Inflation is Most Certainly Running Hot!

Obviously, it was “risk on” this week as money flowed out of bonds into stocks and commodities. Americans are a gullible population. You see that with senseless obedience to mask and vaccine mandates. We have seen it also with a belief that the Fed is honest and in control of markets. But gullible though they are, just maybe they are starting to catch on to the fact that any talk of faster tapering or any sort of punchbowl removal that would cause stocks to crash is just that—talk. This week suggested Wall Street was no longer spooked by such talk, no matter how hot inflation runs.

And inflation is most certainly running hot! As Peter Boockvar wrote on Dec. 10, the CPI in November rose by 0.8% headline and 0.5% core m/o/m. The core rate was as expected while the headline increase was one-tenth more. Versus last year, prices are up 6.8% headline and 4.9% core. It was 1982 the last time we saw a headline print like that. The core rate is running at a 30-year high. Energy prices grew by 3.5% m/o/m and 33% y/o/y while food prices were up by 0.7% m/o/m and 6.1% y/o/y.

Bottom line, as the data was about in line, inflation breakevens are little changed but the stats speak for themselves. We have the most widespread and quickest pace of inflation in about 40 years. I will say again, the rates of change will likely peak in February as comparisons get more difficult and thus the remaining question is at what level does it settle out. I still believe it won’t be going back to the 1.5%–2% pre COVID pace for a few years and 3%–4% is something we’ll see instead. The 2-year yield is up 1.5 bps and back to 0.70%.

One advantage to being a bit older, as your editor is, I remember the 1970s when I was a young man. We were constantly being told as the Fed continued to suppress rates to negative real levels that there was no serious threat of inflation and that they had everything under control. Eventually the bond vigilantes took over, and to ensure the system survived, the Fed was no longer able to perpetuate the big lie. That of course will be true once again.  One reason I am convinced this is a replay of the 1970s inflation problem is that wage inflation is starting to raise its ugly head. There are a massive number of unfilled jobs in virtually every part of the country and in every industry. After a one-month dip, job openings jumped back to a near-record 6.9% in October. You can have commodity prices jump higher from time without too much trouble but if you have a massive wage increase across all sectors of the economy and if those wages are not keeping up with inflation, then you have increasingly hostile workers. Add to that a Marxist mindset in the Biden Administration that is willing to do anything for votes and a Fed that will continue to pump money into the system to keep the stock market from imploding and, by declaring an emergency, send helicopter money to lower income groups, then the stars are aligned for an inflation problem that could very quickly skyrocket into something much more serious than what I experienced as a young man in the 1970s.

Then you have the overreaction of left-wing operatives in the White house, craving control over our lives, keeping the COVID fear-mongering going, which is a main cause of the labor shortage. Here are some reasons the labor shortage is not likely to disappear any time soon.

  • The COVID crisis has many people rethinking their priorities. BofA estimates that as of 3Q ’21, early retirements and caregiving responsibilities had each caused at least a 1 million drop in the labor force.
  • The resistance to vaccines and mask rules along with a steady diet of COVID news has convinced many workers that going back to the labor market is too risky, according to Harris.
  • Ironically, the BofA economist also notes that vaccine mandates have encouraged anti-vaxxers to also leave the labor market (albeit in smaller numbers).
  • Covid has resulted in about 197k deaths of working-age people and has left many with long-run health problems.

Where Does This Leave Gold and Gold Shares?

Last Thursday December 2, Michael said this: “Action today hit a number that we consider meaningful enough to assume (and we could be wrong) that there’s downside risk once again. We’re not long-term bearish on gold with today’s events, just as we weren’t back in January this year when it triggered our quarterly momentum-based risk-alert level in the $1870s. That drop produced a $200 decline by March, which was a 10.6% drop from our risk-alert number. We now estimate that gold might drop to likely next support around its 36-mo. avg. of $1640, which from the current level is a 7% drop. Compare that expectation to the percentage scale drops the S&P 500 has endured over the past dozen years of upside—many erasing 10% to 20% of price within a few months, followed by upside resumption. So put such gold drops (like January to March) into that context. Yes, it might be worth hedging gold now, especially if your position is leveraged. But we don’t expect disaster. We simply want to offer our assessment of possible risk.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.