I must’ve been about 11 years old when I first realized I might be an idiot.
At the time, my grandparents owned a lake house in Louisiana. That sounds more highfalutin than it was.
The lake “house” was just a small, basic cabin—probably no more than 900 square feet—they bought in the 1960s with two of my grandfather’s brothers. Said cabin perched atop a hill on a woodsy patch of tree-shrouded land covering three conjoined parcels. The lake was, as one would expect, at the bottom of the (fairly steep) hill.
My grandfather on this particular weekend assigned me the task of mowing the grass at the bottom of the hill, near the boathouse. He warned me to fill the gas tank first, before I went down the hill.
Disgruntled by the necessity of this annoying task when I’d rather be fishing, and wanting to get it out of the way quickly because the bass were waiting for me, I told him I was sure there would be enough gas for that little plot of nothing. He shrugged. He was like that: Let life’s idiots learn their lessons the hard way.
To cut this short, I had to trek back to the top of the hill and retrieve a full, five-gallon metal gas can and lug that beast back down the hill. Like I said, I was about 11, and at that age I was built like an emaciated willow reed. I think the gas can weighed more than me. My grandfather said nothing. I did see him smile, though.
I feel like Federal Reserve Chairman Jerome Powell is soon to follow in the footsteps of 11-year-old me.
First, I should note that we officially have inflation in America. I’ve been humming an inflationary tune for a while now, and I’ve recommended a few inflation-centric investments recently in our monthly Global Intelligence Letter. Frankly, though, I expected this train to arrive later in the year. But, no, here she is—ahead of schedule.
Latest inflation readings have the Consumer Price Index speeding along at the fastest pace in 40 years. The Producer Price Index—the wholesale prices paid to producers—is right there, too, clocking speeds it has never before registered.
Second, even as inflation makes her grand entrance, the Fed seems defiantly set on keeping interest rates low. Chairman Powell in late-April said the post-pandemic recovery is “uneven and far from complete,” and that even if inflation pressures perk up, these “one-time increases in prices are likely to only have transitory effects on inflation.”
Treasury Secretary Janet Yellen (a former Fed chair, herself) weighed in to backstop her homeboy at the Fed. “I don’t believe that inflation will be an issue,” Secretary Yellen declared this month, “but if it becomes an issue, we have tools to address it.”
This is where I get back to that stubborn 11-year-old lugging a can of gas down a steep hill. I had the tools to address a bone-dry fuel tank before it was bone-dry. Doesn’t mean I used those tools when I needed to. I waited until it was too late, and then I had to work extra hard to “address the issue.”
Thing is, the Fed will address the issue. It will have to at some point. Personally, I think it will address the issue later rather than sooner, because the Fed seems to thrive on dumping money into the economy. It keeps the stock market stoned and giddy, and keeps homeowners thinking they’re rich…before clearly over-heated housing prices collapse again.
Still, when the Fed addresses inflation isn’t really the issue. What we care about is the impact.
See, addressing the issue means one thing, and one thing only: Raising interest rates. And if there’s one thing, and one thing only, that absolutely freaks out Wall Street, it’s the Fed raising interest rates.
When rates go up, investors can suddenly earn more income on savings accounts and U.S. Treasury paper. Those are a whole heck of a lot safer than stocks that are now trading at historically rich premiums. Some amount of money will certainly flow out of overvalued stocks, deflating the bubble.
Likewise, when interest rates go up, the cost of running a business goes up, which means profits go down for most businesses (except those that thrive on inflation, such as the commodity investment I recently recommended in the Global Intelligence Letter). Corporate profits are directly tied to stock market prices. Profits start sinking, prices on Wall Street start sinking. That’s what the 1970s showed us: Inflation arrived going into 1973…and Wall Street wouldn’t see its 1972 high again until 1980.
The lost decade for stocks.
The redux is prepping for her debut.
She likely won’t walk onto the stage for a while. Powell and the Fed are intent on inflating Wall Street and housing prices, and all the free money will keep the drunks numb to reality for a bit longer. But that always wears off in the end.
The hangover…that’s gonna hurt.
What I’m saying is: Reduce your exposure to Wall Street. Increase your exposure of non-dollar assets and to commodities. (Check out all my recommendations for this in our Global Intelligence Letter Portfolio Tracker.)
Inflation won’t be kind to the dollar or corporate profits, and when the Fed gets around to “addressing the issue,” the only tool it has available will undermine Wall Street. It always does.
So, fill up the lawnmower now, before you push it to the bottom of the hill. Because you know this thing is going to run out of gas soon enough.