Inflation is Looming, and it’s Also Hiding in Plain View
There’s no doubt that the US government has printed an unprecedented amount of money since 2009: more than $10 trillion with a probable $6 trillion more on the way. Yet inflation has remained subdued, even though the CPI recently increased 5%, which some think is shocking.
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Soak this in. New money printing now exceeds the total costs of our most expensive wars. The money supply has increased 250% but inflation has remained low. Economists explain that this phenomenon is due to extremely low velocity. In other words that money is just sitting in bank vaults going nowhere. That’s somewhat true, but most of that money actually went into the stock and bond markets, exacerbating the great wealth divide and creating money illusion, the hallucination that stocks and bonds have actually become tremendously more valuable — stocks have become 300% more “valuable” in the past decade.
We’ve had serious inflation but don’t know it because the barometer we use to measure inflation is missing security price inflation. The Consumer Price Index (CPI) measures increases in the prices of goods and services, but that’s not where the money went until recently. We are beginning to see inflation in CPI because some of the $5.2 trillion in COVID relief went directly to consumers. We’ll be seeing more.
Investors realize that this massive money printing is inflationary, so they are protecting themselves, as they should. Cryptocurrencies would not even exist if investors were not afraid of currency debasements. Precious metals, especially gold, are a popular inflation hedge. Real estate is another historically good inflation hedge.
Stocks can be an inflation hedge if inflation does not cause increases in interest rates. Increasing interest rates reduce stock prices because future earnings are discounted at a higher rate, so those earnings become worth less.
In this case, the Federal Reserve is implementing a Zero Interest Rate Policy (ZIRP), so investors are confident in inflation protection from stocks, for now. Some new monies are being directed to manipulate the bond market, but investors are not fooled by the money illusion there. They know bonds are not worth their current price since that price is being manipulated and high.
Investors are moving their cash to inflation-protected securities like cryptocurrencies, precious metals, real estate, and stocks. Stock prices will hold up as long as interest rates remain manipulated and low.
We’ve had serious inflation, but it’s been hiding in the prices of securities that investors expect to protect against inflation. Inflation is in plain view in inflation-protected securities, especially stocks.
An Irony: Inflation Fears Fuel Money Illusion
Venezuela’s stock market teaches a lesson. In 2016 the Venezuelan stock market performed best in the world earning 114% versus 13% on the Dow, even though its economy was in shambles, and it was suffering hyperinflation. This event has direct application to the recent US stock market: Lots of cheap paper money was frantically searching for someplace to go. Like Venezuela, US investors will eventually come to realize that they’ve been fooled in a couple of ways.
Most stock investors believe they’re richer and that’s being reinforced by Wall Street gaslighting that never even mentions the possibility of inflation and its impacts.
But investors will eventually realize that their gains are a mirage driven by a greater fool state that cannot be sustained, even as more money is poured into the economy.
Interest Rates are the Key
The “straw that breaks this camel’s back” will be rising interest rates. At some point, the Fed will lose control, and interest rates will return to “normal.” “Normal” in historical terms is inflation plus 3%. Given the unprecedented money printing, inflation above 50% is a possibility even though most mistakenly believe that 5-10% is as high as inflation can go.
Why will interest rates go up? Because the cost to manipulate them is increasing and will become unaffordable at some point. The government is poking the bear, waiting for something to break. Plus, other countries like China are paying higher interest on their government bonds.
The mirage cannot continue in the face of rising interest rates.
Following the “Roaring 2010s” this decade is loaded with a host of investment threats that can destroy lifestyles, especially for baby boomers. Most of our 78 million baby boomers will spend much of this decade in the “Risk Zone” spanning the 5-10 years before and after retirement. They may not recover from the next market correction, so I wrote: “Baby Boomer Investing in the Perilous Decade of the 2020s” to educate them on protecting their lifetime savings: save and protect.
For more information, please see: How to Minimize the Impact of Inflation, Recessions, and Stock Market Crashes