Yellen walks-back her inflation comments … but inflation is here, we all know it … why this time is different than 2008 … how to make inflation work for you

Janet Yellen is quite the tap dancer.

On Tuesday, a reporter asked her how the economy could sustain the extra spending from federal COVID-19 relief.

Yellen’s response:

It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.

That was not what traders wanted to hear.

The Nasdaq proceeded to roll over, falling about 2% on the day (for any readers less aware, tech stocks are especially sensitive to interest rates).

This prompted a quick reversal from Yellen just a few hours later:

So let me be clear: That’s not something I’m predicting or recommending…

I don’t think there’s going to be an inflationary problem. But if there is the Fed will be counted on to address them.

***What defines an “inflationary problem”?

We know that the Fed is targeting 2% average inflation. Now, that has its own issues, because that’s an average of what, exactly?

Averages required fixed beginnings and endings.

Is the beginning when the Fed adopted this target rate in 2012?

Or since Powell took over in 2018?

Or since, say, 1980, which began the decade that broke the killer inflation of the 70s?

We don’t know, so let’s ignore that (rather important) question.

Instead, let’s look at things we can measure – specifically, the price of goods and services that are directly impacting your wallet (as opposed to the Core Consumer Price Index, which leaves out things like gasoline, groceries, and housing).

Let’s browse recent stories from local news stations around the U.S.

From KHOU Houston:

From gas to groceries, it seems everything is going up in price this year. Even if you are frugal with your dollars, if you need to eat or drive, these price hikes will impact you.

In 2021, filling up the car can cost you twice what you paid last summer…

Excited travelers trying to book a post pandemic vacation are discovering rental cars are hard to come by, and when you do, it can be pricey… Daily rates for car rentals are soaring to $200 a day in some vacation spots…

From Fox 8 News Cleveland:

Your grocery bill may see an increase as grocery prices continue to climb this year, going up .6 percent in March from the previous month, according to data released Tuesday by the Bureau of Labor Statistics.

Consumer costs at the supermarket rose every month of 2021, the BLS found. It increased by .4 percent in February and .3 percent in January, meaning a .7 increase since the start of the year.

The priciest items, per the BLS, were meats, poultry and fish, which increased by 5.4 percent from February to March.

They were followed by dairy and related products, which rose in price 1.6 percent.

From KUTV Salt Lake:

Brand new numbers show just how high home prices have soared across the state, shattering old records and putting a further squeeze on buyers.

And the real eye-popping part is when you consider how much more buyers are spending today on a house compared to just a year ago.

According to data from UtahRealEstate.com, analyzed by the Kem C. Gardner Policy Institute, the statewide median sold price for all housing types in April was $426,250, an increase of 26.9 percent from April 2020.

If we expand our focus to how various commodities have exploded in price, the results are jaw-dropping.

From analyst Charlie Bilello:

Circling back to Yellen’s words, does all this represent an “inflationary problem”? Perhaps. But let’s ask it a different way…

Does all this represent a “personal/family budget” problem?

Well, I’m certainly aware that my cost of living has increased. Are you?

***Though some of these price increases are due to post-COVID supply-chain log-jams, we believe the root issue is the explosion of new currency flooding the economy

Now, some of you may say, “Jeff, aren’t you forgetting back in 2008/2009 when the Fed printed tons of cash and saved the economy? Well, that didn’t lead to inflation, so why should we be worried today?”

Fair question.

Short answer – because in 2008/2009, the Fed’s new dollars boosted the monetary base but not the money supply.

To put it simply, even though the Fed created trillions of new dollars (the monetary base), most of it remained parked in the big banks, shoring up destroyed balance sheets (which meant it didn’t increase the money supply).

In fact, only a fraction of it actually made its way into the U.S. economy. This prevented a substantial surge in inflation.

See for yourself…

First, let’s look at what happened to the monetary base in 2008/2009. Below, you can see it exploding (we cut off the chart in early 2010).

But now, look at what happened to the M1 Money Supply.

To make sure we’re all on the same page, here’s how Investopedia defines M1:

M1 is a narrow measure of the money supply that includes physical currency, demand deposits, traveler’s checks, and other checkable deposits.

For simplicity, let’s think of it as “dollars that reach you and me.”

Here’s how the M1 Money Supply increased as Bernanke was printing trillions. I’ve circled the period from 2008 through 2009:

This increase appears significant, but it’s not an increase on par with what we see with the monetary base. For greater context, let’s now turn our attention to recent years.

First, we’ll look at what has happened to the monetary base. We’ve circled the increase in 2008/2009 to contextualize it against the increase from 2020-to-now.

Brace yourself…

But as we just noted, the real issue isn’t the money supply, it’s the actual money reaching people like you and me, who can spend it, which results in inflationary pressures.

So, what’s happened with the M1 Money Supply?

You should probably sit down for this one…

As before, we’ve circled the uptick in 2008/2009 compared with 2020-to-now.

This seems pretty different from 2008/2009.

Might that be a problem?

***One type of inflation destroys wealth, the other type creates it

Let’s look at the flip side of inflation.

Last week, we featured an interview between our macro specialist, Eric Fry, and our CEO, Brian Hunt.

From that Digest:

Eric references his mentor, Jim Grant, who would say that there are various types of inflation. When the prices of things we consume go up, we call it inflation. But when the prices of things we own go higher, we call it genius, or a bull market.

But Eric says that inflation is simply a different facet of the same phenomenon – lots of liquidity flowing toward an asset that’s in excess of the supply.

While inflation erodes our wealth at the gas pump and in the grocery line, it’s creating wealth in the financial markets.

That’s because all those printed stimulus dollars aren’t necessarily going toward bills and mortgages…they’re flooding into the financial markets.

From the New York Times:

…one of the biggest tools deployed by the U.S. government to cushion the economic blow — stimulus payments — is also driving a huge surge in investing by small traders.

Analysts at Deutsche Bank recently estimated that as much as $170 billion from the latest round of stimulus payments could flow into the stock market.

They conducted a survey of retail traders in which respondents said they planned to put roughly 40 percent of any payment they received — or $2 of every $5 — into the stock market. Traders between the ages of 25 and 34 said they expected to put half of their stimulus check into stocks.

“That could lead to a bit more mania, speculation in the market,” said Patrick Fruzzetti, managing director and partner at Hightower Advisors, an investment firm. The “stimmies,” he said — using a popular online term for stimulus checks — will go into people’s trading accounts, and “they will trade.”

***Want to see the latest evidence of this mania?

Enter the cryptocurrency, Dogecoin.

We’ve reported on Dogecoin before. But to make sure we’re all on the same page, Dogecoin is an altcoin that was launched nearly a decade ago as a joke.

At that time, new altcoins were popping up all over the place. Dogecoin was a gag, mocking the explosion of “me too” altcoins that didn’t provide any real value.

Back in February, Dogecoin’s own creator, Bill Markus, couldn’t believe its price surge.

Here he is, commenting:

The idea of Dogecoin being worth 8 cents is the same as GameStop being worth $325: It doesn’t make sense. It’s super absurd. The coin design was absurd and it was meant to be absurd.”

Um… eight cents?

That was in February. As I write, Dogecoin is trading at 61 cents. Yesterday, it was at 64 cents.

From Yahoo! Finance:

It took Amazon 13 years to deliver a 10,000% return to investors. It has now taken Dogecoin five months.

The cryptocurrency (DOGE-USD) hit a new all-time high of $0.60 on Tuesday, pushing Dogecoin’s market cap north of $70 billion to become the fourth-most valued coin, according to Yahoo Finance’s data partner CoinMarketCap. That’s now larger than the market cap of Moderna, one of the companies shipping COVID-19 vaccines to save the world from the pandemic.

That means a $1,000 bet placed on Doge to begin the year, when its price was around half of one penny, would now be worth more than $100,000. 

This is what good (though utterly absurd) inflation looks like.

***Prepare for what’s coming – both good and bad

Let’s just ask the question that many investors are wrestling with today…

What in the heck is going on?

There are warnings of a market crash… meanwhile, certain assets are surging, minting overnight millionaires… there’s the Fed downplaying inflation, despite real-world evidence of inflation… there’s the push-and-pull between tech stocks and old school stocks… and what about interest rates? What about Biden’s proposed tax plan? Do valuations matter anymore? What about our national debt levels?

Investors are confused – and rightfully so.

Given this, next week, we’ll be beginning a segment that might as well be called “What in the Heck is Going On?” We’ll be turning to our various analysts to better understand the nature of this crazy market environment, and how investors should respond.

So, if you’re confused, hang in there, and tune in next week.

Wrapping up inflation for today, we’re already hearing a lot about bad inflation – that’s because it’s here.

Forget official Fed numbers. Forget Yellen and Powell and their comments. The truth is you can look at your checking and credit card accounts to see that inflation has arrived.

But…

The flip side of this is that – for a while – we’re going to see a boom in certain investment assets. I’m talking a lifechanging boom. Just look at Dogecoin.

This boom will be fueled by the unprecedented volume of dollars now flooding our economy. That money has to go somewhere, after all.

We’re going to see an explosion in certain stock prices, various crypto assets, real estate, commodities.

Yes, there will be a price to pay eventually. But for now, there’s money to be made.

So, on one hand, get ready to spend an extra few hundred dollars for groceries, gas, and whatnot.

But on the other hand, get ready to earn hundreds- perhaps thousands-of-percent gains on certain investments that soar as money sloshes around the investment markets.

Inflation has arrived – let’s make it work for us.

Have a good evening,

Jeff Remsburg