Inflation Surge Unlikely To Prove Temporary
Summary
- The Fed is promising to be too easy for too long, and that means the current inflation surge is unlikely to prove temporary. That, in turn, means that interest rates are very likely to rise above expectations.
- Fiscal policy is dangerously "stimulative." No need for Congress to do anything except get out of the way of the private sector.
- Cash remains trash, as its purchasing power is being seriously eroded by inflation. Ditto for most fixed-income securities.
For the time being, I haven't see anything that has changed my mind about what's going on in the economy and the markets.
The Fed is promising to be too easy for too long, and that means the current inflation surge is very unlikely to prove temporary. That, in turn, means that interest rates - which are currently expected to remain very low for a long time - are very likely to rise above expectations.
Fiscal policy is dangerously "stimulative." No need for Congress to do anything except get out of the way of the private sector. A $3+ trillion "stimulus" is not only unnecessary, but harmful to the economy's prospects. More spending, an expansion of the welfare state, more regulations, more taxes, more subsidies, and more transfer payments will seriously weaken the economy's long-term prospects. Not in the near term (i.e., the remainder of the year at least), but in the long haul.
In this context, I would view the passage of Biden's spending goals to be very bearish. By that logic, if Congress blocks trillion-dollar deficit spending, the outlook would brighten considerably.
Unfortunately, there is little that investors can do. Cash remains trash, as its purchasing power is being seriously eroded by inflation. Ditto for most fixed-income securities. Better to own productive assets that can ride the tide of higher prices (equities, commodities, commercial property). Prudent levels of debt (at long-term fixed rates especially) should benefit from higher prices and a general loss of purchasing power.
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