The mixed messages on inflation and what does it mean?
Posted By RichC on June 23, 2021
Although I’m likely tainted in having lived through a period where inflation was real and uncontrolled, I do worry that people living today either
ignore or downplay the negative impact inflation, stagflation or worse … hyperinflation … can make on our country.
For those who know me, I’ve likely been the “boy who calls wolf” at every sign of excessive money printing, bailouts, giveaways and unfunded government program. I’ve worried about debts and deficits … and feared that every time a hot trend triggered the FOMO buying and owning (housing, dotcom stocks, no-money down borrowing, health care costs, education costs, IPOs, NFTs, SPACs and cryptocurrencies of every flavor). 
Thankfully so far, we have survived each boom and bust cycle … and I’ve participated but remained responsibly balanced through many of them.
Now, for the first time in long time, investors, the market and even financial experts have developed an inflation fixation. Stocks have risen from their pandemic lows and have quickly reached valuations that has started the worrying process again. Each expert or business analyst will talk about inflation and any news that suggests prices are rising too fast even has the subject come up at the kitchen table.
This time I do think the immediate surge is “transitory” as the Federal Reserve chairman mentioned due to the slumped economy reopening, but I do tend to look at a few factors which pose problems down the road … and again, it looks concerning again.
- The easy-money Fed policies and government stimulus dollars may be continuing too long
- Sending unemployment to people to stay home when there are jobs to fill is forcing employers to pay workers more, their costs to go up and prices rise
- The Biden administration is heavy handed which regulations and taxes
- Shortages and importing issues force prices higher
- Commodity costs are up … whether it is lumber for homes or energy
- Speaking of energy, no pipelines, no new oil exploration and punitive government policies against fossil fuel causes energy prices to rise
At this point I’m back to my normal cautious … but also am not fully in panic mode after last week’s selloff and think Phil Flynn and Jonathan Hoenig had it right on Fox Business this week: “The inflation risk is not why the stock market reacted, it was the fact the Federal Reserve seemed so surprised.” (paraphrased).
Here’s what Clough Capital Partners posted on their blog. It seems to the consensus if there is one.
Our base case is that inflation is still tame
Today the consensus anticipates an economic boom with the return of inflation being the possibly inevitable consequence. We have no doubt the employment recovery will be fast and with the checks from the second federal stimulus program in the bank and a new $2.3 trillion infrastructure investment program on the shelf, the economic boom scenario only looks more likely.
The base effect caused by falling prices during the pandemic will make year-to-year inflation numbers this spring look like we are going back to the 1970s. But we believe that is likely to evaporate in the second half of the year.
Commodity prices have indeed risen in recent months, but these prices rise because a demand surge happens before supplies can be brought on. Shortages of industrial and agricultural commodities are widespread today but eventually supply and logistical bottlenecks will be resolved and price pressures relieved.
China serves as an example of what the coming months could look like. The country was the first economy to recover last spring and its needs for industrial materials soared, but it has now reportedly rebuilt its inventory stocks.
Over the long term, there are also powerful secular forces that we think will limit spending and inflation pressures. These include demographics (a population that is getting older and saving more), already heavy consumer balance sheets and technology, which is driving production costs down.
Inflation fears are still a risk to equity markets
While we believe runaway inflation over the long term is unlikely, concerns about rising prices still have a grip on markets, and the inflation fixation is probably one of the biggest risks to stocks in the short term. As such, we are actively looking to hedge against it.
Speaking of the 1970s inflation … the Wall Street Journal wrote a great piece that included my favorites … graphs and charts … which I tweeted about and linked:
Inflation info in @WSJ article: "Sylla characterizes postwar #inflation as prices catching up w reality. In the 1960s, heavy govt spending & Johnson’s Great Society programs met low-interest rates. Money supply grew strongly & the Great #Inflation began." https://t.co/tYDbiU6pGI
— Rich Corbett (@RichC) June 21, 2021
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