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Inflation and the Fed

Transitory? You Kidding Me?

Written by Briton Ryle
Posted May 19, 2021

You get one guess as to why stocks are getting whacked again today. 

I’m not trying to be mean, or act like I have information that nobody else has. This one’s pretty easy — because it’s the same rationale that we’ve heard just about every single day in 2021…

Inflation and the Fed. 

The Fed is holding one of its two-day closed-door meetings right now. The economic elites want us to think they are poring over data, dividing the drag coefficient of a super-tanker by the tensile strength of titanium to see if that has an impact on the price per board foot of lumber in Waukegan... 

And all the trading algos have their knickers in a knot, worried that the Fed is going to suddenly, mysteriously, magically change its outlook about the U.S. economy and inflation…

I have one word for you: Transitory. When the great Oz finally takes the podium and tells us to ignore the man behind the curtain, he will insist that record-high home prices are not here to stay... that the rise in prices and money supply that we can clearly see with our own eyes is not really inflation at all.

It is simply a temporary condition brought on by the sudden release of 18 months' worth of pent-up demand. 

In other words, it's transitory…



Looks Like a Duck… Coyote??

To be fair, Powell and his cohorts are right. Prices are rising largely due to pent-up demand. And in fact, in many sectors demand is outpacing supply. And that’s because supply chains were so damaged during the pandemic that there really isn’t enough of some stuff to go around...

First-quarter GDP came in at 6.4%. Amazing, huge. But they say if inventories were full, growth would’ve hit 9%. 

It goes without saying that if growth is hitting 6.4%, then prices are moving too. Call it whatever you want: inflation, transitory price movement…

The ultimate point — and problem — is that inflation and economic booms are always transitory. 

Because when the economy is booming and everyone’s making money, risk appetite’s increase. Investors will shimmy further and further out on the ledge until there’s no firm ground left to stand on…



Houston, We Have a Problem

So if you wanna know why tech stocks are weak right now, it’s because those big funds that told us TINA (there is no alternative) are now wondering if they screwed the pooch by buying Tesla shares when the company was valued at nearly a trillion dollars. 

The smartypants will say, "Well if rates rise, it’s more expensive for tech companies to raise money, and that will impact BLAH BLAH BLAH…”

What they’re really saying is, “Holy shit, did we just buy the top of the biggest bubble we’ve seen in 20 years???”

It’s times like these that my generally optimistic nature gets truly tested. 

But I’ll give it a shot anyway. You may have missed that the last couple employment reports missed by kind of a lot. In one of 'em, I think the real number was 200,000 jobs added when the grumpy folks with calculators were looking for 1 million…

This is actually extremely good news. We very much need to see a slow grind back to “full” employment. That is the only thing that will moderate demand and allow the Fed a victory lap. 

If you don’t know, wage inflation is the Fed’s most watched metric. We start adding jobs in the millions every month and this economy will go supernova. 

However, if we can see one of those mysterious slow grinds that marked the recovery from the housing crash, maybe, just maybe, we can get a balanced recovery.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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