Hey There Income Hunters,
My, how quickly the market narrative can change …
But by late last week, though, reality had set in and screens on the talking-head shows were blaring things like …
Market Tumbles as Hot Inflation Shocks Investors!
It was no surprise to #IncomeHunters like you and me, though …
We have been laser-focused on the Fed and its massive printing of money for months.
I’ve told you time and again how our central bank is trapped, needs inflation and will do whatever it takes to get it.
But, oh, NOW everyone else is shocked?
Well, I, for one, am sitting here today happy as a clam — and many readers I’ve heard from are right beside me.
Gold has cleanly broken above the 200-day moving average and gold and silver miners had a nice day on Monday, as well.
My fellow #IncomeHunters and I never doubted this was coming …
First, it was energy and basic materials … then it spread to commodities … then silver and, last as usual, gold. (I love Bitcoin, but with little history it was left out of the sequence.)
So enjoy it — but don’t get too comfy.
As a massive baseball fan, I’ll put it this way … we’re only in the second inning.
The Fed is dead wrong about inflation being transitory — and I’ll break that down for you today.
This is the nation’s third bout with inflation, and the only question that remains is which era the 2020s will resemble … the 1940s or the 1970s?
I’ll answer that today, too, so you can plan ahead and crush it while the consensus stays a step behind …
It Begins and Ends With the Debt Level
What kept me focused on the inevitable high-inflation scenario we’re now entering is that the U.S. was at the end of its long-term debt cycle.
It’s simple, debt cripples countries …
And by the end of 2021, the U.S. will have $30 trillion in debt — at a minimum.
Do you know what that means?
First, a rise of just 1% in interest rates will add $300 billion to the interest paid-to-GDP ratio.
Second, we will never grow out of debt if rates rise.
Inflation, then, has always been the only way out.
Federal Reserve Chairman Jerome “J-Pow” Powell and his gang are forced to lie about the situation because they need time to let inflation run high.
I’ll tell you why, and it’s very important to understand the dynamics …
As you can see from the debt-to-GDP graph below, today’s debt levels are similar to what they were in the 1940s.
The 70s, however, were a very different story …
Not only was the music much more funky, but we didn’t have a debt burden.
That freedom allowed Paul Volker, Fed chairman at the time, to raise rates until he broke inflation’s back.
We’re in a totally different ballgame today.
As depicted in the chart above, after the 1929 crash, the Fed lowered rates to zero, thought that was enough and started raising them to fight inflation.
Bad move! The economy plunged back into depression.
After totally screwing up, the Fed put rates back to zero, printed money and got the banks to issue loans — PLUS launched quantitative easing to buy up all the bonds necessary to hold interest rates below 2.5%.
FDR’s New Deal then created jobs and the economy finally got back on solid footing.
Look above one more time at how the debt-to-GDP came down in the 1950s and how long it took for it to get back to where it started.
Real GDP — meaning GDP + inflation — is all the Fed needs. And inflation is part of the denominator of the debt-to-GDP ratio …
So, the Fed will print massive amounts of money to increase price inflation, in hopes of spurring wage inflation, which looks likely in our near future.
At that point, the government can raise taxes to increase revenues — plus inflation will decrease public and private debt because the vast majority of Americans will have more dollars to pay down fixed amounts of debt (like most mortgages and loans).
Why This Inflation Will Not Be Transitory
When you look at a typical inflation graph, you’ll see spikes and drops, then more spikes and more drops …
However, there’s more going on there than meets the eye.
While the percentage change is showing you the rate of change of annualized inflation, you need to understand the absolute changes in inflation to grasp the big picture.
The two charts below serve as prime examples.
While we see the inflation spikes …
Absolute inflation is rising throughout the entire period. So each spike is occurring from a higher level of absolute inflation.
And there is nothing transitory about this trend:
Bring It Home
There are differences between today and the 1940s, of course.
The biggest one in my mind — aside from the emergence of Post Malone — is that Amercans back then had a lot of faith in government.
The U.S. had won the war. Soldiers were returning home — and getting jobs, a paid education for their kids and contributions to their mortgages.
Also, Americans wanted to work, and the nation was united and super-positive about the future.
Today, well, maybe not so much.
The Fed will create inflation, but it remains to be seen whether the population will be motivated and willing to unite around our current system and leaders.
Still, there’s a long way to go and we may see some of the sweeping reform and change that FDR was able to deliver in the 40s.
President Biden certainly is spending like a modern-day FDR.
Regardless, Power Income will continue to be a source to help you stay in front of the money flows and help you hunt down consistently profitable and repeatable winners.
Have a great day and as always …
Live and Trade with Passion My Friends,
Griff