INFLATION. Almost every financial commentator is talking about it. According to the Fed, it will be transitory or in other words just a temporary phenomenon. While this latest bout of inflation appears to be exceedingly strong at this time, there are many forces at play here.

My guess is that it will NOT be transitory because it appears to me that it is being caused by too much “money printing” and not enough production. As a matter of fact, the Bureau of Economic Analysis reports that nearly 1/3 of ALL consumer spending in the USA is supported by government transfer payments. Of course, our government is the most indebted in the history of the world and the “money” has to be conjured up from nowhere so it can be spent.  This doesn’t appear to be ending anytime soon.

One reason why inflation could slow down meaningfully would be that demand for products could fall off of a cliff because the economy is NOT rebounding as robustly as those in charge would have you believe. Even then, more than likely, more stimulus would be announced which could lead to more inflation.

I read an article on Bloomberg by Garfield Reynolds “Bond Traders Laugh Off Commodity Supercycle Dreams”. Now, I don’t know whether we are in the beginning of a commodity supercycle or not but all of the elements appear to be in place. The laugh that I really got out of this piece was that the bond traders say that “Treasury yields are signaling the global economy will be too weak in the coming years to sustain the explosion in commodity prices”. That may well be true BUT to imply that the treasury “market” is signaling anything is ludicrous. With the central banks buying virtually ALL supply either directly or through their member banks- the bond market, if it is sending any signals at all, is sending false signals just like the false prices being manipulated by the “printers” to give an illusion of normalcy.

To imply that we can make any real conclusions based upon fake low rates is laughable. In my opinion, the act of conjuring up cash out of nowhere and buying those same treasuries- thereby distorting virtually all prices- is the exact reason that we just may have a commodity supercycle because the “printing” has to continue to grow exponentially to keep rates low and stock, bond and real estate prices high. Any pullback and the entire edifice could collapse in a swift downdraft.

I also got a kick out of the fact that it was stated “If yields do spike that’s likely to then bring commodities crashing down”. Again, that may be true BUT what will those in charge do when, by definition, if rates are spiking bonds are crashing, stocks are likely crashing also, and real estate is likely crashing and burning at the same time? My guess is that it is unlikely they will watch most assets collapse. It may happen but based upon what we have seen in the past 35 years or so it doesn’t seem too likely. More likely is that they “print and buy” even more leading to even more price inflation as the currency gets debased further.

This appears to me to be the same setup as it was prior to the 2008 meltdown where virtually all assets are rising together. It is just as likely that they will all fall together and there will be few places to hide if we get a severe downturn. A large part of the reason for this is that the leverage in the stock market is DOUBLE what it was in 2008. This is leading to valuations that are also at all-time highs. When valuations are high the expected future returns are, in turn, lower. It only makes sense since you are in effect- buying high. Of course, the same leverage that leads to outsized gains on the way up will also grease the skids on the way down- particularly if the margin clerk is doing the selling. It goes fast with no input from the person who could not meet the margin requirement.

In speaking to many people, I believe that most people are aware of the danger that conjuring cash up out of nowhere poses. The fear that I have is that in other cases, like Weimar Germany, it was said that the currency collapse happened slowly over time and then- all at once. It is not hard to imagine the same scenario playing out here if we stay on our current path.

I believe many people have been lulled to sleep because it appears the central banks are “printing and buying” with impunity and few, if any, consequences (SO FAR).

With the level of “printing and buying” at dizzying heights (and that is with just what we are allowed to know-who knows how much more we DON’T know) I believe it is imperative to plan for FAR higher prices going forward.

As far as investing goes- I believe that hard assets and real goods are the investment of the near future. The “printing” creates nothing but illusory “wealth” while we human beings still need food, water, shelter, energy, and life-sustaining goods. Those cannot be conjured up out of nowhere and have to be produced.

In addition, we need “money”. The “money” we are using today is likely in its final stages of collapse. This has happened hundreds of times throughout history and it has ended in tears EVERY TIME.

On the other hand, gold and silver have acted as a store of value for centuries. While it takes tens of millions of bolivars to buy a cup of coffee in Venezuela, a single ounce of silver feeds a family of 4 for a month. In Germany homes and companies were purchased for a few ounces of gold when the Mark collapsed in the 1920s.

Back in 1966- prior to Alan Greenspan becoming Fed chairman he wrote:
“Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a worldwide division of labor and the broadest international trade”. To me, the key words are stability and balanced growth. Without the “printing” and those at the top buying assets- most of the time with massive leverage there would be few- if any -boom-bust cycles that we are seeing on an ever-increasing basis. The world is awash with central bank “money” which distorts prices and leads people to make decisions based upon false signals.

JP Morgan “Gold is money. Everything else is debt”

There were two presidents who attempted to issue money through the US Treasury and bypass central banks.  1862 Abraham Lincoln issued $450 Million worth of greenbacks.

In 1963, John F Kennedy (Executive order 11110) issued $4.3 BILLION in silver certificates- bypassing the Federal Reserve. What do these two Presidents have in common?

It appears to me the central banks will stop at nothing to keep their extraordinary privilege of conjuring cash up out of nowhere going.

This is likely the reason they, along with their owners- the major banks, have been suppressing the price of precious metals and buying tons for themselves at the same time. (2200 tons of gold bought by central banks from 2018-2020).

More than likely there is a plan in place for when the US dollar joins the other currencies that are in the dustbin of history- as all paper currencies have ended over a period of time. A little planning may make the transition a little more smooth. Owning the right assets that will stand the test of time and not prove to be a passing fancy may be a good place to start.

Be Prepared!

Any opinions are those of Mike Savage and not necessarily of those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only be a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when prices are overall rising.

Precious Metals, including gold, are subject to special risks including but not limited to: price may be subject to wide fluctuation, the market is relatively limited, the sources are concentrated in countries that have the potential for instability and the market is unregulated.

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