The Biggest Question Right Now About Inflation

News broke last week that consumer prices are taking off.

In May, the government’s measure of consumer price inflation jumped 5% versus May of last year.

But is this temporary, as the Federal Reserve and the White House claim?

Or is inflation here to stay?

It’s the question on the table in this week’s Weekly Pulse video.

It’s where I (Chris Lowe) and host Tom Beal break down the single most important market story on our radar for the week.

Regards,

Chris Lowe
Editor, The Daily Cut and Legacy Inner Circle

P.S. If you prefer to read along, we’ve included a transcript of our conversation below.

Transcript

Tom Beal: You may have noticed, like I have, things that I’ve purchased on a regular basis, week in and week out, the prices have increased.

Today, we’re going to be talking about inflation. Is it here briefly or to stay?

My name is Tom Beal, host of The Weekly Pulse, where we break down the biggest wealth-growth story of the week.

I’m here today with the editor of Legacy Inner Circle, Chris Lowe. Chris, how do we kick off today’s conversation?

Chris Lowe: So Tom, this week, I thought we’d talk about the consumer price index (CPI). It’s getting a lot of play in the news. You’ve probably seen it yourself. It’s what measures inflation.

Specifically, it measures the change in prices for a basket of goods, including food, energy, housing costs, and sale prices across a spectrum of goods.

The news this week was that according to the CPI, we have had price rises of 5% going back over the last 12 months. That spooked a lot of people. And it’s got a lot of people talking.

So in this week’s video, I thought we’d look behind the headline figures a bit and see what’s driving those inflation numbers.

Then we’ll try to answer the question, “Is this going to be permanent or not?”

Finally, I thought I’d share a very basic, broad, easy strategy for coping with inflation as an investor.

Tom: This week’s episode is brought to you by Legacy Inner Circle. That’s where Chris Lowe has the unique ability to peer into the model portfolios of all the Legacy Research experts and bring you the golden nuggets that can help you grow and protect your wealth in the upcoming weeks, months, and years.

We have a special offer for you, as a Weekly Pulse viewer. Be sure to click that and join us inside the Legacy Inner Circle members’ area, as well as the iOS and Android app for members only, for less than the cost of a venti at Starbucks.

Click the link, go learn more, and we look forward to seeing you inside the members’ area. Now, back to this week’s episode.

I know when I’m out and about getting the things we normally get for our household – the groceries, all the different things – I noticed several things that are 20% plus marked up from just a few weeks ago.

I actually brought it to the attention of the shops, and they’re like, “Everything in here has gone up. We’ve raised our prices on everything.”

So this is a very pertinent topic, that I think is touching all of us. I’m excited to hear what the data shows and where we can project this moving.

Is it short term? Where is this heading?

Chris: Tom, that really is the most basic question. Wall Street analysts up and down the financial world are trying to figure this out.

Look, we definitely have things going up in price. But the question is, is that going to be a sticky, lasting inflation, the kind of thing we saw in the 1970s, where you got double-digit inflation in the U.S.?

Or is this a phenomenon that’s been triggered by the reopening of the economy and all those supply chain disruptions that were caused by COVID, the shutdowns, and impacts on trade?

I was researching this this morning for this video, and I just pulled out some figures… You have the headline number – 5% – but beneath that, we can take a look at some of the items that are really shooting up.

Airline tickets, it’s pretty obvious. A lot of people were grounded. They were stuck in their homes. Now, they’re starting to fly again. They want to go on vacation. Airline tickets are up 24% from this time a year ago. That is part of the CPI, and it’s part of what’s driving that headline 5% figure.

Car and truck rentals are up 110% from a year ago. I’m in Spain at the moment, where I work remotely. I was talking to someone who typically goes on holiday to Italy. They hire a car. They said their car hire costs have gone from something like €1,000 to €3,600. It’s really crazy. They’re a family of three or four. They hire a big car. Anyway, it’s skyrocketing.

Used car and truck prices are up nearly 30% over the past 12 months. It’s not so big, but the price of new cars and trucks is up 3.3%.

Pack that all together, and some of those items are driving that inflation. A lot of that is to do with categories that have been heavily disrupted by COVID.

There’s a chip shortage that’s causing people not to be able to make new cars. That’s causing people to buy used cars.

So we have all these compounding factors figuring into this headline inflation.

That doesn’t mean there’s no inflation. It’s just worthwhile noting that some of those drivers are not typically seen in inflationary times. It looks a little bit more like a once-off.

That bring us to the second question we want to answer: Is this permanent?

Now, I’ve listened to both sides of this argument. I’m undecided, I’ll be really honest. I’ve been looking at this and thinking about this. I’ll give you some of the arguments for and against.

And then one particular thing that I think is very important. It’s something that’s happening in the bond market that should give us an indicator of whether this is a sticky, long-term inflation or a passing thing.

People who argue the case for inflation sticking around point to high prices for commodities, corn, grain, soybeans etc. They’re at their highest level since 2012. The price of lumber, a lot of people who have been doing any DIY know that’s at an all-time high.

Gasoline prices are up. Meat prices are up. I know when you were shopping, Tom, you noticed the price of steaks going through the roof.

There’s one thing I’ve noticed that makes me wonder whether the bulk of investors really believe this is a long-term thing. It’s in the bond market.

I don’t want to get too far into the weeds, but basically, bond prices fall when investors see inflation going up. That’s because when you lend $1,000 or $100,000 to the government, they promise to pay it back with interest over time, and then they give you that principal back.

The money you’re going to get back is going to be worth a lot less if inflation sets in. So bond prices tend to sell off, because investors think, “If inflation is happening, I’m going to get my money back. It’s going to be the same dollar amount, but it’s going to buy a lot less.”

So if we really have very sticky, entrenched inflation, you’d expect to see it showing up in a selloff in bond prices.

I put together a chart of the iShares 20+ Year Treasury Bond ETF (TLT). It’s an exchange-traded fund that looks at the prices of U.S. government bonds with 20 years to maturity and longer.

As you can see on the chart, it did indeed sell off. We got this selloff from January going into March.

But from March to now, we’ve actually seen TLT rise 11%. That tells you that bond investors, for whatever reason, are not freaking out yet.

I think that’s a very important chart to keep an eye on. We can come back to it in future updates.

Tom, have I lost you anywhere along the way? How is this sinking in? Is it helpful at all?

Tom: I was a late bloomer to my financial literacy. So a lot of what you’re talking about, I’m oblivious to. I’m not sure what this all means. I’m just hearing it, but I know that with your guidance, I’ll get to know more about it.

But, as we discussed, I am noticing the price increases and having discussions with the family of slight modifications in what used to be the norm, making some slight adjustments.

Because it’s not what you earn, it’s what you keep. So in this time of change right now, let’s revise the plan and go this route. I got the buy-in from this. What I’m doing now is with that slight adjustment, listening to your and the expert advice within Legacy Inner Circle as to where to put that money that used to be spent on the other stuff, in investments to produce the returns over the upcoming months to make that money go to work for me.

I don’t quite understand all of it. So if you’re watching this, it’s okay. But I do recognize the underlying theme. So I’m on board with that.

Chris: OK, so I’ll see if I can make it a little bit easier. And then we’ll move quickly on to that whole thing of “What should I do?”

The two things I’m trying to say are, number one, you have this headline inflation number of 5%, but that’s an amalgam of a bunch of other numbers.

When you strip some of those numbers out, you see that a lot of the factors that are driving that headline number are coming from once-off supply chain type things, like the price of used cars, the price of airline tickets, the price of hotels. That’s a lot to do with the reopening. It’s not on the basic stuff so much that’s really pushing it up.

The other thing is that if the bond market sees very strong inflation coming, you can expect bonds to start selling off. And bonds aren’t selling off.

It’s the dog that didn’t bark. It’s the signal you’d want to see to really get worried about it. We’re not quite there yet.

But Tom, you’re absolutely right. Prices are going up. It’s something folks are worried about. I think we might look at some more specifics in next week’s Weekly Pulse. I’ll pull out some of those specifics that our analysts are talking to their readers about.

But for this week’s issue, what I want to say to viewers is something extremely basic that should guide all your decisions, if you’re concerned about inflation.

Inflation is all about too much money chasing too few goods and services. So you get a lot of people bidding up this short supply of goods. And the more they bid up prices, the more prices go up. That’s to do with how much money is sloshing around the economy in order to bid things up.

Inflation is happening in the U.S. dollar, essentially. That’s because it is ballooning in supply. We’ve got a 30% increase in the supply of dollars since just before the pandemic.

So if you’re concerned about inflation happening in the U.S. dollar – and most people watching this will be, because that’s what they earn and save in – you want to move from something that is in abundance to something that is scarce. That’s the very basic model for this.

I said this at the beginning of the year. I think we’re going to see a rally in scarcity this year, anything that is scarce. That’s artwork. It’s cryptocurrencies like bitcoin. It’s these non-fungible tokens (NFTs), little receipts for ownership of art. It’s commodities, which are scarce. It’s gold. It’s all of these things. Collectibles would come into it, an old car. Anything that can’t be printed by a government, you want to own in an inflation.

That’s just the basic understanding. So you don’t want too much of your wealth in things like government bonds. You don’t want too much of your wealth in things like cash because they can be increased. There’s no limit to those.

What you want in an inflation are things that are scarce. You want that scarcity value. So you want things like collectibles, gold, commodities, bitcoin. Any of these things, I think, are going to do very well if we find out that we’re going to have sticky inflation and not temporary inflation.

So that’s just the very basics, Tom. Does it make sense to you, to own scarcity in a time of inflation?

Tom: Yes, and that’s huge. Now, my mind’s like, “Yes. So do what I’m doing, get more crypto, get more gold, things of that nature, which are the scarce things.”

But thinking back to the movie, which was based on the reality of the housing bubble crash, when the person looking at the data was like, “This should have crashed. This is being propped up by something that is not normal.”

My question is, “Is it similar to the bonds not being sold to it feeling propped up? Should they have been sold at this point?” Are there people thinking that?

Chris: I think that’s a really good point, Tom. You’re right. The bond market is being heavily intervened in by the Federal Reserve, which is the central bank in the U.S. So yes, there is a possibility that that chart I showed you is being pushed around enough by the Fed that the indicator isn’t quite sounding the alarm yet. It’s a very good point.

I think a lot of folks watching this will say, “The government doesn’t exactly want to announce high inflation. It’s going to try to do everything it can to cover it up.” That includes all these seasonal adjustments and the way they compose the basket. And like you say, fiddling around in the bond market by the Fed.

As I said earlier, I’m not 100% percent sure either way on this. I don’t have that crystal ball in front of me.

A lot of this is quite emotional. People who remember the inflation of the 1970s will know how difficult that is. Or anyone who, like I have, has lived in a country where the currency is inflating.

I lived in Argentina for four years during quite serious inflation. So the notes I was earning, when I’d take them out of the ATM – a 100 peso note used to buy a ton of stuff – you couldn’t get change for it in a restaurant. You’d take this thing out and people were like, “Whoa! What are you doing?” Then eventually, when I left Argentina, that 100 peso note was just chump change.

That is important. It means you want to get your head around that idea of the rally in scarcity. Because all of the big themes that are taking off this year – we looked at commodities on this Weekly Pulse previously, we looked at bitcoin, we looked at gold – all of those things are tied together by the scarcity value that they have. I think that’s one of the very big reasons they’re rallying.

You also see it in the art world. You see art prices going through the roof.

We saw that NFT by this artist Beeple, this digital image – $68 million. Now, that strikes me as somebody who’s worried about inflation, looking for something that can’t be replicated. Because the art is the best thing as an inflation hedge. If you own a Picasso, the guy is dead, he’s not painting any more pictures. There’s no way there’s going to be any more Picassos. You can be sure your wealth is going to be stored over time because of the scarcity that involves.

I hope that answers some of the questions. Next week, we can look at more specific strategies for dealing with inflation.

Tom: Great. Like I said, I’m late to the game of growing my financial literacy. But one of the keys to every area that I was new and then quickly rose to knowing it very well was tying into the expert advice, yourself and the other experts of Legacy Research through Legacy Inner Circle.

That said, with the small financial literacy background I have, my mind goes to “Wait a minute. How many trillions have we printed?” I don’t have to have a degree to know that when you print $5 trillion or $10 trillion out of thin air, that probably isn’t good for the long haul.

Call me crazy for having that hypothesis, but even with my low financial literacy IQ, that leads me to think there might be some false propping-up of that bond situation. Similar to how the Big Short shares, this doesn’t make sense. It should have already tanked.

I’m no expert, but I do follow your expert advice, and that’s where my mind is like, “Just from what I see, that’s something to take note of.”

Chris: Tom, I think that’s going to be front and center in a lot of people’s minds.

Look, at the end of the day, inflation has a huge psychological component. If enough people believe inflation is going to happen, it’s a self-fulfilling prophecy. Because what do you do when you think your money is losing its buying power? You spend it quickly, so you capture as much buying power as you can.

So if you know you’re going to have 10% inflation, that your savings are going to go down by 10% from this time to 12 months’ time, that causes you to go out and spend. All that spending increases inflation and actually causes the thing to happen that you’re worried about.

We could, in fact, have inflation purely, or at least a large part, on those psychological foundations. We’ve seen that before.

It’s a really good point, Tom. This is a really sticky area to talk about. You’re right, there’s a lot of jargon in there. We’re talking about the bond market. We’re talking about the CPI. But I thought it’d be interesting to look at some of those things that are pushing up prices. With the caveat that the Fed’s manipulating the bond market. I would like to see something happen in bonds, because the Fed doesn’t have the ultimate power in the bond market. The market still exists.

It’s just something I’m looking out for. If I see that real selloff, I’ll be thinking, “This is really setting in.”

But for now, I’m on the fence about it. But we’ll return to this subject next week, Tom, and we’ll look at some more specific strategies from Teeka, Jeff, and the analysts.

Tom: Awesome. Thank you for bringing that to my and the viewers here at The Weekly Pulse’s attention. I’m looking forward to digging deeper into it. Thanks again, Chris.

Chris: Thanks, Tom.

Tom: For those that are still here, if you haven’t yet joined Legacy Inner Circle, this is the time where things are happening so fast. I couldn’t be navigating this without being inside Legacy Inner Circle, hearing from Chris and the Legacy Research experts to really help me understand what the heck is going on. Change is happening so fast.

Chris, for those who aren’t yet inside Legacy Inner Circle, how can you share with them that now’s the time to take a look, join us in the members’ area, and gain the insights from you and the experts?

Chris: Tom, you mentioned not being an expert earlier on. I’m not an expert either. I was a financial journalist. My skill is in communicating ideas to people. I haven’t run a hedge fund. I’m not a geologist, like Dave Forest. I’m not a tech entrepreneur in Silicon Valley, like Jeff Brown.

But I’m in a lucky position, in that I’m able to tap into all their research. I have a team that pours over everything every day. We discuss it. I have the guys on speed dial. We talk a lot. That’s really my role. I want to make that clear. I’m sort of a curator of the ideas that the Legacy team produces. I wouldn’t consider myself an expert, although I do understand financial markets. I did train in all of that. But it’s not my ideas that folks subscribe to Legacy Inner Circle for.

The reason you subscribe to Legacy Inner Circle is to get that view into what all of our analysts are thinking. We have Jeff Brown, as I mentioned, former Silicon Valley insider. He does a phenomenal job covering bleeding-edge technology, 5G, self-driving cars, nuclear fusion, space travel. It’s fascinating stuff. There’s lots of really big investing ideas in there, like precision medicine, gene editing, stuff like that.

We have Teeka Tiwari, pioneering cryptocurrency investor, a guy who’s been on fire with his recommendations. He also recommends pre-IPO shares. We have a view into what he’s doing with his subscribers, all his picks.

Those are the things we’re sharing with our readers.

Dave Forest is another good example. Dave is a geologist. He also has a finance mind. He’s gone searching – for commodities – around the world. He was in Myanmar. There’s a civil war on there now, but Dave was in there looking for copper. He found it, developed a mine. This guy is an industry insider in commodities.

That’s extremely important right now. As I mentioned, this rally and scarcity idea is really coalescing around commodities. We’ve got copper, corn, and these commodities at all-time highs.

So if you’re a member of Legacy Inner Circle, you have access to all of those ideas. Sometimes, it will be about commodities. That’ll be the thing that we really want to understand. Sometimes, it’s going to be a tech breakthrough. Sometimes, it’s going to be something in crypto space. You name it.

So it’s a broad church. We look for the best ideas in the market that will help our readers grow their wealth. We try to do a good job of explaining things, making it easy.

I typically get on a Zoom call with these guys and try to break down an idea. Today, I’m actually going to be talking to Professor Steve Hanke. He’s a professor of applied economics in John Hopkins University. He is one of the world’s experts on inflation.

So I’ll be putting a lot of these questions to him. In an hour’s time, I’m going to be calling him at his office in Baltimore. Then we’re going to be sharing the full audio of that conversation plus a transcript with our Legacy Inner Circle members.

So if you want to deep dive into inflation, there’s probably no better person in the world to talk to than Steve Hanke. He was involved in setting up currencies for countries around the world. He just received a knighthood from Albania because he set up their currency. He has very deep thoughts on whether this is a real inflation that’s going to set in or something temporary.

That’s the type of thing we do. Steve’s not on our team, but sometimes, I reach out to outside experts, too.

So if you want to understand what’s going on in the world, if you want a big-picture view, I think Legacy Inner Circle is a fantastic place to start. You’re going to get a big, wide overview of different areas of the markets. See what excites you and take it from there.

Tom: Thank you for describing that. Literally, you have now, as Chris described, his team, the experts, all of us. Chris is like that curator at the museum, bringing you the best, most pertinent information on a weekly basis.

So click the link below to learn more via the video. You’re going to see a special offer for you as a Weekly Pulse subscriber. Basically, for less than the cost of a venti at Starbucks, you can gain access to everything inside Legacy Inner Circle. That’s because we’re so confident you’re going to love it, as do our members throughout the world.

So click that button. Go learn more. We look forward to seeing you inside the members’ area and the iOS and Android app.

Until next time… Make today great.

Thank you again, Chris.

Chris: Thanks, Tom.

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