Apparently, it was all just a lie—this whole “inflation is transitory” caca-doo the Federal Reserve has been feeding the world for the last couple of months.
So, before I forget, if you take away anything from today’s dispatch, let it be an urge to pad your financial life with more gold and silver.
But first we return to the scene of the crime…
Pressed by a CNBC journalist recently, Maharaja of the Fed, Jerome Powell, clarified that “transitory” is, in fact, not actually the same adjective you and I are familiar with. Seems we’ve all been operating without the Fed’s super-secret decoder ring.
The [consumer price] increases will happen. We’re not saying they will reverse. So, there will be inflation, but [its] process will stop. […] If it doesn’t affect longer-term inflation expectations, then it’s very likely not to impact the process of inflation going forward. What I mean by transitory is that it does not leave a permanent mark on the inflation process.
If you don’t understand most of that quote, don’t worry—no one does. It reminds me of the newspeak sputtered by then-Prez Clinton in the midst of his Monica Lewinsky circus when he said the truth “depends on what the meaning of ‘is’ is.”
However, I want you to pay attention to what I underlined: “We’re not saying [prices] will reverse.”
Meaning…the inflation we’re now seeing is NOT transitory!
Prices are rising and they will NOT stop and reverse. They will reset higher. And those higher prices will be our new normal.
Pooh-bah Powell is explicitly telling us exactly what I have been writing to you about in recent months—that inflation this time around is most assuredly the opposite of transitory, because the tsunami of federal dollars that have flooded the economy over the past year landed in consumer wallets.
And consumers with free money to burn are like an arsonist who wins a bucket of gasoline and a flame-thrower on The Price is Right!
Light ’er up!
He can prattle about transitory not leaving a permanent mark on the process (whatever that means). But the reality is that we’re looking at consumer prices that are permanently and significantly higher. That is precisely what Fed Daddy is now telling us.
Earlier this year, when the Fed was yapping about letting inflation run a little hotter than the 2% it has long craved, I said I would not be surprised if we saw inflation hit 4% or 5% in 2021.
And where are we today…midway through the year?
Numbers from June have us at 5.4%. Shocking! (Only, not really.)
Frankly, I think we’re going to look back on 5.4% with a rose-tinted quaintness by the time the year concludes. We could very well see hyperinflation headlines atop every newspaper front page in the country. Not the Weimar Republic-meets-Zimbabwe hyperinflation that runs into the thousands and millions of percent.
But we very well could see double-digit inflation invade American shores soon enough. (If that sounds crazy, remember it’s happened before, as recently as the 1980s.)
And as I pointed out too many times to recall, the Fed is submissive in America’s relationship with debt, which is going to be problematic as inflation surges.
Because the side-show freaks we elect to Congress have such an unhealthy lust for debt, the Fed hasn’t much capacity to jack up interest rates, which is the tool it historically uses to tamp down fiery inflation.
For reference, I cast your memory back to the days just before the housing market imploded in late-2007. What helped fuel the meltdown: Interest rates went up.
The Fed Funds rate—the lever the Fed pulls and pushes to control the economy and which directly impacts mortgage rates—rose from about 1% in the summer of 2004 to 5% by the summer of 2006.
The housing market was awash in adjustable-rate mortgages with teaser rates so small they’d make you blush if they were bikinis on a beach. The higher rates took a bit of time to filter through those adjustable-rate mortgages as they reset each year. But by late-2007, millions of Americans had no way to afford their new mortgage costs, which had soared by hundreds of dollars, often more than $1,000 a month.
Instead of the monthly mortgage check, cash-strapped and underwater homeowners simply mailed in the keys to their house and fled. And you know the rest of that story.
Same concept with government debt—just a bigger bankruptcy awaiting. The Fed can’t raise interest rates without significantly increasing the cost of Uncle Sam’s debt repayments…meaning it has very limited scope to contain inflation.
So, back to the solution I offered earlier: gold and silver. Commodities too! Don’t forget the commodities! (Check out my specific gold, silver, and commodities recommendations in the Global Intelligence Portfolio Tracker.)
Those three are going to be the primary assets that cushion the blow of this “transitory but really not so transitory” inflation the Fed has brewed up for us.
Grab a bucket. The nausea’s coming…