Inflation is officially the rule by which Wall Street is now playing. That’s according to Fed Chairman Powell, who last week said the Fed is now more-inclined to let inflation run hotter than 2% and, thus, less inclined to raise interest rates as inflation pushes higher.
So, now it’s time to pull the inflation playbook off the shelves and start prepping our portfolios for what’s to come.
Clearly, this is a moment when precious metals and certain cryptocurrencies are going to fare unexpectedly well. Already, gold, silver, Bitcoin, and Ethereum have moved higher, sparked by savvy investors who, months ago, saw this particular graffiti spray-painted all over the walls and began snapping up those assets at much lower prices.
But even today’s higher prices will look like a bargain, based on where we’re probably headed. Because at this point, America has jumped the shark, monetarily speaking, and there’s really no path back to rationality that doesn’t include a crisis – a catharsis – to put the economy and the Street back on solid footing.
Because of the pandemic, Congress is forced to keep families and businesses afloat as best they can with stimulus checks. Because of the pandemic, the Fed is propping up the bond market by directly buying corporate bonds – a historic and unhealthy precedent. Debt, as a result, has exploded to nearly 154% of GDP, an egregiously large number the country has never before reached, even in times of war.
Meanwhile, the deficit-to-outlay ratio (a measure of how much government debt comes from borrowing) is now north of 60%.
Anything above 40% speaks to the likelihood of hyperinflation.
Will we see hyperinflation? Who knows?
In the Great Recession, much of the government’s largesse ended up inside banks, with limited inflationary impacts. This time around, a lot of the G-man’s money is flowing into consumer wallets, and that – artificially fabricated dollars pouring into the real economy – is an inflationary ingredient.
Plus, we’re also in the midst of a stock market bubble, and a collapse will almost assuredly see government dump trillions of additional dollars into the economy to buoy asset prices and save fragile industries.
The real question we face is: Will Fed officials prove deft enough to allow just a little inflation?
Again, that’s a question only the future can answer.
But it’s clear that the Fed has limited capacity to raise interest rates, given the impact higher rates would have on government’s ability to repay existing debt. And, I’ll argue, the Fed has zero interest in raising rates and a great deal of interest in letting inflation run much hotter than 2%. Short of default, inflating away as much of America’s debt as possible is about the only legit option D.C. has nowadays.
As such, now it the moment to prepare for the possibility that the Fed isn’t able to contain inflation.
Right now, and despite already higher prices, owning physical gold and high-quality gold miners is a winning strategy. (Beware gold ETFs such as GLD; it could prove to be a disaster in a crisis, but more on that later this week). Physical silver and silver miners, meanwhile, will likely do even better. And bitcoin could test levels that are multiples of its previous $20,000 high, while Ethereum could sail well past its previous high just north of $1,400.
You don’t necessarily need to load up on these assets. But it’s not a bad bet to pare back stock market winners that have appreciated markedly since the March lows and to stuff some of those profits into gold, silver, and crypto.
We have reached a Gilded Age moment not unlike the Roaring 20s nearly a century ago. The cracks that will bring it all down are plainly visible, though far too many investors right now are too willing to suspend their disbelief.
Those who do, do so at their peril.