Alan's Alert 6-7-2021

 

I was going to talk about uranium today but after some crazy inflation comments coming out of the Fed members and one former Fed chair and current Treasury Secretary, all eyes are on the CPI release that is scheduled for Thursday.

 

The first comments came from Cleveland Fed President Loretta Mester addressing the poor labor report saying;

“Fed policy needs to be patient right now” and the “economy has more progress to make on hiring”. 

 

Next NY Fed President John Williams stepped up the rhetoric saying;

“I just don’t think the time is now to take any actions” and “The economy has improved and I think it’s on a good trajectory. But to my mind, we’re still quite a ways off from reaching the substantial further progress, you know, we’re really looking for”.

 

As if this wasn’t clear enough, Janet Yellen, the former Fed chair and current US Treasury Secretary had an interview with Bloomberg in which she stated:

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.” And “We’re seeing inflation but I don’t believe it’s permanent. We at least on a year-over-year basis will continue, I believe, through the rest of the year to see higher inflation rates – maybe around 3%.”

 

Now Janet didn’t get to be where she is because she’s a dummy.  She’s a smart.  She’s well educated (Brown, Harvard), and has a work history that reflects a long tenure in government finance (Fed chair, SF Fed pres, chair of Council of Economic advisors).  The catch here is, she doesn’t work for us, the people.  Her employer is the big banks and the Biden administration.  Her goals are to pass these large programs (infrastructure, Biden’s budget).  Inflation worries are not her worries.  She’ll embrace inflation until it gets out of hand.

 

The same goes with the rest of the Fed.  They simply believe that all factors point towards “transitory” inflation.  They are willing to let things run hot for a while.

Now is Yellen right about inflation being good for society?  Inflation being good for the economy is a very Keynesian idea.  If there is a steady stream of inflation, all prices go up; producer prices, capital goods, land, wage rates, earnings on assets go up and those assets rise in value (which is what the big banks want).  The value of the dollar decreases, meaning imports are expensive but the export business is booming. 

 

Now you might be thinking, well Alan, this doesn’t sound so bad and Janet seems pretty smart but I warn you, this is a distortion of the true market forces which always prevail in the end.  You can only push on a string for so long before it comes snapping back.

 

Goldman Sachs put out their spin on the situation and raised their near-term inflation forecast.  The bank also analyzed returns in high and low inflation environments finding that the median real return was higher under a low inflation environment (1.1% & 1.3% vs .3% & .7% monthly returns).  They discovered that the best returns in a high inflation environment was health care, energy, real estate, & consumer staples.

 

Sorry that this was a Debby-downer/chicken-little kind of a post.  Be thankful that I didn’t wade into the deep waters of Austrian vs Keynesian business cycle theory.  I guess this is a warning of sorts, there is going to be a lot of tension in the market until the CPI is released Thursday pre-market.  Protect yourself and be positioned for the coming wave.