Legacy Research Group

Inflation is still top of our minds…

Yesterday, Federal Reserve chief Jay Powell told lawmakers that the inflationary uptick will fade soon.

But is he hiding something?

And how can you shield your buying power if inflation sets in?

It’s all in your Weekly Pulse video update at the top of the page.

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: The topic of inflation continues, with the Federal Reserve chiming in with their perspective.

What to do in these times?

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: Tom, today, I thought we would go back to that big question that we raised in last week’s Weekly Pulse – is inflation permanent or a temporary thing? [Catch up here.]

We know it’s fairly high. In May, inflation came in (over the previous 12 months) at 5%.

We’re recording this on Tuesday morning. It’s not going to reach our viewers until Wednesday, but I do know that Federal Reserve chairman Jerome (Jay) Powell is gearing up to testify in front of Congress today.

He has released what he’s going to say – that inflation is transitory. He’s going to put the Fed firmly on the side of the transitory argument.

And he’s going to say things like inflation was very low this time a year ago. So there’s this base effect. If you have very low inflation a year ago, and you measure against that, you’re going to have a higher reading, like a bigger upsurge.

And he also blamed things that we talked about last week – higher gas prices, the rapid increase in consumer spending as the economy opens, and supply bottlenecks that have to do with COVID-19.

Now, for last week’s Legacy Inner Circle, I talked with one of the world’s foremost authorities on inflation, a guy called Steve Hanke. He’s a professor of applied economics at John Hopkins University. He also heads up The Troubled Currencies Project at the Cato Institute. And he’s been involved in identifying inflations and hyperinflations and helping governments cut them off for several decades.

[If you’re not yet a member of Legacy Inner Circle, you can avail of the special offer for Daily Cut readers here.]

And so I thought in this week’s Weekly Pulse, we’d look at how Steve Hanke’s view differs from Jay Powell’s view at the Fed.

Tom: As I discussed last week, I’m kind of new to all this stuff. So I don’t even know who Jay Powell is. But I’m interested to hear the difference between what he is going to say and what you talked about with Steve Hanke, so I can bring myself – and hopefully the Weekly Pulse viewers – up to speed.

Chris: Jay Powell is the Chairman of the Federal Reserve. President Trump appointed him to the post in the second year of his term. He took over from Janet Yellen. He is the world’s most powerful central banker. And he has been the one with his foot firmly down on the accelerator pedal all the way through the COVID-19 pandemic.

And, of course, the one thing that will slow down the stimulus by the Fed is rising inflation. That’s why we’ve been on this topic, Tom. We got that 5% annual inflation reading. That’s the highest year-over-year reading in 13 years.

So last week, we were like, is it something serious and baked in?

Or is it something like Jay Powell is trying to convince everyone not to worry about. It’s got to do with this base effect. Inflation was very low a year ago. Don’t worry, because there’s these bottlenecks in supply that are pushing up things like lumber and copper. These bottlenecks are going to disappear.

Well, I talked with Steve Hanke. He’s a professor of applied economics. He’s also been involved in currency reforms around the world. He’s worked with a number of states, including Albania, to implement sound currency systems there. He was just knighted by the government of Albania. He’s a very interesting character.

He said, “Wait a second. You’ve got this question set up wrong.” There are transitory effects. This is true. There are supply bottlenecks.

We talked last week, Tom, about used car prices, right? And I was saying, “Look, that’s a very big run-up in used car prices. That’s because new cars aren’t being built quick enough because of these bottlenecks. So it’s pushing up the price of used cars. Looks transitory.”

Steve Hanke said, “That’s true. But it’s also true that there’s a huge monetary underpinning behind all of this.”

I wanted to pull up some of the things he talked to me about. It was quite shocking. He pointed out that for the last 17 months, the average annual growth rate for M2 money supply (a broad measure of how many dollars are in the economy) was 20% per year.

We had this really big money supply boost. And Steve says that what you really need, in order to keep pace with a growing economy, is 7% or 8% a year.

That’s a very big piece of this. The M2 money supply, the amount of dollars circulating in the economy, has grown at more than double the pace that Professor Hanke thinks is sensible and reasonable within the current environment.

Does that make sense, that these two things could actually be coexisting? And this binary question that we’ve been asking could be misplaced.

Tom: It makes sense. And it’s funny I didn’t know who Jay Powell was. He’s the head of the Federal Reserve. I used to know who the head of the Federal Reserve was, growing up. But I also used to think the Federal Reserve was part of the government. And then I found out they are not even part of the government. That was like finding out Santa Claus wasn’t real.

In my mind, I’m thinking they’re all about damage control. Call me skeptical. And by the way, these are my opinions, not anyone else’s. But to hear he’s the head of the Federal Reserve, I don’t believe much of what they’ll be saying, other than I’m seeing them as damage control. That’s where I stand.

Chris: I think that’s a really good point, Tom. You’re dead right to point that out. Of course, Jay Powell at the Fed wants to play down inflation. Their whole thing, going back through Janet Yellen and Ben Bernanke, who was there during the 2008 financial crisis, has been monetary stimulus.

So inject dollars into the economy via this thing called quantitative easing (QE) and drop interest rates to the floor. Okay. That’s the foot-on-the-gas thing.

Of course, he is out there, talking in front of Congress, and he’s going to play down the monetary factor.

But Steve Hanke, who, as I said, has been watching inflations and hyperinflations for 30 years, he’s like, “Hold on, Jay Powell. You’re playing a bit of a trick here.” It’s almost like one of those conjurist tricks, where you wave one hand while you do something in the other.

So, really, what Jay Powell is doing, says Steve Hanke, is waving his hand over here, saying all this transitory stuff. And he’s not wrong about that. But you can have both of these things at the same time.

I’ll break it down, Tom. Steve Hanke says we do have 5% inflation. It’s going to go higher. There’s typically a lag. There are three things that happen.

When you have this monetary injection, you have this stimulus that goes into asset prices, stocks, crypto, Dogecoin, all of these things. All this money that’s floating around goes zooming into the market.

We saw that, right? We saw the stock market crash in March last year. Then it came back up, and we saw this incredible rally in stocks. Steve’s right about that.

First, it goes into asset prices. Then it goes into the wider economy. Then it goes in through the Main Street economy.

And we’re seeing that. We’re seeing a fairly robust economy, given that we’ve just been through this pandemic and all the shutdowns.

The third thing that happens, Tom, is inflation in consumer prices. Another very big takeaway from my conversation with Steve Hanke is that you’ve got these lags. You first see inflation showing up in asset prices. Then, you see it showing up in economic growth. And then, it shows up in consumer price inflation.

The bottom line for Steve is that we’re going to see higher inflation. The Fed is doing this trick of the mind, like the Jedi mind trick, when Obi-Wan says, “You haven’t seen these droids.”

I think what we can expect, if Steve Hanke’s right, is higher inflation. He’s talking about 6% inflation. Which is a fairly big deal, considering we’ve had almost no inflation for the last decade. It’s been so low. One of the things that’s been missing from the whole picture is inflation.

I think that brings us back to that thing I talked about last week – a rally in scarcity. I’ll come back to that. But does that all make sense? The monetary versus the transitory?

Tom: It does. And I was thinking the same thing that you just brought up – the scarcity, which is the precious metals, the cryptocurrencies, but more specifically, bitcoin. Which is, at least from my understanding, one of the only ones that is limited to that total number that can’t be increased. Is that correct? Bitcoin and gold, etc. is a good thing in this type of scenario?

Chris: That’s right, Tom. My job is to communicate the big ideas of the Legacy Research team – guys like Teeka Tiwari and Dave Forest – and make sure that everyone who tunes in to The Daily Cut or The Weekly Pulse, or who subscribes to Legacy Inner Circle and gets those deep dives, knows what the team is thinking and what those big ideas are.

When I look at the ideas that are really popping, it’s nearly all around these scarce assets. We’ve got Dave Forest talking about rising oil prices, rising uranium prices, rising copper prices, rising you name it – all these scarce commodities.

Bill Bonner, our co-founder, he writes The Bonner-Denning Letter. In January, they were like, “Hey, we think that the Trade of the Decade is going to be selling the dollar and buying oil stocks.” (I wrote about this in The Daily Cut.) That has been a huge trade so far this year.

Oil and oil stocks are popping. That’s also around this rally in scarcity idea, because oil, of course, is scarce, if you take it out of the ground.

And then, as you say, bitcoin. Bitcoin has been through the wringer lately, down 50%, something around there. But yes, you can be sure of its limited supply; that’s baked into the code.

We’ve talked about the fact that bitcoin has a 21 million cap and it’s all run by code. You’ve got this thing called the “halving.” It happens every four years. The supply is cut in half. So you have this tapering supply.

I still think, and I said it at the beginning of the year, that if you just have one theme in your mind for 2021, the rally in scarcity has got to be top of your list.

Jeff Brown has said the same thing. Teeka Tiwari said the same thing. Watch out for inflation. You’re going to want to be tuning in to things that are scarce in supply.

Real estate is another great example. A lot of folks own their own home, and maybe a second home. Great time to be a real estate investor, because, of course, real estate is hard to build.

Anything you can’t print or create – by typing on a keyboard, like the Fed does – is going to be a great thing in 2021 and beyond.

Tom: That gets my mind to where and how can I make some moves in the scarcity realm. And Chris pointed out numerous different things to put some thought and attention into to see how you can grow and protect your wealth.

The main takeaway from here is put your mindset to grow and protect your wealth into the scarce things out there. Chris outlined a lot of them for you here.

Thank you, Chris, for sharing that with us today in this Weekly Pulse episode.

Chris: Thanks, Tom.

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