Between a Rock and a Firing Squad

Uncle Sam Gets Caught in the Inflation Trap

Sticker shock.  

A common term we’ve all used at some point when buying something or other and we weren’t expecting the price we were quoted.  

Apparently, the term grew out of the new-car lots of 1975, when American consumers went car shopping only to discover that the Big 4 automakers of the day—Ford, Chrysler, General Motors, and American Motors—had suddenly hiked sticker prices by 8.5% to as much as 13%. 

Ah, the good ol’ days… 

Live long enough and they come back to haunt you. 

To wit, the October inflation report. It showed inflation on a year-over-year basis surged 6.2%, the highest reading since December 1990. On a one-month basis, it surged by the annualized equivalent of 10.8%. 

And just like that, we have a winner.  

I’ve been saying across pretty much the entirety of the year that we would see a double-digit reading before 2021 ended. And here we are… 

Which brings us back ‘round to ’75. Because as we dig deeper into the October inflation, we find that new-car prices jumped 9.8%—the biggest increase since…1975. 

But wait (my best informercial voice), there’s more! 

Furniture and bedding prices soared by the most since Harry Truman was president in 1951, the early days of America’s emergence as the first middle-class consumer super-power. Tires and sports equipment: biggest price increase since the early 1980s, when I was in 9th or 10th grade. Same with restaurant meals.  

Meanwhile, your morning bacon, the pulled-pork sandwich at lunch, and your evening pork chops: Up at a pace last seen in 1990. 

You get the dismal, wallet-robbing picture. 

All year, our man at the Fed, J. Powell, has sought to soothe jangled, inflationary nerves by offering up a calming balm of gaslit hogwash—jibber-jabber about transitory this and temporary that.  

But as I have routinely interjected in the last eight or nine months, “transitory” is not how any of this works. Prices are resetting permanently higher. 

Inflation will slow at some point, but it’s going to be at a slower rate off a higher base. 

That’s going to naturally lead to real wage inflation. And if it doesn’t, it’s going to lead to a worker rebellion that makes The Great Resignation of the last year look like an elementary school recess.  

Workers are done with management that pumps dollars into their own pockets or into Wall Street’s increasing wealth. (It’s a primary reason freelancing is exploding. Fiverr, one of the leading freelance sites, and where I do my freelance script-doctoring, recently reported rapid earnings growth…with a lot of that coming from business-users hiring freelancers like me.) 

The Fed’s in an increasingly no-win position between that proverbial rock and a firing squad. 

They need to raise interest rates to slow inflation’s gallop. But, boy oh boy, is that gonna sting!  

Uncle Sam, as I’ve reported many times, is up to his great-great-great grandson’s eyeballs in debt. And news just out in the last week or so shows that consumer debt is now at historic highs as well. 

Higher interest rates would drive up the cost of running America (given that we borrow now just to repay the interest on previous loans), and it would hit credit card balances, student-loan rates, and mortgage rates. Which, of course, slams the consumer. 

But if the Fed doesn’t act…well, 6.2% year-over-year, and 10.8% month-over-month is going to look so quaint as we move into the middle of 2022.  

Then the solution is just going to be even more painful. 

What I’m saying is…YIKES! 

What’s happening now is precisely why I’ve been regularly building hard-asset exposure in the Global Intelligence Letter Portfolio. In a rising rate world, Wall Street’s gonna crack and that will slam high-flying, oxygen-deprived tech stocks.  

But plays on the commodity super-cycle and consumer necessities are going to fare well. 

And in a world where the Fed leaves interest rates alone, the market will ultimately flee the dollar because other, more prudently managed currencies and economies are now entering into an interest rate-hike cycle. Cash will reflexively flow to currencies with higher interest rates because that cash can earn more money there. 

So, no good news really. Sorry to rain on your Saturday. 

Best I can tell you is to prepare. Own hard assets. Own commodity exposure. Own non-dollar exposure. And, yes, own crypto. Homicidal price volatility aside, bitcoin has most assuredly outpaced inflation since it launched the cryptosphere in 2009. That’s not going to change anytime soon.