Inflation is here.
We saw it last month in producer prices. We saw it the month before that in both producer and consumer prices. And, I’m pretty sure we’ll see it again in Tuesday’s consumer price index due out at 8:30am.
With the Federal Reserve printing money like it grows on trees–and the Biden Administration promising to give out our last dollar to anyone the White House believes might be deserving of that money we (literally) don’t have–we’re starting to see one heck of a lot of cash slushing around in our economy.
Shocking Increase in M2
In the last 12 months, the M2 money supply has skyrocketed roughly 30% …that’s the largest one year gain since 1943.
Of course, in 1943, we were fighting (and funding) World War II…
I realize the President believes we are “at war” with coronavirus, but, the good news is — with more than 3 million people being vaccinated per day…we’re actually coming to the end of that so-called war. So why ramp up spending now?
We know the answer. This progressive team of Keynesian politicos has never seen a dollar it didn’t want to spend — or borrow, for that matter. The problem with all this spending, borrowing and printing…is that it’s bound to lead to inflation.
And, since the Fed is no longer resisting inflation…buckle up.
Inflation is Coming And It Will Erode Spending Power
Inflation is percolating and will most definitely hit the markets and our wallets, and our savings in one way or another. The biggest problems with inflation include:
Inflation erodes the purchasing power of the U.S. consumer. After all, you may have spent your life saving money but, does it even matter if suddenly it costs you $35 to buy a cup of coffee?
It runs the risk of creating an asset bubble in the markets. What happens when Wall Street wakes up and says, ‘maybe these companies aren’t quite worth the 40x earnings that we valued them at?’ (Historically, keep in mind, the S&P has traded at roughly 17x earnings.)
But, on the bright side (and you know I’m always looking for the bright side) there are assets that may benefit from inflationary pressures. We’ve talked about bitcoin at length — and I continue to remain fascinated in bitcoin’s blockchain technology as well as a big believer in the premise that we could all benefit from the discipline of a currency that is truly free from a Central Bank’s interference — but, the other beneficiary of an inflationary environment is (most often) gold.
Gold – Next Stop $1800? Then, $2000?
Gold has not seen the upside that one would have anticipated over the last year. That may be, in part, thanks to the popularity of cryptos. It’s also under pressure as some investors are turning to treasuries. Nonetheless, I remain convinced that these investments do not need to be mutually exclusive.
A smart portfolio is a diversified portfolio.
As such, it’s worth watching gold in this environment. With gold futures dropping more than 9% in the first quarter of the year, for the biggest quarterly loss for the commodity since 2016, gold may currently be one of the few bright spots in the commodities space — in that, it is still presents an opportunity for growth.
Even with an improving economy (as Powell predicts we will have) gold will be viewed increasingly as a safe haven hedge against inflation. As such, some bulls even anticipate that gold could rally back over $2,000 over the course of the year.
Bottomline: inflation is here and will continue to grow. Whether the Fed can walk the tightrope it hopes to walk is highly debatable. In the meantime, investors should be prepared.