Inflation is like a shark moving just below the surface; it is something that most people would instinctively want to avoid.  Inflation is currently in its infancy, it is a tiny toothless shark, but I can guarantee you now that the Central Banks will find it difficult to muster the courage to wrestle with it when, further into its adult life, it grows into the churning beast of hyper-inflation.

Rising inflation causes an increasingly expensive world where prices can eventually go parabolic (hyper-inflation).  The painful solution to these chronic high prices is either setting slightly higher interest rates right now, or setting REALLY high interest rates in about 10 years, or stupidly waiting for the parabolically higher prices themselves to put a total halt to the economy at a much later date.  Obviously the first choice is the best, but we won’t find the courage to act.

During the coming eight years I expect ‘bouncing’ inflation, as a sort of practice run, where inflation makes around 3 separate strong climbs followed by an equal number of abrupt deflationary drops (basically bobbing up and down) before beginning to steadily grind much higher during the 2030’s.

The chronic deflation (falling prices) that we had encountered during the past decade has evaporated and inflation is now at a relatively high level by comparison.  Most authorities say that this is transitory, meaning that higher prices will last for only a few months in duration.  Right now the recent parabolic spike in ‘materials’ inflation has already backed off somewhat and the relative strength has rotated into ‘energy’ & ‘gold’ inflation.  However, if you consider the somewhat obscure U.S. economic indicator known as the Logistics Manager’s Index, going back to normal within a few months may not be in the cards.  This index asks the corporate supply chiefs of important corporations where they see inventory, transportation and warehouse expenses now and 12 months out.  The gauge, with its 90% accuracy rate, currently shows higher inflation still in place 12 months from now.  It will be difficult to get supply to match with demand and this may hamper any meaningful drop in commodity or retail prices.  In fact, about the only thing keeping a roof over prices right now is the fact that the velocity of money (the speed of the movement of already printed money) is historically still at the slowest pace ever (there is still almost $2-Trillion sitting on the sidelines in the United States alone).

Thirty years ago I started putting together the puzzle of what would happen longer-term to stocks, bonds and commodities and gold.  I can not-so-humbly say that I’ve been accurate so far.  I understand market cycles and inflationary cycles and secular cycles and very few money managers know about or even care about these subjects.  What I did not originally know was what specific & unusual events (Covid-19) would come into play to assist in the slow-motion cyclical changes that I saw coming.  I do admit that I expected the rotating leaders of both U.S. political parties to spend endlessly and then to just print money in order to pay for it all; each leader in turn doing those things that would ultimately set the framework for hyper-inflation in the 2030’s followed by hyper-deflation in the 2040’s.  So what I see is our irrational fear of experiencing mild discomfort now causing inescapable and significant financial pain much further down the road.  We seem to have a phobia about raising interest rates even though doing so would be a temporary solution to both the falling USDollar (USD) and to the rising inflation.  When the Fed recently merely mentioned the possibility of rising rates in 2023 the USD strengthened dramatically during the next three days.

So, on June 16th, the Federal Reserve announced that despite the current high levels of inflation, that they would absolutely not be raising interest rates for another two years.  TWO YEARS.  The stock market immediately fell, thus indicating that it didn’t like the response because it was both too early AND too late.

In the United States, we have already printed our way to an additional $6-Trillion+ in “pain relief” in just the past year and we are now discussing printing many times that amount.  The problem is that the resultant inflation (ultimately from money printing causing USD devaluation) will hit the vulnerable and disadvantaged much more than the rich.  We will lift up the poor now with expensive social programs and direct payments, only to later crush the poor because the bill for all of this will eventually come due.  Even good causes are not free.  And if we excessively weaken the USD in the process, then we will have to pay more Dollars for everything that we buy, including necessities like food, and that is what inflation actually is.

DOLLAR STRENGTH  (Chart courtesy of Wolf Richter):

U.S. NATIONAL DEBT…  This debt has grown by $19,000,000,000,000 since the year 2007.  (Chart courtesy of Charles Schwab):

The Central Banks and the individual treasury departments of countries across the globe are all falling in line.  Even in Germany, with its reliable fiscal discipline, there is growing support to reform the constitutional debt brake in order to permit more deficit spending, mostly on social programs.  And when Central Banks do eventually acknowledge their inflation concerns, it may be too late to avoid the jaws of the shark.

Chronically high inflation is a real problem.  As President Ronald Reagan said in 1978 (the last time we were suffering from stagflation):  “High inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

So, governmental money printing & spending coupled with consumers spending their $-Trillions in Covid-relief checks on anything that they could get their hands on, plus the resultant commodity and oil price increases originating out of supply scarcity, will all lead to inflation.  On top of that, demographic scarcity of human workers will cause eventual wage inflation.  A reluctant and behind the curve Federal Reserve (and all other Central Banks), afraid to cause havoc in a debt-heavy world, will just add fuel to the inflation fire by delaying needed and necessary interest rate increases while everyone continues to “print.”  This is especially bad because monetary policy operates with long and variable lags.

Retail orders are at record highs but manufacturing inventory is extremely low by historical standards, so the result is inflation (because people are willing to pay more for scarce items) and rising commodity prices (because empty retail shelves have to be reloaded with the newly manufactured items that people buy).  Retailers have found one sneaky solution in the concept of SHRINK-FLATION where they use the same packaging but quietly shrink the amount of each item.  As an example, a cereal box is sold at the same size and price but the inner contents shrink from 18 ounces to 14 ounces.  

As Deutche Bank recently wrote to its private clients:  “It is a scary thought that just as inflation is being deprioritized, fiscal and monetary policy is being coordinated in ways the world has never before seen.”

William White, the former Chief Economist at the Bank of International Settlements and the holder of a treasure trove of economic honors, has clearly outlined what I’m attempting to say:

• In the near-term, we will see significant inflationary pressures that will last for more than an additional 12 months (because of the reasons listed above)
•  In the medium-term, inflationary pressures will repeatedly dissipate because excess debt will temporarily dampen economic growth
• In the long-term, we will not be able to avoid hyper-inflation because of monetary excess and the need to liquidate extreme levels of debt

Three of the Founding Fathers and early Presidents of the United States (Jefferson, Madison, Monroe) were from my current hometown of Charlottesville, Virginia.  On September 6, 1784, Thomas Jefferson sent a letter to his neighbor, James Monroe, that included the following sentence:  “No generation should contract greater debts than may be paid during the course of its own existence.”

SUMMARY:  MarketCycle’s scary inflation discussion above (and in other postings over the past year) is ultimately a story about the distant future.  Despite any near-term temporary pullback, we are at the beginning stage of a brand new 8 year Cyclical stock bull market (that started in late May of 2020) within the confines of an ongoing 18 year Secular stock bull market (that started in late October of 2011).  There is not much to fear in the intermediate-term, but investors should very slowly prepare now for eventual inflation.  It is headed our way.  Right now, savings should be tossed into proper investments and this includes some assets that benefit from rising inflation.  I’ll say it again, every penny that can be put toward the markets should be put into the markets!  And of course MarketCycle Wealth Management is here to help with that, as are others.  Knowledgeable professional help does not cost, it pays.

___________________________________

ADDITIONAL… Written on Sunday, July 4th:

IMO, we’re still in a bull market and recession probabilities 6 months out is still near 0% with expected GDP at 8% and earnings to remain strong for another 6 months.

In the near-term, the stock market may pull back a bit before it can head higher.  Stocks always have to let off pent up steam when they start to overheat, or else they cannot safely move higher.  A temporary and fast pullback for the S&P-500 of perhaps 5% may be in the works and then the S&P-500 is likely to head toward 4600 (revised up as previously suggested) and this would be another record high.  Don’t be surprised if we eventually see the S&P-500 at or beyond 10,000 by 2029.

Relatively stronger in the ‘almost’ near-term:  Dow, Nasdaq-100, technology, ARKK, growth stocks, momentum stocks, low-volatility stocks, quality stocks, dividend-grower stocks, buy-back stocks, gold, bonds, energy commodities, alternative energy stocks, online buying stocks, semiconductors and U.S. stocks in general over other regions

Relatively weaker in the ‘almost’ near-term:  S&P-500, small-caps, material commodities, emerging market stocks, value stocks, high-beta stocks, high-dividend stocks and crypto-currencies

Thank you for reading!

MarketCycle Wealth Management is in the business of navigating through shark filled waters.  We manage the investment accounts of people just like you.  We strive to earn our keep.  The first 3 months is at no charge.  It’s easy.  Now is the time.

SUBSCRIBE    to this blog via the signup on the website (that actually now works)

SUBSCRIBE    to our daily REPORT via the link on this website

MARKET CYCLE  —  DUAL MOMENTUM  —  TREND FOLLOWING  —  LOW VOLATILITY  —  HEDGE FUNDS

Before I start, I’d like to say that MarketCycle Wealth Management was just given a top 5-star rating by Investor .com

War costs more than ‘an arm and a leg.’

Money printing (a term that I am using loosely) to pay for the Vietnam War during the 1960’s,  along with then President Nixon replacing the Federal Reserve Chairman with his very own personal political hack and then taking the USDollar off of the gold (backed) standard, caused the USD to weaken and it naturally followed that the price of commodities and goods went up.  We didn’t earn the money that the United States spent, we essentially just printed it; we pulled it out of thin air.  Inflation is when the excessively created currency gets so weak that it takes “more” of the currency to buy the same item.  If it normally takes $50 to buy a pair of shoes, after high-inflation it takes $100 to buy the same pair of shoes.  Perhaps it takes $200 or $300 or even more to buy the same pair of shoes.  Right now, the inflation rate in Venezuela (at 2500%) is so bad that it might take a year’s salary to buy a pair of shoes and next week it might take two year’s salary.

So after the Vietnam War finally ended, literally everything cost more, and then a lot more.

In order to break the back of inflation, then Federal Reserve Chairman Paul Volker (appointed during President Jimmy Carter’s one term), gradually raised interest rates in the very late 1970’s and then the very early 1980’s, ending up at close to 20%.  Interest rates are currently fairly close to 0%, so imagine rates at fairly close to 20%!  My first home mortgage in the early-1980’s was somewhere around 15% and that creates a crippling monthly payment!

After Volker ‘broke the back of inflation’ with sky high interest rates in 1981, we experienced gentle deflation for forty years, like an autumn leaf gently and slowly falling from a tree, as interest rates drifted downward for that entire 40 year period; it ended just recently.  It took 40 years to go from 20% to 0%.  When rates fall, bond values rise, so bonds, as an asset class, benefited for forty years.

Back in late March of 2020, MarketCycle Wealth Management very accurately called the exact bottom of the Covid stock market crash (to the day).  And during the first week of April of 2020, and before anyone else, MarketCycle called the start of inflation.  By “the start of inflation,” I meant that, in my opinion, it represented the start of a prolonged secular 18-ish year period where inflation slowly and gradually builds for about 8 years, dips during a prolonged deflationary stock market event in the very late 2020’s, and then inflation takes off like a jet for the first 8-ish years of the 2030’s.

So, what’s my point?  Wait, do I even have a point??  Yes, my point is that the money printing to pay for the Vietnam War was nothing, it was trifling, it was insignificant.  Today, we’re talking about real money printing.  It started with monetary actions designed to pull the United States out of the Financial Crash of 2008 (which wasn’t a crash, it was actually an expected bear market).  But since the Covid-19 Crash of 2020 (a true ‘Black Swan’ crash), money printing has taken on a life of its own, especially under President Trump’s hand appointed Fed Chairman and wealthy idiot, Jerome Powell.  The most recent mess started with President Trump and is now in hyper-overdrive with President Biden.  We’re sending monthly checks to every child in the United States.  We’re sending so much monthly money to ordinary citizens that many people refuse to go back to work, post Covid.  The rush of cash has caused consumers to consume; everything imaginable has been purchased in mass and inventory is now kaput.  To make new inventory, commodities have to be purchased and now commodity stockpiles are going kaput.  Vicious cycle.  Money printing directly causes inflation AND ‘free’ money also causes consumers to gobble up every item in sight which also causes a powerful secondary level of inflation as commodities need to be replaced.  It is a vicious cycle that can only be broken by raising interest rates to astronomical levels, just as Paul Volker did in the past.

I recently saw a great (sustainable growth) mahogany porch swing on Amazon for around $150 and I wanted to consume it.  I waited one week to buy and saw the price at $250, so I waited a week for the price to drop again, only to find that it was now $400.  I decided to pass on the swing but still checked one week later to see this price: $550.  That is inflation.  And 8 months ago I ordered and paid for a new bike from ‘Bikesdirect.com’ and it still hasn’t come because wood prices have gone so high that the cost of the shipping crate is “too expensive” and now I’ll “just have to wait until lumber prices come down” and regardless, the bike shop will “lose money on the deal when the bike finally ships in another four months.”  Inflation is like having a hole in your pocket.

Of course, current inflation at this rapidly increased level is transitory; it is likely just a brief prelude to what the chronic hyper-stagflation of the 2030’s might look like.

In the United States, we now want more money in order to pay off everyone’s student loans.  We want reparations for the horror of slavery to the tune of $15-Trillion.  We want free allopathic drug care for all.  We want free pre-K schooling and free community colleges.  We want brand new infrastructure.  We want more powerful weapons.  We want to increase monthly allowances for those who irresponsibly have the most children.  We want to subsidize and fund and retrain.  We’re talking about implementing Modern Monetary Theory where everyone is paid a monthly salary by the U.S. Government just for being alive.  We will print and print and print and print and print (and tax)… and inflation will likely go to unimaginable levels.  But it is a slow moving boat.  At first the excess money will stimulate the economy, perhaps for another 8 years, but eventually the debt will come due and it will have to be paid.

Honestly, I am not making any sort of political statement, some of the above items are quite good for society.  I’m just saying that the market is sensing what’s coming:  INFLATION from money printing.   Well, actually it is sensing eventual HYPER-INFLATION or more likely HYPER-STAGFLATION (stagnant economy coupled with high inflation).  I see the end game as being a debt that is so high that it simply cannot ever be repaid and the Federal Reserve will be forced to drop rates to zero-% and then buy all of the debt of the United States government and make it disappear, interest free, on its hidden books.  Then the USDollar collapses in a deflationary spiral and our grandchildren will be the ones that have to clean up our economic mess  (and it may be too late for our environmental mess to be cleaned up).  But there is likely another 15 years between the party that we are living today and the economic depressionary mess that will have to be cleaned up.

You may have noticed that this isn’t another one of my ‘feel-good’ blogs and I do wish that I saw a different future, but nothing has changed in my mind.  In my opinion, we have another 8 great years of easy times because of easy money, and then a decade of worry and economic trouble that we have to prepare for now (by saving and investing every penny), and then we get the 2040’s which I’ll spare readers from having to hear my full thoughts on.  But to sound biblical, out of crisis cometh opportunity and out of ashes cometh fresh new growth… and sometimes we have to hit the bottom of the barrel before we can make any significant bounce toward positive changes.

However, the story for today is that out of money printing comes both growth and inflation… and out of inflation comes rate hikes… and out of rate hikes comes eventual stunted growth.

MarketCycle saw true inflation beginning back in the Spring of 2020 and I now foresee the Federal Reserve ‘talking about rate hikes’ in 2021, then the actual tapering of QE (which they have already secretly started) and then the Fed actually raising rates sometime in 2022 or even early in 2023.

Unlike during the past 40 years, bonds will get killed by these new ‘opposite-direction’ Central Bank actions, and this includes any ‘bond-like-assets’ such as preferred shares (although convertible bonds and high-yield bonds may survive).  So, we must prepare now.

There are assets that benefit from inflation and MarketCycle Wealth Management is already (slowly) rotating client accounts in that direction.  But most investors around the globe have been placed into 60/40 ‘buy-&-hold’ portfolios, and they are about to really get hurt.

SUMMARY:  Future hyper-stagflation with an “inflation is coming” warning shot being fired right now… but we are STILL in the stock bull market of our lifetimes and will remain so for quite awhile yet!  Don’t get side-tracked, take advantage of easy street while you still can!!

Did people spend their Covid stimulus checks on rent and food?  Apparently not.  They seem to have gone on a record consuming spree, gobbling up literally everything.  $2-Trillion is still sitting on the sidelines, waiting to drive up both the stock market and inflation:

Who is the architect of our coming dilemma? 

The National Debt of the United States is already reaching Crazy Town levels:

The early start of inflation is now here and higher consumer prices are the result:

The historic speed of the recent inflation data has surprised some (note the upper right violet colored dot showing the last 10 data points):

Existing home prices and especially new home building prices are through the roof and the trend started in mid-2020:

What is the biggest current worry amongst asset account managers?  Inflation and the Fed’s reaction to inflation.

Will technology be harmed as so many on Wall Street keep repeating?  In my opinion, no.  I believe that technology stocks will lead the market higher for another 8 years:

But now?  Despite the start of inflation, we’re still on easy street because of easy monetary policy.  There is money sloshing around everywhere that you look.  And as I’ve been saying since early April of 2009: “We’re in the stock bull market of our lifetimes.”

The U.S. stock market never moves higher in a straight line, but it continues to zig-zag higher and higher and no, it is not currently overvalued… we should soon see the S&P-500 @ 4500.

Thanks for reading!

MarketCycle Wealth Management is in the business of managing the investment accounts of people like you.  We try hard to earn our keep.  The entire process is easy and the first 3 months are at no charge.

SUBSCRIBE    to this blog via the website.  It is free and you get no spam or any contact in any way.

SUBSCRIBE    to our more in-depth REPORT via the connecting link on this website.

MARKET CYCLE  —  DUAL MOMENTUM  —  TREND FOLLOWING  —  LOW VOLATILITY  —  HEDGE FUND

I expect the next eight years to be very similar to a combination of the 1960’s and the 1990’s decades, building the conditions for a truly massive inflationary period in the 2030’s.  I further expect innovative & disruptive companies (and their corresponding “dot-com IPOs”) to go gangbusters this decade, similar to the 1990’s, and then to blow up at the end, again, similar to the 1990’s.

In very late 1999, one of my patients gave me a cap that I still sometimes wear.  I had it on this very morning as I was working in the yard.  It had the name of what may have been the very last dot-com company formed before the two year long “dot-com” crash that began in the year 2000.  Investors were horribly damaged in that recessionary bear market.  I cannot state the name of this particular dot-com because the domain name has since been picked up by another company.  This original 1999 company formed with no offices, no warehouses, no furniture, no inventory, no employees; in its entirety it consisted of a name printed on baseball caps and it had put out the word that it would soon be hiring because literally all newly offered dot-com companies went into a booming & euphoric IPO offering state (an IPO is an Initial Public Offering of stock).  Stock shares of these bare bones IPOs were instantly moving into the price range of $-Way-too-much.  Best game in town, until it wasn’t.  The excited woman gave me the cap and told me that she was going to quit her real job to work for this “can’t lose” new company; the same company that went bust about a month later.  Well, the company itself wasn’t harmed because it only consisted of baseball caps and it had nothing to lose, but the investors lost 100% of their investment money.  I made out okay because I didn’t invest in the IPO, but I got a nice baseball cap out of the deal.

Some of the greatest traders/investors of all time saw the bubble that was forming and they began to ‘short’ the market during the second half of 1999.  A ‘short’ means that you are betting that the market will drop.  These same great traders/investors lost half of their money during this six month period.  “Half of their money” may have been upward of a $250-million individual loss in a mere 6 months (one of the most famous investors of the time lost exactly that much).  During the second half of that final year of the bull run, the dot-com (tech mostly) companies went straight up so anyone shorting the market lost money rapidly.  YOU NEVER BET AGAINST THE PRIMARY TREND DIRECTION OF THE MARKET.  So, they not only lost huge amounts of money betting against the bullish run, but they also lost the opportunity to literally make a fortune during the last 6 months of 1999 simply by being bullish in a bull market.  Double whammy.

The great trend trader, Ed Seykota, once said:  “It is not logical to bet against the primary trend direction of the market.”  He was right.  A bull market is a bull market and those people that think that a bull market is actually a bear market are simply and obviously incorrect.

Thanks for reading!

MarketCycle Wealth Management is in the business of managing the investment accounts of people like YOU.  It is both easy and affordable.  Good portfolio account management doesn’t cost, it pays.  MarketCycle Wealth Management strives hard to earn its keep.  There is a contact form on the website.

There is a (no spam) sign-up for this free monthly blog on the website.

There is also an easy sign-up for our in-depth website (MarketCycle Wealth REPORT) on the website.

From Hedgeye:

MARKET CYCLE  —  TREND FOLLOWING  —  DUAL MOMENTUM  —  LOW VOLATILITY  —  HEDGE FUND