Date: 02/14/2022
Author: Mr. X
For months, they told us inflation was just “transitory.” It wasn’t. It still isn’t. And if they “fix” the problem with interest rate hikes, the cure may be worse than the disease.
In April 2021, Federal Reserve officials were calling inflation transitory. The New Yorker’s “Economy” section the next month said that the inflation reported in April will “probably be temporary.” In June, White House officials said inflation was “transitory.” On July 19, President Joe Biden himself said: “There’s nobody suggesting there’s unchecked inflation on the way – no serious economist.”
(I note in passing that when politicians are appealing to credentialism, it’s generally a bad sign.)
Mark Zandi at Moody’s wrote for CNN in July that “hyperventilated rants about how uncomfortably high inflation is here to stay are misplaced,” and that inflation will “soon abate.” In the same piece, Stephanie Roth of JPMorgan Private Bank said that the situation “still screams transitory to us” but “if we’re wrong, it could shorten the economic cycle that we’re in.” In October, strategists at Goldman Sachs said investors would “gain confidence that the current pace of inflation is transitory.”
In November, I wrote the following in a piece entitled “Inflation Is More Than Transitory”:
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?
Well, I told you so.
Get Your Political And Financial Executive Briefing… Every Morning Of Every Trading Day
By late November, the tone had changed. “I think it’s probably a good time to retire that word [transitory] and try to explain more clearly what we mean,” said Federal Reserve Chair Jerome Powell. Treasury Secretary Janet Yellen also said it was time to retire the word. Both said that they underestimated inflation, but blamed supply chain problems as the reason for inflation, not out-of-control federal spending.
The change in tone came as the Administration started to face the political costs. Mohammed El-Erian of Allianz SE called their previous narrative “the worst inflation call in the history of the Federal Reserve.”
Nonetheless, some people were still sticking with it. “When It Comes to inflation, I’m Still on Team Transitory,” wrote Alan Blinder in The Wall Street Journal on December 29.
While Secretary Yellen and Chairman Powell may have retreated from their claims that inflation would fade, they still began the year with an optimistic view. In a January interview with CNBC, Secretary Yellen said that “if we’re successful in controlling the pandemic, I expect inflation to diminish over the course of the year and hopefully revert to normal levels by the end of the year around 2%.” Frankly, this is bizarre. Framing inflation as a health issue is questionable considering that geopolitical tensions, supply chain issues, and infrastructure weaknesses are all disrupting economic activity more than the pandemic. We’ve been living with the pandemic for years now, and the rosy projections of a new “Roaring Twenties” were made when it was still underway.
It’s also not like people weren’t warning the Biden Administration and the central bank about what was happening. All the way back in February 2021, former Clinton Administration Treasury Secretary Summers warned in The Washington Post that inflation posed a real threat. He blamed the price tag for the Biden Administration’s proposed spending bill. “[T]here is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflation pressures of a kind we have not seen for a generation,” he said, “with consequences for the value of the dollar and financial stability.” The former Clinton Cabinet official is now warning that the tight labor market will add “significantly to inflationary pressure in the United States for some time to come.” Looking at their respective track records over the last year, I’m more inclined to trust Larry Summers over Janet Yellen when it comes to inflation.
The former secretary’s reference to the dollar is also significant. It’s my belief that China and Russia are systematically working together to remove the dollar’s status as the world’s reserve currency. Even smaller actions like El Salvador adopting bitcoin as official currency (much to the fury of the International Monetary Fund) shows that some smaller nations may be eager to be free of the dollar. China’s lead in developing a digital fiat currency is crucial to this effort.
There’s also the geopolitical showdown in Eastern Europe. Now, we’ve been here before and some diplomatic face-saving gesture could prevent President Vladimir Putin from ordering an attack on Ukraine. Yet regardless of whether there is a military conflict or not, the sanctions that the United States has proposed against Russia will surely fuel the Kremlin’s quest for ways to avoid them. It’s worth noting that President Putin and President Xi Jinping of China were side-by-side when the Olympics began, an unsubtle reminder to the world of an emerging alliance. Earlier this month, China and Russia also agreed to a 30-year deal in which Beijing would buy natural gas from Moscow.
Significantly, the sales will be settled in euros, not dollars.
If China, Russia, and other powers want to displace the dollar, they may not have to do much. While Secretary Yellen may publicly be holding to her 2% prediction, one wonders when she’ll have to back away from this claim too. Inflation has hit a 40 year high, 7.5% year-over-year. A study from the Chicago Fed found that job switching is one of the main reasons for the increase – which indicates Larry Summer is probably right.
The consumer sentiment index is at its lowest figure since 2011. A recent poll released by CNN not only showed that a majority disapprove of President Joe Biden’s job performance, but that a plurality identified “reducing inflation” as the government’s top priority. The Administration is going to need to take strong action to get inflation under control before the midterms.
However, such action will involve interest rate hikes. That in itself wouldn’t be so bad except that we may be facing a half-point or three-quarters of a point hike next month. Some say we may get an “emergency” hike even earlier.
This is coming at a time when oil prices are rising to nearly $100 a barrel. The United States is also financially supporting Ukraine in response to a Russian invasion threat. The Democrats also haven’t given up on working to pass a spending bill, with their usual renegade Senator Joe Manchin (D-WV) pushing tax hikes on corporations and, critically, capital-gains.
All of this combined with a massive interest-rate hike could prove devastating to growth stocks. American credibility (and thus, the value of its currency) could also take a severe shock if Russia invades and defeats Ukraine. As this is written, cryptocurrency, gold, and silver are all rapidly increasing in value.
The Fed and the Biden Administration dismissed the threat of inflation for far too long. Now, the measures they and their Democratic allies in Congress may impose could simply make things worse. It may not be in the power of the Fed to check inflation at this point, given the rise in energy prices, a possible fertilizer shortage, and, perhaps, the fortunes of war. For more than a year, we’ve essentially been told to have faith in the central bank and the federal government’s ability to manage the economy. Their assumptions were wrong and they failed to do so. Now, in their flailing attempt to suppress the inflation they previously ignored, they may squelch one of the great bull markets of history – and one of the major pillars holding up the American economy.
They do not have this thing under control. It may be simply impossible to control at this point. Ignore the happy talk from the powers that be and position yourself to profit from volatility. Whatever Secretary Yellen and Chairman Powell have to say at this point almost isn’t worth considering.
Where to turn to? My colleague Corey Snyder has been studying a single “tell-all” pattern that helped him score an 899% gain 22 days with a basic stock trade. If you don’t want to move into options, Corey’s system is something you can’t afford to ignore in a market that is spiraling out of control.
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 RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
