Inflation Is More Than “Transitory”

Date: 11/11/2021
Author: Mr. X

Inflation in the United States is at a 30-year-high. The Labor Department reports that the consumer-price index was up 6.2% in October from one year ago. Inflation has been above 5% for the last five months.

Treasury Secretary Janet Yellen recently assured the country that we are not heading into the Bad Old Days of the 1970s. “I’d express price increases to level off, and we’ll go back to inflation that’s closer to the 2% that we consider normal.”

However, her argument contains a dangerous assumption. She said that prior inflation persisted because “people thought that policymakers wouldn’t bring it to an end, and inflation expectations became embedded in the American psyche.” The Federal Reserve simply “wouldn’t permit that to happen” now.

In other words, they want us to trust them. To which I can only respond – why?

The Federal Reserve’s reputation is not exactly in the best position right now. Federal Reserve Bank of Dallas President Robert Kaplan and Federal Reserve Bank of Boston President Eric Rosengren both recently resigned following criticism that they traded in real estate investment trusts (REITs) even while the Federal Reserve was buying mortgage-backed securities and treasury bonds to shore up the economy. Mr. Rosengren claimed poor health as the reason for his resignation and while there is no reason to doubt his word, the timing doesn’t look good.

Fed Chairman Jerome Powell is also under heavy criticism. Senator Elizabeth Warren (D-Mass) has called him a “dangerous man” and said she will oppose another term for him. Chairman Powell also sold between $1 million and $5 million worth of stock from his personal account on October 1, 2020, as the COVID-19 pandemic was raging. These revelations have led to an ethics investigation for the Federal Reserve ordered by Chairman Powell himself. The Fed has also imposed stricter trading rules.

Whether these rules will actually change anything isn’t the point. Unlike Caesar’s wife, the Fed is already the subject of suspicion. In September 2021, public trust in the Federal Reserve hit the lowest level in 10 months, according to polling from Morning Consult.

Chairman Powell, like Secretary Yellen, has stated that inflation is temporary. The precise word Chairman Powell loves is “transitory,” a term he’s used so often that MarketWatch has called it “something of a running joke on Wall Street for its vague meaning.”

Chairman Powell and others on “Team Transitory” aren’t re-enacting Baghdad Bob here, claiming that everything is fine when it’s not. There are some good reasons to think that inflation will cool down. The supply chain disruptions will fade as supply gradually catches up to demand. Indeed, chipmakers like Taiwan Semiconductor Manufacturing (TSM) might lose ground if there’s suddenly an excess of supply in a post-pandemic world.

American officials also aren’t the only ones predicting inflation will fade. Citibank analysts predicted inflation will fade with time, though we haven’t seen the worst of it yet. They predict the worst will hit by February 2022. The Bank of England and the European Central Bank have also predicted that supply disruption will eventually ease and energy prices will gradually lower.


Hunting Down Gains No Matter Who Has Power

Yet behind all of this is a mistaken premise. Transportation Secretary Pete Buttigieg says that the key is putting the COVID-19 pandemic “behind us.” With potential treatments from Pfizer (PFE) and Merck (MRK) nearing approval, it may seem like that’s an achievable goal.  However, FDA approval, producing drugs at the required levels, and distributing them all take time. Moreover, we can’t refer to these drugs as cures but merely potential treatments.

China remains committed to a “zero tolerance” approach when it comes to COVID-19, imposing massive lockdowns when there is even a single case. Given the continuing adaptation of the virus, a “zero tolerance” mindset is completely unrealistic. Any supply chains that have any part dependent on Chinese manufacture are thus exposed to massive uncertainty. A new lockdown could come at any time.

The goal of a “post-COVID” Europe, North America, and Australia also seems questionable. Germany, one of the most highly vaccinated countries in the world, is reporting a daily high for the number of new coronavirus cases. As a result, the traditional Christmas markets are already announcing they are shutting down. Russia is also experiencing a new peak for COVID-19 cases, with 83% of hospital beds reportedly filled. The Washington Post warns that northern states, among the most heavily vaccinated, face a potential “fifth wave” of cases.

Unless there are readily available cures for the disease, putting the pandemic “behind us” is not going to happen any time soon.

When it comes to the smooth functioning of the global economy, China’s real estate market just threw a giant wrench in the gears. China Evergrande Group defaulted as it has failed to make payments even after a 30 day grace period. Other Chinese real estate developers are also struggling to make ends meet. The Fed itself has warned that there could be “possible spillovers” to the United States.

The Federal Reserve could try to tame this out-of-control market with an interest rate hike. That may make access to capital more difficult. It will also increase the amount the federal government will have to pay on the interest for the federal debt. This will lead the government to seek more revenue in the form of new taxes. That alone may cripple future economic growth. Cryptocurrency especially may be in the sights of policymakers.

As this is written, the major stock market indices and cryptocurrency sector are all down. However, gold and silver are showing some life. Throughout the pandemic, wild predictions have been made about gold and silver about to spike in price. While prices are relatively high, you’d have been better off with stocks and cryptocurrency.

That may finally be about to change. Currencies and economies generally are about faith. In an age of increasing distrust in government and economic institutions, it may be time to consider a larger hedge with precious metals.

This doesn’t mean avoiding the market – there’s always a bull market somewhere. The spectacular IPO of Rivian (RIVN) and the huge amount of spending that will be directed at electric vehicles and the raw materials necessary to build them (notably lithium) will provide many opportunities for huge growth.

A $40 Trillion Mega-Wave is shifting the global economy… 

Changing everything from the clothes we wear to the cars we drive. It’s recently produced a 500% windfall in only 30 days.    

The Right Trading Approach At The Right Time

Yet we can’t deny that there is a spirit of uncertainty, distrust, and even fear. Moments of high volatility like this can be turned to your advantage. “The Great Reset” that we discussed when the pandemic began was one such moment – and many of the things we predicted then (especially when it comes to vaccine stocks and companies like Zoom (ZM)) developed just as we said they would.

Another opportunity may soon be upon us. There will be more chances for life-changing gains. However, before you act, make sure you protect yourself. Increase your hedge with precious metals, remain calm during chaos, and take anything the so-called experts say with suspicion. Inflation may or may not be “transitory,” but the massive economic shift created by the pandemic is with us to stay.

We’re never going back to “normal.” This is what counts as “normal” now.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for three times a week to bring you news on what those with power are debating, planning, and doing.

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