“Stubborn,” the Financial Times tells us.
Inflation that is.
“Stubborn inflation.”
The FT treats inflation as though it’s a living breathing thing…
A stubborn child who needs scolding…
A stubborn spouse who needs reminding to stop being so, well, stubborn.
But inflation isn’t “stubborn.”
Inflation is just behaving in exactly the way anyone with an ounce of sense could have predicted.
And if you think inflation is about to return to pre-2020 levels… you’re mistaken.
We’ll explain why below. And why the talk about the Federal Reserve supposedly doing its darnedest to fight inflation is just one big old smokescreen.
But before we get to that, today’s market action…
Market Data
The S&P 500 closed down 1.2% to end the day at 5,147.21… the NASDAQ lost 1.4% to close at 16,049.08.
In commodities, West Texas Intermediate crude oil trades at $86.56, up $1.02…
Gold is $2,304 per troy ounce, down $13 from yesterday…
And bitcoin is $68,215, up $2,510 since yesterday.
And now, back to our story…
Inflation Isn’t Stubborn, It’s Part of the Fed’s Plan
The FT story was all in the context of the new record-high price for gold.
The story notes:
Gold prices surged to an all-time high on Wednesday as traders responded to signals that the US Federal Reserve was preparing to cut interest rates later this year even as inflation remained stubbornly above the central bank’s target.
The haven asset has rallied 15% since mid-February after gaining 0.5% to touch $2,295 a troy ounce on Wednesday, also boosted by concerns over the potential for an escalating conflict in the Middle East.
Two Fed officials said on Tuesday that three interest rate cuts this year would be “reasonable”, even though the world’s largest economy continues to perform strongly, with consumer prices rising slightly in February. Gold, which offers no yield to investors, tends to benefit from a fall in so-called real interest rates — borrowing costs adjusted for inflation.
And here’s the key observation from Michael Widmer, a commodities strategist at Bank of America. He told the FT, “The market is interpreting that the Fed is willing to accommodate higher inflation as it cuts rates.”
You bet they are.
Remember that old inflation target of 2%?
Don’t expect to see that again. Why? Remember the context around why central banks worldwide started to use 2% as an unofficial inflation “target.”
That was during a period when interest rates were falling and had been falling since the early 1980s.
Governments and central banks were worried that if inflation fell too low, it would result in deflation, which would make it harder for businesses and governments to repay outstanding debt.
Of course, we should emphasize the latter — they were most concerned about governments being unable to repay debt.
Right now, it’s a different but similar story.
Like the old story, the Fed (and the government) doesn’t want inflation to go down too much. Only this time, it’s not that they’re necessarily worried about deflation… it’s that they’re worried that even if inflation hits 2% (the old “target”), that will be too low.
Now the government is in debt to the tune of $30 trillion… and is running a budget deficit of nearly $2 trillion per year.
And while the government has a bunch of bonds in the market that it issued at rock-bottom interest rates… every week, billions of dollars worth of low-rate bonds are coming off the books, to be replaced by bonds at a higher interest rate.
That means the government’s cost to service its debt is going up each week too.
Naturally, the Fed would like to cut rates to help out the government. But it can’t do that too much for fear inflation could return to the 8% and 9% level we saw just a couple of years ago.
They aren’t that mad.
But at the same time, the Fed is quite happy for inflation to be around the 3% level. In fact, we bet that 3% will be the “new 2%”.
Why? Because higher inflation means the government can repay debt with devalued dollars.
Investors bought bonds a few weeks, months, or years ago. But when those bonds mature, investors will get back cash that isn’t worth as much as it was when they loaned it to the government.
And sadly, it won’t take much for folks to become used to a 3% inflation rate. Just as it didn’t take much for most people, and the Wall Street drones to become used to a 2% inflation rate.
Before long, CNBC, Bloomberg, the rest of the mainstream press, and academia will all parrot the same message, “That a 3% inflation rate is the sweet spot for a growing economy.” Or words to that effect.
That’s why we continue to like gold. Gold is up. Not because of “stubborn inflation”. It’s up because some investors (not all) have figured out the Fed’s and government’s game plan, and they’re not about to fall for it.
If you’ve got any sense, you won’t fall for it either.
More Markets
Today’s top gaining ETFs…
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Arrow DWA Tactical: Macro ETF (DWAT) +3.9%
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First Trust Brazil AlphaDEX Fund (FBZ) +2.5%
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iShares MSCI Turkey ETF (TUR) +1.9%
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Global X MSCI Colombia ETF (GXG) +1.5%
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VanEck Indonesia Index ETF (IDX) +1.5%
Today’s biggest losing ETFs…
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ProShares Ultra QQQ (QLD) -3.1%
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Siren Nasdaq NexGen Economy ETF (BLCN) -3%
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iShares Semiconductor ETF (SOXX) -2.8%
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VanEck Semiconductor ETF (SMH) -2.7%
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First Trust Nasdaq Semiconductor ETF (FTXL) -2.4%
Cheers,
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Kris Sayce
Editor, The Daily Cut