Looking at Inflation

The week ending May 21 was clearly a “risk-off” week as everything except the traditional safe havens—gold and T-bonds—lost value. Last week the market was still shaking off the pain of worry over higher interest rates as a result of the shocking CPI numbers that are reminiscent of the 1970s. But don’t worry. Our oh-so-loving President Biden will be sure you have a nice glass of milk and cookies before bedtime. Our loving omniscient and omnipotent government and partner, who can magically create money and thus everything you need out of thin air, will be sure all your needs are met. With that assurance that inflation is really nothing to worry about, the markets began to rally once again, though it should be a bit troubling to gullible believers in government propaganda that both gold and Treasuries rallied if all is well. 

Actually, I do want to keep an open mind about the inflation issue, which is why I’m happy to have David Rosenberg as my guest on my radio show next week. David, who is Canada’s most famous economist, believes inflation is indeed transitory, as does my friend Chen Lin. If by inflation David means the CPI, I think that’s possible, at least in the short term, because the economy is very complex and because governments manipulate statistics to support their propaganda. John Williams, who is a guest occasionally on my show, can provide all the details on how the U.S. Government spins inflation and employment numbers in various ways to make them look good to the voters.

But inflation is not just the CPI. The Austrian school’s definition of inflation is simply a growth in the money supply. And if you don’t think the supply of U.S. dollars isn’t on an exponential hyperinflationary rise, I have a bridge to sell you in Brooklyn. If stock prices rise due to money creation rather than because of increased earnings, isn’t that inflation? Just because stocks and bonds and housing prices are not included in the CPI does that mean we don’t have inflation? Talk about young people not being able to buy a first-time home! What about those same young people needing to pay nosebleed prices for stocks so that over the next 10 years or so when equity prices revert to the mean they are likely to realize huge losses as they enter the early years of adulthood.

Yes, it’s pretty much been a one-way street for equities since 2008-09 because the Fed has continued to force interest rates lower and lower to rates that have nothing to do with the true cost of capital, so that stocks and bonds are artificially overvalued. 

Which leads me to Alasdair’s latest article titled, “Suffering a sea-change.” For those of us who believe the likes of brilliant con artists like John Maynard Keynes cannot outwit the collective wisdom of the laws of economics in the long run, we believe there will be a day of reckoning in which the Fed and other central banks will lose control of interest rates, which will bring the entire house of cards crashing down. Here is the overview of Alasdair’s latest essay, which you can also access at Goldmoney.com.

There is an established theoretical relationship between bonds and equities which provides a framework for the future performance of financial assets. It would be a mistake to ignore it, ahead of the forthcoming rise in global interest rates.

Price inflation is roaring, and so far, central banks are in denial. But it is increasingly difficult to see how monetary policy planners can extend the suppression of interest rates for much longer. There can only be one outcome: markets, that is to say prices determined by non-state actors, will force central banks to capitulate on interest rates in the summer.

Hardly noticed, China is deliberately putting the brakes on its economy, which will cause an inflationary dollar to collapse, unless the US defends it by putting up interest rates. Deliberate? Almost certainly, as part of its strategy, China is taking the financial war with the US into the foreign exchanges.

Bond yields will rise, with the US Treasury 10-year bond leaving a 2% yield far behind. Equity markets will sense the danger, and it might turn out that the month of May marks a peak in financial asset values—following cryptocurrencies into substantial bear markets. https://www.goldmoney.com/research/goldmoney-insights/suffering-a-sea-change

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.