Our New Era: “The Great Reflation”

I feel like I’m taking too many victory laps.

But frankly, that’s kind of the way it happens in my world.

I make various observations and predictions about the economy, the dollar, and assets—many months or even a couple years in advance… And then suddenly it’s raining victory laps. (Assuming victory laps rain down.)

The latest two victory laps are interrelated…

Two headlines to share:

U.S. consumers are driving down inflation by refusing to pay higher prices
            – Associated Press, August 12

The Risk Of Slowflation Rises With Mixed Wholesale Inflation Report
            – Forbes, August 13

Both speak to predictions I made many a moon back.

When the Fed was hellbent on bringing inflation down, I wrote that consumers were the key players in that fight—not the Fed.

The Fed has zero control over many of the reasons inflation exists today.

Jerome Powell & Co. had no control over the pandemic, particularly when the pandemic was toying with the Chinese economy, the world’s factory floor. They had no control over the Russia/Ukraine war, which wreaked havoc on food crops and energy prices. And they have zippo influence over the weather, such as droughts that befouled all kinds of crops from Brazil to India to Europe and the US heartland.

All of those were big factors driving inflation—along with the Fed, Treasury, and Congress pouring tanker loads of money into the economy post-pandemic.

I wrote that the best approach the Fed could take was to remove its hands from the wheel and let the consumer steer.

Consumers are far savvier creatures than are Fed governors, who are wealthy and by and large come from an ivory tower background of economic theories that, in the real world, don’t always pan out as theorized.

Consumers shift quickly on the fly…

If inflation pushes prices for Product X too high, then consumers will stop buying Product X and switch to cheaper Product Z.

And then inflation begins to retreat.

Which is precisely what the Associated Press noted a few days ago. Per the AP:

Some of America’s largest companies, from Amazon to Disney to Yum Brands, say their customers are increasingly seeking cheaper alternative products and services, searching for bargains or just avoiding items they deem too expensive…

The reluctance of consumers to keep paying more has forced companies to slow their price increases — or even to cut them. The result is a cooling of inflation pressures.

Hmmm… who’d a’thunk it?

As for that Forbes headline, it refers to the idea that inflation—despite the above—is far from tamed in America. Instead, the US is seeing “slowflation,” or persistent inflation that just drags on and on and on at a slower pace, but well above the Fed’s preferred 2% rate.

Forbes set out to differentiate slowflation from stagflation by noting:

Stagflation is a term economists use to describe a period when growth stagnates or falls while inflation is high, whereas slowflation is a more recently coined term denoting a period of slow growth accompanied by elevated inflation. Given relatively solid U.S. labor market and growth data, slowflation seems like a potentially more significant risk than outright stagflation.

A back-pat for El Jefe, who said this was coming—this idea that while inflation rates have come down, the US is in for an extended period of inflation that exceeds the Fed’s target.

The culprit: Those events the Fed cannot control, coupled with all the free money Western governments dumped into the global economy during the pandemic and after. You don’t just hoover up that much free cash, and you can’t grow the global economy fast enough to absorb all that cash.

Moreover, the West’s central banks find themselves in a pickle: Consumers recognize that inflation is a real worry and, so, they’re spending, spending, spending (even taking on record debt) to turn decaying dollars and euros and pounds into consumer purchases because they know those purchases will cost even more tomorrow.

Basically, spend it while you can still afford it.

That helps keep inflation elevated because the world has more and more money chasing the same relative amount of goods and services (like I said, the world can’t grow the global economy fast enough to absorb all the money available to consumers).

So, where does that leave us?

Well, it says we want to own exposure to hard assets like those we have in the Global Intel portfolio, including gold, silver, copper, and others.

It also says we want to own crypto because inflation and fiat currencies’ eroding purchasing power is good news for crypto prices, particularly bitcoin, with its limited supply of just 21 million coins.

We’re in a unique era: The Great Reflation.

We’ve spent the past 40 years in a world of low interest rates and tepid inflation, an era tailored to paper assets such as stocks and bonds.

That era is dead and buried.

Now comes the rebound, as I’ve been predicting for a long time.

And in this era, paper assets are out. Hard assets—and digital assets—are in.

Soon, we’ll have a victory lap for that prediction, too.