Knock Knock Knockin’ On Inflation’s Door

Brian Wesbury, Advisor Perspectives: https://www.advisorperspectives.com/commentaries/2021/02/08/the-return-of-inflation

Combined, Americans saved about $2.9 trillion in 2020, more than doubling the previous record high of $1.2 trillion in 2018. As of the third quarter of 2020, the amount Americans held in checking accounts, savings accounts, time deposits, and money market funds was up $2.8 trillion from the year prior. Add another $1.9 trillion in federal government stimulus spending (borrowing from the future, to spend today) and the US is awash in cash, much of which is funded by Washington’s money printing.

Unfortunately, in spite of a strong recovery in output, industrial production is 3.3% below pre-COVID levels, while real GDP is 2.5% below. In other words, demand is OK, it’s supply that’s still hurting – a perfect recipe for inflation.

We can see the impact of this affecting markets. The 10-year Treasury yield has risen from roughly 0.6% in May 2020 to 1.2% today. The gap between the yield on the normal 10-year Treasury Note and the inflation-adjusted 10-year Treasury Note suggests investors expect an annual average increase of 2.2% in the consumer price index (CPI) in the next ten years, and those expectations are rising.

Bitcoin, while we doubt it will ever be real money, hit a record high today reflecting fears of lost dollar purchasing power. Commodity prices continue to surge.

All this money printing threatens to eventually create a sugar high in equities. We aren’t there yet, but markets are floating on a sea of new money. In fact, it’s more like a tsunami! Inflation hedges (real estate, commodities, materials companies) will do well. Traditional fixed income (long-term bonds) is at risk. The return of inflation because of misguided policy choices is a very real threat to the long-term health of the US economy.

And if that’s not clear enough, try this – Treasury curve is steepist since 2015