A perfect recipe for inflation!

I have some very interesting facts to share with you, particularly since Congress is so quick to spend almost 2 trillion dollars and does not know where they will get that money other than burrow from our future. I apologize for my candor upfront, because this really upsets me!

We think many are living in denial. Inflation is already on the rise, and not for the obvious and most predictable reasons. In the past six months, the Consumer Price Index is up 3.6% at an annual rate and if it rises a modest 0.2% per month between January and May, it will be up 3.4% over 12 months. That is, by the way, a lot!

Part of this is because COVID shutdowns led to weak inflation in early 2020, but we expect inflation to move higher in 2021. Incomes and savings have increased, while production has not. Demand is exceeding supply. Simple economic theory. When too much money chases too few goods, those goods can cost more which is inflation. 

All personal income combined – wages & salaries, employee benefits, small business income, rents, interest, dividends, and transfer payments – was up 6.3% in 2020 versus 2019. Total after-tax income was up 7.2% in 2020, the most for any year since 2000. Again, despite what we have been told, we all have more money not less. 

Combined, Americans saved about $2.9 trillion in 2020, more than doubling the previous record high of $1.2 trillion in 2018. That has to blow your mind. Americans, despite the amount they have spent year over year is higher last year, but they are also saving more than twice as much as the record high in 2018. This is amazing, but also a result of the money giveaways! 

Americans not only had more money to spend, but they saved a record high by far. And again, you mean we need to spend another 1.9 trillion dollars more of borrowed money?!

As of the third quarter of 2020, the amount Americans held in checking accounts, savings accounts, time deposits, and money market funds was up $2.8 trillion from the year prior. Add another $1.9 trillion in federal government stimulus spending (borrowing from the future, to spend today) and the US is awash in cash, much of which is funded by Washington money printing. 

Unfortunately, despite a strong recovery in output, industrial production is 3.3% below pre-COVID levels, while real GDP is 2.5% below. In other words, demand is OK, it’s supply that’s still hurting – a perfect recipe for inflation. 

We can see the impact of this affecting markets. The 10- year Treasury yield has risen from roughly 0.6% in May 2020 to 1.2% today. The gap between the yield on the normal 10- year Treasury Note and the inflation-adjusted 10-year Treasury Note suggests investors expect an annual average increase of 2.2% in the consumer price index (CPI)(consumer spending) in the next ten years, and those expectations are rising. Bitcoin, while we doubt it will ever be real money, hit a record high today reflecting fears of lost dollar purchasing power (what inflation really is). Commodity prices continue to surge. 

All this money printing threatens to eventually create a sugar high in equities. We aren’t there yet, but markets are floating on a sea of new money. In fact, it’s more like a tsunami! Inflation hedges (real estate, commodities, materials companies) will do well. Traditional fixed income (long-term bonds) are at risk. The return of inflation because of misguided policy choices is a very real threat to the long-term health of the US economy.