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The REAL Inflation Trend

Written by Briton Ryle
Posted April 12, 2021

Did you see Friday's headline economic report? Holy moly — the PPI doubled in a month. Remarkable...

The PPI is the producer price index. It measures the change in price that companies pay for the stuff they need to make the stuff they sell. Interestingly, the prices the PPI monitors are the first ever paid for the stuff in question. As in, the first time 60 bucks changes hands for a barrel of oil or some dingbat shells out 1,700 clams for an ounce of gold...

Sorry, sorry — that was a mildly mean-spirited jab at the gold bugs. I just can't help myself sometimes. You see, I have this affliction where I'm compelled to invest in stuff where value is determined by actual demand and utility. And I'll tell you why this is about to become very important...

It has to do with inflation.

Ever since the Fed reopened the cash floodgates after the COVID market crash, people have said inflation is coming. You just can't increase the money supply by as much as the Fed has and think that there will be no impact on prices. 

The Fed hasn't discouraged this view at all. In fact, Chair Powell has repeatedly said "Bring it on" to inflation. He'll tell you the Fed has the tools to keep inflation from becoming a problem. In part, he's talking about the Fed's ability to establish overnight lending rates. But he's also talking about the fact the Fed can buy Treasury bonds, known as quantitative easing. 

As we've seen for the last four months or so, investors will push interest rates higher regardless of the Fed. Real interest rates have risen because investors believe inflation will force the Fed to raise interest rates sooner than it wants to. 

So when an inflation report like the PPI doubles in a month, it matters. We all know there's a point when it stops making economic sense to buy stuff. And that's right around the point when consumers say, "I can't afford that." At some point, inflation will force the Fed to act. 

Gold and Inflation: Is It Different This Time? 

This is kind of a trick question. Gold isn't really going to "protect" you from inflation.

If you want to trade your dollars for something that will make you a lot more dollars as prices move higher, buy stocks. Buy a house or a rental house. Buy a '69 Camaro. Heck, buy Bitcoin, as I suggested in December when it was $19K. 

I know, gold did pretty well after the great financial crisis (GFC). But what didn't do well coming off that low? Las Vegas Sands traded under $3 a share in March 2009 and hit $50 18 months later...

The trick here is that the recovery out of the GFC wasn't an inflationary environment. In fact, the Fed never really shut off the liquidity for damn near 10 years and we still didn't get any inflation. So this time around, people think this is the big one? This is the time that inflation is really going to shoot up and gold is gonna explode higher? 

If people believed this, wouldn't they be buying gold? Well, they aren't. You can track these new inflation fears to the beginning of 2021. That's when stocks started selling off. And that's when gold started selling off too. Sorry.

Not in My House

When was the last time we had inflation that was a problem? Late 1970s, right? And yet inflation sticks with us as the sum of all economic fears. It's kinda weird. 

That 1970s inflation spike was an anomaly, a blip on the chart, most likely because the dollar had just come off the gold standard and the dollar had to find its trading range. The world was pretty different then, too. 

Bigger picture? Interest rates have been falling since WWII. The long-term trend is toward deflation, not inflation. And it's basically because of efficiency. Efficiency is the single most deflationary force there is.  

Back in the day, it's like everything was inefficient. Car engines had to be 500 cc and get 12 mpg just to get you to 60 mph in a respectable 7 seconds. Today you can do that in a Camry. The Soviet Union was a model of inefficiency and waste for 70 years. Today in the "ridiculous country" department, we've got Venezuela and maybe Turkey.

Efficiency squeezes every penny of value out of things and situations. That's the trend, and I don't think it's changing. 

So again I will say to you: The only antidote to all this, the only thing that will give you an edge when efficiency is perfected, is assets. Own the companies that are doing the squeezing. And do it soon, because I think this whole inflation-fear market pullback has just about run its course.

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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