The market only had eyes for one thing today…
Inflation.
The March Consumer Price Index (CPI) number, that is.
The result?
No doubt you’ve already seen it as it came out at 8:30 this morning, ET.
(But in case you missed it, the CPI was 3.5%.)
The more important detail is something we mentioned last week. The idea that the Federal Reserve, the government, and their international counterparts all have the same plan – to keep the inflation rate from falling too low.
If you read that essay, you may have dismissed it as conspiratorial nonsense.
But as it turns out, we weren’t the first to offer the idea that the Fed may just like higher inflation.
We’ll explain more below. First, today’s market action…
Market Data
The S&P 500 closed down 1% to end the day at 5,160.64… the NASDAQ lost 0.8% to close at 16,170.36.
In commodities, West Texas Intermediate crude oil trades at $86.32, up $1…
Gold is $2,348 per troy ounce, down $21 from yesterday…
And bitcoin is $69,841, up $784 since yesterday.
And now, back to our story…
Don’t Bet Against… Goldman Sachs?
To recap… We mentioned last week that, for years, central banks (the Fed included) had set 2% as the ultimate goal for inflation.
The theory was that 2% was the level at which inflation wouldn’t cause too much harm to the general public… but at the same time, it was just enough to devalue the currency without folks noticing it.
Why does the government want to devalue the currency? So it can go further and further into debt… to spend more and more money on public-spending follies… to increase the power and stretch of the government.
Those, dear reader, are facts. Not supposition… or conspiracy… but facts.
The problem governments face now is they’ve have gone so much further into debt, that a 2% inflation rate isn’t enough. To maintain and increase government spending, governments need higher inflation.
But they can’t just come out and say that. They need to go through a process. In a way, it’s kind of a similar process to how a money launderer washes illicit cash through the economy to hide its source.
Governments and central banks need to “wash” the idea of higher inflation through the economy… the banks… and compliant media mouthpieces.
It’s why, as your editor watched CNBC this morning (we watch so you don’t have to!), we noted the tone of all the so-called experts and commentators.
As we mentioned at the top, the latest CPI was 3.5%. This was higher than the market expected. What was the response to this?
The commentators said it likely meant further rate cuts were off the cards. But the key clue to the scheme is what they didn’t say. No one offered an opinion that maybe the Fed should raise interest rates to fight this higher-than-expected inflation.
It’s obvious why. The need to “wash” higher inflation through the minds of the general public. The market may have been surprised by 3.5%. But the Fed and government wouldn’t have been dissatisfied with 3.5% at all.
The ongoing commentary will now be to talk about how the Fed needs to get inflation down to around 3%. This will become the new benchmark. It will take time… just a little time. But before long, everyone will have forgotten about the “old” target of 2%. That’s because “3% is the new 2%.”
And it’s not just your editor spouting this. Unknown to us, the government’s favorite bankers – Goldman Sachs – had offered this view back in November 2022.
We quote from the report titled “Is 3% the New 2%? Sizing Up a Scenario of Higher Inflation Targets.”
The report notes:
What’s more, inflation-targeting frameworks around the world vary, and while they tend to have coalesced around some form of a 2% objective for most developed markets, it is not set in stone.
It goes on:
Regardless of whether or not there should be a change in the inflation target, it would be interesting to explore how financial markets might react if there were a change to, say, a 3% target.
And more:
However, we suspect that a 3% inflation target would still be sufficiently moderate to avoid major concerns about demand destruction. Meanwhile, monetary policy would likely be more supportive, all else being equal. Indeed, central banks would be able to cut rates more aggressively in an economic downturn, thereby accelerating the recovery and providing a policy tailwind to equities.
Finally:
Whether 2% inflation mandates are still the appropriate framework for monetary policy can be debated, but overall, we believe a 3% inflation environment would likely be positive for risk assets, as the tailwind from stronger economic growth would more than offset the headwind from higher nominal bond yields across the curve.
The old market saying is “Don’t fight the Fed.” We would add to that by appending “…or Goldman Sachs.”
We don’t know for sure what this will mean for the markets in the short term. Except to say that it’s likely to be rocky. Hopefully, you’ve followed our advice on that in recent weeks.
We’ve told you to take some money out of the market. Lock in some profits, cut some losses (before they become bigger losses), and then use smaller stakes in small-cap stocks in case markets do move higher.
Meanwhile, by cutting your market exposure, you’ll have more cash in the bank.
One final point. As we write this morning, gold and silver haven’t moved much. We will bet a whole bunch of dollars that both gold and silver will move higher this year as the market starts to wise up to this coordinated plan to keep inflation up.
We’ve warned you… will you heed that warning? It’s up to you.
More Markets
Today’s top gaining ETFs…
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iShares MSCI Global Energy Producers ETF (FILL) +0.9%
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USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI) +0.6%
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Invesco DB Commodity Index Tracking Fund (DBC) +0.5%
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Siren Nasdaq NexGen Economy ETF (BLCN) +0.5%
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Invesco Energy Exploration & Production ETF (PXE) +0.4%
Today’s biggest losing ETFs…
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iShares U.S. Home Construction ETF (ITB) -4.7%
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Pacer Benchmark Industrial Real Estate SCTR ETF (INDS) -4.1%
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The Real Estate Select Sector SPDR Fund (XLRE) -4.1%
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SPDR S&P Semiconductor ETF (XSD) -3.9%
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First Trust Small Cap Value AlphaDEX Fund (FYT) -3.3%
Cheers,
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Kris Sayce
Editor, The Daily Cut