When I was a kid, I was stupid.
Like really stupid.
Let me explain…
My friend’s dad worked at a Texaco refinery in south Louisiana in some kind of quality-control role, and he was always bringing home chemicals and stuff as sort of a show-and-tell project.
One day, he brought home some variety of Jet-A, the fuel that planes use.
He told us that Jet-A, a form of gasoline, is not flammable as a liquid…that only the fumes are. And to prove it, he proceeded to drop a lit cigarette into a bottle-top full of Jet-A. Nothing happened. Very cool.
On that particular day, he’d also brought home some acetone, a highly flammable, colorless solvent used to make things like nail polish remover.
He touched another cigarette to a small amount of acetone to show us that it produces a really cool, blue flame.
When his two little demonstrations were completed, he walked away.
Which is when stupidity walked in the door.
My friend, Mike, and I knew that regular gasoline buns kinda yellowish, and we figured by mixing in some acetone we could create a green flame!
Yellow + blue = green…right?
Spoiler alert: Chemistry most assuredly does not work that way.
The eyebrows grew back. Thankfully, nothing else was damaged.
I was reminded of this disastrous mixing of two ingredients as I was reading two different news stories recently.
One is the November inflation reading—it came in at a blisteringly hot 6.8% year-over-year increase.
The last time America experienced such an inflationary surge was nearly 40 years ago, in the early ’80s, on the downside of the 1970’s inflationary era. Thing is, though, we’re on the upside this time
Then there was the second story…
An Associated Press survey from this month found that only 35% of Americans think the national economy is in good shape. Worse, nearly half of those with annual household earnings of less than $50,000 describe their financial circumstances in negative terms.
They’re battling inflation’s impact on their wallet while their income has remained stagnant or even decreased.
Like gasoline, acetone, and a lit cigarette mixed together…that combo is bad news.
As we approach a new year, inflation is quite likely to ratchet even higher.
The global supply-chain snafu is not going away anytime soon. I’ve talked to some people inside the supply chain—meaning those who are involved in shipping/receiving—and they all think this persists into 2023.
Plus, we’re still battling the pandemic. Every new COVID variant seems to shut down borders and limit businesses, which serves to exacerbate the supply-chain challenges.
The Federal Reserve is going to act by raising interest rates in an effort to tamp the inflationary fires.
But I am not so certain that plays out like the Fed hopes.
I mean, this is a global supply-chain issue. Higher U.S. interest rates really don’t carry a big stick there.
Plus, think about what a rate hike really means in practical, family terms.
The average American family carries $6,270 in credit card debt. Families in the lowest income quartile carry more than $4,800.
The challenge here is that the Fed Funds rate—the rate the Fed pushes and pulls on to manipulate the economy—determines pretty much all the interest rates in the lives of American consumers.
When the Fed Funds rate goes up, so too do credit card rates. Minimum credit card payments rise, taking more cash from consumer’s pockets but not commensurately reducing card balances.
When the Fed Funds rate goes up, so do auto loans and leases. Already the average new-car payment is well over $500 per month. Used cars are right at $400 per month.
That’s not a small payment. As rates go up, one has to wonder if new car sales slide meaningfully, which then has knock on employment effects, which in turn impacts consumer perceptions about the health of the economy…and the downward spiral begins.
Plus, when the Fed Funds rate goes up, so too do mortgage rates.
For most Americans who own homes, that won’t be a bother. They have fixed-rate mortgages that won’t change. But adjustable-rate mortgages, ARMs, have been creeping higher all year. They now account for more than 4% of all new mortgages.
As the Fed Funds rate goes up, ARMs will readjust higher, meaning payments rise. This was the dagger that killed the housing market in 2007-2008. Of course, ARMs aren’t nearly the same problem today, but they still pose a risk to consumer pocketbooks, which in turn poses a risk to the economy.
So, the moral of our story today is that 2022 looks to be a challenging year, economically.
But of course, when you know what’s coming, there are always ways to play these trends to your advantage.
Meaning I must say once more, own some gold. Own some physical silver. Own exposure to industrial metals and the commodity super-cycle in your stock market portfolio. (You’ll find my recommended investments in these areas in the Global Intelligence Portfolio.)
The inflation that’s bad for your wallet, is great for the right portfolio.