The answer to nearly every problem in the past few years is “print” money. I remember when Covid first came out the central banks conjured up trillions of currency units. As far as I know, it didn’t stop the spread of the disease. As people’s incomes were decimated the central banks conjured up even more trillions with the click of a few buttons. This “money” is being sent out to make sure the masses don’t revolt- at least not for a while longer anyway.
This has all led to a massive chasm between the “haves”, the billionaires who have added $13
Trillion in “wealth” since the last meltdown and the “have nots” who are struggling to maintain their
lifestyles and has left those on the lower rungs already struggling to survive. This is a toxic situation.
The sad truth appears to be that we may just be in the beginning of the hard times that appear are coming
our way. In my trips to the grocery store and hardware stores I am seeing a marked increase in prices.
I am also seeing a lot of “We’re Hiring” signs. This conjured up “money” has a lot of people sitting around
collecting more than they have been earning by working. This is one of the large problems I see going
forward as industry after industry is getting impacted by a shortage of supplies or parts necessary for
production. If any part of the supply chain breaks down it can impact the entire chain as we are seeing.
It has been pretty well reported that there is a chip shortage that is impacting global automobile
production leading to higher car prices. Possibly more importantly, there is another industry that is getting
hit hard in multiple ways. Farming.
While cars may be a necessity these days it pales in comparison with our need for a stable food supply.
A silicone chip shortage has led to farm equipment manufacturers halting shipments to dealers. This
means that the equipment dealers cannot even give a reliable estimate of when certain products may
become available. This is bad timing as most planting should be happening right now. In addition, in the
West, and now creeping into the northern plain states, is a megadrought condition that is reminiscent of
the dustbowl of the 1930s. This time is actually worse, because, according to NOAA the soil
moisture in Southwestern states is the lowest in 120 years.
There are many farmers in California (major produce producer) that are making decisions to destroy
certain crops so that others can survive or possibly not planting at all because of a lack of water.
This not only may cause a lack of product, which could lead to FAR higher prices but it is also destroying
current jobs on top of it.
This is not only happening here but also in Africa (Locusts destroying crops), Brazil is experiencing its
worst drought in over 20 years and the impact on coffee, sugar and oranges could be substantial.
Many companies have already announced future price increases and the increased cost of raw
materials and rising labor costs have not fully worked through the system yet.
Needless to say, if production is down and people still need the necessities of life prices are likely
to rise substantially- and soon. In my opinion the more the central banks “print” the higher the prices
will be and the faster monster inflation will arrive. We could be near a moment where we will see how
“printing” too much money becomes the disease- not the supposed cure.
There is one element that I believe could throw a wrench into the plans to “inflate away”. REPOS.
The Fed has basically been monetizing the debt for quite some time. They have been able to make people
believe that this is not the case because the major banks (owners of the Fed) would buy the newly issued
debt and would hold the asset collecting higher interest than was being paid for the bond. An easy way
to make a quick buck for the insiders. Currently, as of May 20,2021 the Fed’s reverse repo facility has
exploded to $351 billion. That is higher than at any time during the Covid crisis and the 5th. highest usage
of all time according to Zoltan Poszar of Credit Suisse. He also believes that this is an ominous sign that
the banks have run out of room to take on the massive amount of new debt being issued. If he is indeed
right there could be some major problems for financial assets- particularly domestic bonds and the US
dollar shortly as the illusion that the Fed is not buying virtually all of the newly-issued debt gets exposed
as untrue. A falling US dollar would cause inflation in the magnitude of the drop in value. While I believe
this is the Fed’s ultimate goal it could prove disastrous to all but the top 5% or so as common goods may
become scarce or unaffordable.
Many people are blissfully unaware of how close we may be to a meltdown of a magnitude we have not
seen in our lifetimes- not here in the USA anyway. There are plenty of examples in history which show the
outcome of our dangerous economic path. Many still believe that you can “print” your way to prosperity.
Or you can get something for nothing. History tells us a different story.
Personally, I believe those that see what is happening and understand it are going to buy real assets or
good solid companies that produce those goods. Of course, there may be some value in bonds but my
guess is that the only real value left in bonds may be in emerging markets since they can’t just “print up”
whatever amounts they need to pretend they are solvent like the major economies.
As a matter of fact, there are many companies in the precious metals, industrial metals and energy
production and transportation that have great numbers now. If inflation continues higher those great
numbers may turn to really great numbers and outsized returns like we saw from 2003-2007.
For anyone thinking they may have missed out because of recent gains my guess is that you likely only
missed the first inning as it appears the only way to feign solvency is to conjure up exponentially more
and more fiat (backed by nothing) currency units.
Notice I call them currency units and not money because our Federal Reserve Notes are a unit of debt
Owed back to the issuer. That is why JP Morgan once said “Gold is money. Everything else is debt”
Doesn’t it make sense to have a decent part of your portfolio in hard assets that are not someone else’s
liability? Personally, I will take an asset over a liability any time.
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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