Anyone been to the grocery store lately? Filled up your car with gas? Bought electrical wire at Home Depot? Tried to buy a house? Have you noticed anything? "Transitory" inflation is chomping through all the liquidity infused into the world the last two years. Printing dollar bills doesn't create wealth - it dilutes it. We printed how many trillions of dollars over the stimulus packages, Fed bond buying, and whatever else?
Inflation can be succinctly summarized as "more dollars chasing fewer goods". Well, with the last two years we've burned the candle at both ends; we infused massive amounts of money into the system (with no associated productivity gains) and manufacturing grinded to a halt worldwide. So we have all sorts of dollars and nothing to buy. Anyhow, you are all aware of this.....but you may not be aware that we may not even be near the peak of inflation yet.
The first chart up there is wheat futures, and you can see it's gone buck wild the last 30 days.
What's next? Here we have oil, the backbone of a LOT of stuff, not just gasoline. You know all those goods you need to buy? They have to be transported. You know all the plastic we consume? It is made using oil.
Next chart is corn. Me likey corn. Even if you don't like straight-up corn chances are you DO like lots of things made with it.
What else can we find. Oh yeah, lumber. Hard to build stuff without it, eh.
Continuing on.... to... Natural gas.
Next up... (throwing a dart blindfolded). Copper. Have you tried to buy wire lately? Holy crap. I mean the stuff has security tags on it at Home Depot and Lowes.
Even things like Gold and Silver, which a lot of people invest in, are actually used as materials in the things we buy. Anything with circuit boards in it will have gold. And yes, people actually do harvest gold from circuit boards!
My point with all of this is that life is about to get a LOT more expensive. What will that do? It'll cause Consumer Confidence to crater. This means people will scale back from unnecessary purchases, vacations, etc. Considering our entire US economy is based around consumer spending, a cutback in this will have a profound trickle-down effect. The Fed, in my opinion, has zero choice but to aggressively raise interest rates. It's in all of our best interests that they do that, or whatever else needs to be done to try and shove the inflation genie back in the bottle. Hopefully some of it takes care of itself, because inflation itself erodes the money supply......and as Covid subsides manufacturing bottlenecks should lessen.
Still, have you ever been backed up on the freeway in traffic, only to realize that there was no actual reason for the backup? There was likely an accident or some incident earlier, but even long after that has been remedied the backup will remain. So even if manufacturing went back to full capacity this moment, we'll be looking at months and months until it starts to show up in the data. The economy is like one of those massive container ships that are 1300 feet long. MASSIVE inertia. This is why the inflation problems didn't even really show up for over a year after we started printing monopoly money. Unfortunately for us, inertia is a two way street - it's going to take a long time for monetary policy changes to have their intended effects. So the Fed is at a great risk of either coming down TOO HARD on inflation, or not coming down HARD ENOUGH....and we won't know for months.
My guess? They somehow screw something up. It's not really their fault, because they are being tasked with an almost impossible situation. Powell isn't incompetent and he's surrounded with the smartest economic minds in the world, armed with more data than we know what to do with. The truth is the economy is just so complex that it has an incredible amount of variables and we really don't know what will happen when we tinker with some of them. We know what SHOULD happen, or what MIGHT happen, or what HAS happened..... but as everyone involved in the financial markets knows this doesn't guarantee a damn thing going forward. Me personally? I think the Fed drives us into a recession. It may be the only way to get ahead of inflation before it becomes a self-fulfilling runaway freight train.
.....and what do you think this means for QQQ, DIA, SPX, IWM?
Inflation can be succinctly summarized as "more dollars chasing fewer goods". Well, with the last two years we've burned the candle at both ends; we infused massive amounts of money into the system (with no associated productivity gains) and manufacturing grinded to a halt worldwide. So we have all sorts of dollars and nothing to buy. Anyhow, you are all aware of this.....but you may not be aware that we may not even be near the peak of inflation yet.
The first chart up there is wheat futures, and you can see it's gone buck wild the last 30 days.
What's next? Here we have oil, the backbone of a LOT of stuff, not just gasoline. You know all those goods you need to buy? They have to be transported. You know all the plastic we consume? It is made using oil.
Next chart is corn. Me likey corn. Even if you don't like straight-up corn chances are you DO like lots of things made with it.
What else can we find. Oh yeah, lumber. Hard to build stuff without it, eh.
Continuing on.... to... Natural gas.
Next up... (throwing a dart blindfolded). Copper. Have you tried to buy wire lately? Holy crap. I mean the stuff has security tags on it at Home Depot and Lowes.
Even things like Gold and Silver, which a lot of people invest in, are actually used as materials in the things we buy. Anything with circuit boards in it will have gold. And yes, people actually do harvest gold from circuit boards!
My point with all of this is that life is about to get a LOT more expensive. What will that do? It'll cause Consumer Confidence to crater. This means people will scale back from unnecessary purchases, vacations, etc. Considering our entire US economy is based around consumer spending, a cutback in this will have a profound trickle-down effect. The Fed, in my opinion, has zero choice but to aggressively raise interest rates. It's in all of our best interests that they do that, or whatever else needs to be done to try and shove the inflation genie back in the bottle. Hopefully some of it takes care of itself, because inflation itself erodes the money supply......and as Covid subsides manufacturing bottlenecks should lessen.
Still, have you ever been backed up on the freeway in traffic, only to realize that there was no actual reason for the backup? There was likely an accident or some incident earlier, but even long after that has been remedied the backup will remain. So even if manufacturing went back to full capacity this moment, we'll be looking at months and months until it starts to show up in the data. The economy is like one of those massive container ships that are 1300 feet long. MASSIVE inertia. This is why the inflation problems didn't even really show up for over a year after we started printing monopoly money. Unfortunately for us, inertia is a two way street - it's going to take a long time for monetary policy changes to have their intended effects. So the Fed is at a great risk of either coming down TOO HARD on inflation, or not coming down HARD ENOUGH....and we won't know for months.
My guess? They somehow screw something up. It's not really their fault, because they are being tasked with an almost impossible situation. Powell isn't incompetent and he's surrounded with the smartest economic minds in the world, armed with more data than we know what to do with. The truth is the economy is just so complex that it has an incredible amount of variables and we really don't know what will happen when we tinker with some of them. We know what SHOULD happen, or what MIGHT happen, or what HAS happened..... but as everyone involved in the financial markets knows this doesn't guarantee a damn thing going forward. Me personally? I think the Fed drives us into a recession. It may be the only way to get ahead of inflation before it becomes a self-fulfilling runaway freight train.
.....and what do you think this means for QQQ, DIA, SPX, IWM?
With that being said, tomorrow before market open the CPI inflation data will be released. Is this just a head-fake....only to see if all disappear tomorrow? One thing is for sure - volatility reigns.