CPI maintains around 6%.
If it goes up more than the math scales with it. The more likely scenario is the Fed will attempt to raise rates in early 2022 but will realize rather quickly that they are in a corner and can’t get out. At this point, they will likely have no option, but to bring rates back down to where they are today … 0%.
After this Papa Joe B will have a decision to make. Run into the 2022 election cycle with soaring inflation and a helpless Federal Reserve OR take action! We think the most likely outcome would be some type of price control similar to Nixon. Although, we haven’t ruled out Papa Joe and the gang suggesting that the answer is another trillion-dollar plan to save America through the decisive actions of our fearless Congress …
It’s not all doom and gloom though, we believe in every crisis there is always an opportunity and our team is well connected to identify that when it comes. In the meantime, get your portfolio ready for rough seas… maybe even an iceberg.