November 18, 2021
Next week, Americans will experience their most expensive Thanksgiving holiday ever…
Everything from airline tickets to gas prices to the turkey and stuffing costs more this year. Prices were up 6.2% in October compared with a year ago, and inflation is at its highest level in about 30 years.
Democrats are realizing there’s a political cost to inflation… The University of Michigan’s sentiment index, which tracks the way people are feeling about the economy, has plunged to a 10-year low.
Meanwhile, new polling from USA Today/Suffolk University shows the president’s disapproval rating has hit a 59% high… And a new CNN poll shows 72% of the country doesn’t think President Biden is focused on the most important issues.
Washington has tried to tell us this inflation was just “temporary” and the result of supply-chains issues… But it’s clearly much more than that.
Sensing Americans’ frustration with rising prices, the Biden camp has quietly stopped trying to convince people inflation is “transitory.” Instead, these politicos are now blaming COVID-19 for the higher cost of your Thanksgiving turkey.
Last weekend, the president’s economic advisers made the rounds on the weekend news programs, claiming “it’s the pandemic, not politics” that’s causing our rising inflation.
For example, National Economic Council Director Brian Deese went on NBC to say, “We can address this issue [inflation] in the short-term and the medium-term. In the short term, we’re focused on executing a strategy to finish the task on COVID.”
And Treasury Secretary Janet Yellen said:
The pandemic has been calling the shots for the economy and for inflation. And if we want to get inflation down, I think continuing to make progress against the pandemic is the most important thing we can do.
So… COVID is the reason why fuel costs are up 59% this year over last… natural gas is up 28% and firewood costs 35% more… eggs cost 12% more and prime rib is up more than 90%… and a washer or dryer will cost you 15% more this year?
I’m not buying it.
I’d like to remind Deese, Yellen, and the powers-that-be in the economic chambers of Washington that the pandemic is, for the most part, over. (Thank goodness.)
As a society, we’re learning to live with COVID.
Last weekend, I saw this firsthand when I attended a community-theater production in my hometown. Audience members had to provide negative COVID tests or proof of vaccination to gain entry. This slowed down the entrance line a bit, but the theater was packed. Clearly, people aren’t staying home for fear of the virus.
After all, if COVID were still in full swing, we’d all still be stuck at home. And, if we were all home for the holidays… there would be little demand for goods and services.
The world has opened back up, with folks flooding back into the world, spending money, driving up demand, and generally kicking the economy into overdrive. America is ready to party this holiday season…
So while the administration is trying to play the blame game, the real root cause of inflation is not COVID-19 and the resulting pandemic… It’s the consequence of the Fed’s reckless money printing finally catching up.
A new system shows which stocks could soon rise 100% thanks to a Connecticut couple’s catastrophic 401(k) loss.
Keep the Money Flowing
The Federal Reserve has been printing money and buying up mortgage-backed securities and Treasury bonds to the tune of $120 billion a month since the nationwide pandemic began nearly 20 months ago.
Washington added about $3 trillion in new cash – based on the Fed’s balance sheet – between 2007 and 2019… and then another $5 trillion since then.
And though the Fed has begun to taper, it’s still purchasing many tens of billions worth of bonds and mortgage-backed securities and it will continue to do so for a while. It is also keeping interest rates at a record low… And has promised to keep them there.
But there’s no desire to shift policy in sight…
Instead, there’s a ton of pressure on Fed Chairman Jerome Powell (who may soon be replaced by Lael Brainard) to keep the “money flowing.” He’s done just that and will continue to.
On top of that, Biden’s Build Back Better $1.9 trillion agenda will pump even more dollars into the economy. Democrats say this will help curb inflation. But, come on…
Americans, regardless of their politics, understand more money in the system means a lower purchasing power for our dollars.
When you saturate the market with so much liquidity, it comes as a real cost.
Who Pays the Price?
The problem with all this interference from our monetary policymakers and political elites is that (once again) the middle class loses.
The wealthy with capital to invest in the markets will see their portfolio values increase. (Consider the roughly 60% gain in the S&P 500 Index since March 2020.)
Corporations, meanwhile, are increasingly benefiting from the inflationary environment since it provides them with a once-in-a-generation opportunity to raise prices. Assuming they can raise prices enough to cover their costs, they’ll ultimately grow their profit margins. This helps corporations, shareholders, and the class of people with capital and assets to invest all over again.
The Wall Street Journal reported this week:
Nearly two out of three of the biggest U.S. publicly traded companies reported fatter profit margins than they did before the pandemic. Nearly 100 of these giants have booked 2021 profit margins—the share of each dollar of sales a company can pocket—that are at least 50% above 2019 levels.
Popular bedding manufacturer Sleep Number has managed to push through three major price hikes this year, while Carrier Global, a manufacturer of heating and cooling equipment, has done the same.
Assuming no systemic crisis strikes us (and I don’t see one on the horizon), inflation is here to stay… and likely to only grow worse.
By the middle of winter, we may be looking at an 8% increase (or more) in consumer prices.
That’s tough on middle- and working-class families, and it will have political consequences for the Democrats in charge. But as investors who know what’s coming, you can protect yourself and even benefit.
For instance, this week retail sales shot up, in part due to inflation. That’s why I’m optimistic on the long-term outlook for retail, food, and manufacturing/consumer staples. This sector should be able to increase its profit margins.
Companies typically don’t lower prices… Assuming some of these shipping and manufacturing costs are eventually reduced, profit margins should swell.
And so, I continue to like the market. Earnings are still strong… Retail giant Walmart (WMT) reported better-than-expected earnings numbers this week, and shared that its U.S. inventory is up 11.5% ahead of the busy shopping season. And despite the coming challenges to the middle class, earnings should remain strong through the fourth quarter.
The Fed isn’t about to change its policy, so I still like gold in this environment, too. The U.S. debt-to-GDP ratio is sure to grow over the coming years. When you add to that the Fed’s aggressive policies, the dollar will continue to lose value.
All in, I expect markets to continue their trajectory higher… and prices to do the same.
Inflation is here to stay. If the Fed doesn’t shift its policy soon (as I suspect it won’t), President Biden may be remembered as a modern-day Jimmy Carter, and we all know what happened to him in the landslide 1980 election…
Publisher, American Consequences
With Editorial Staff
November 18, 2021