| Dear Reader, I wanted to share a piece I wrote for my private newsletter, The Daily Dirtnap, on inflation. I thought you might find it interesting. I’m not one to offer a problem without a solution. So, you will find my suggestion for moving forward at the bottom of this email. Let’s dive in... THE DAILY DIRTNAP 10AUG21, VOL 13 NO 144 PORKULUS So, this —AIR QUOTES— “infrastructure bill” is roughly the size of the Larry Summers stimulus back in 2009. And the spending bill that was just unveiled, at $3.5 trillion, is five times the size of that. It’s all “Up” from Here When Biden was elected, I said that there would be a $10 trillion deficit in 2021. If all of this passes in its current form, we will be up to $7 trillion, with four months to go. I will be owed an apology from the people who said my prediction was ridiculous. Of course, we are going to have inflation—and a lot of it. We’re at 5.4%, right? Up from 1.4%. That’s insane. This isn’t breathlessly being reported in the news. Are we becoming numb to it? A deficit-to-GDP of 30% isn’t news? Boy, are we in for a surprise. But here is the thing from a sentiment standpoint… We have lost the capacity for moral outrage. Nobody sees our national debt as a problem that affects them personally, so nobody cares. And nobody is drawing the connection between spending and inflation. I mentioned this last week: it looks like the Republicans are going to pick up a bunch of seats in Congress. And yet, there’s a chance spending won’t go down under a Republican Congress. This — AIR QUOTES— “infrastructure” bill was bipartisan, after all. This is not a fiscally conservative Republican party. I think that a couple of years from now, we will look back at this period of time, with the 10-Year Treasury Note at 1.2% and $4 trillion of spending coming down the pike, and say, “Dang, I should’ve had a V8!” You remember those V8 commercials, right? It’s that obvious. But it’s only obvious if you’re flying at 35,000 feet. If you have your head in the screens all day, you won’t see it. This is why I advise people to take a break from staring at the screens and go take a look around. Everything Is Free Now, Right? We extended the eviction moratorium. No more rent! We extended the student loan payment moratorium. No more student loans! All that is left to do is to make food free. It won’t cost that much! You think I am joking... Someone is going to suggest it. I’m not sure there are adjectives in the dictionary to describe this. “Moral decline” doesn’t quite capture it. But there are precedents in history, and since the Germans are so good at documenting history, we have book after book covering the Weimar Hyperinflation of the 1920s. Not to get all Austrian hardhat on you, but Weimar is a pretty close analog. I don’t think the world is going to end, but I would not be betting that inflation is going lower. The Psychology Is Changing I had the great Peter Atwater on my radio show, talking about sentiment and psychology. (If you don’t know who Peter Atwater is. Here’s a one-sentence summary: He’s a really intelligent guy who transitioned from helping hedge funds successfully navigate the banking crisis to teaching social psychology in the financial realm.) I told him that inflation is 90% psychology. He corrected me and told me that inflation is 100% psychology. That sounds about right. The mechanism is clear: When people believe that prices are going higher, they act in such a way that causes prices to go higher. … which leads us to the present day. This Fed Won’t Make the Hard Choices Back in the 1970s, early 80s, former Fed Chair Paul Volcker wasn’t about economics; he was about psychology. He had to crush the inflationary psychology. He was vicious, people were uncomfortable, but the deed got done. This time around, we are tolerating much higher levels of inflation, but no one is going to do a thing about it. Jerome Powell isn’t Paul Volcker. That much is apparent. Inflation is 5.4%, and people aren’t even squealing yet. Unfortunately, the only analog that people have when it comes to inflation is the 1970s’ stagflation. Yes, the inflation of the 1970s was caused partially by too-loose monetary policy. If you want my interpretation of it, the “stag” part was partially caused by an encroaching regulatory state. Prices and wages were fixed throughout the economy in many sectors. Price signals were not permitted to function. And we might get there eventually. I suspect that when inflation gets to double digits (which is, I expect, what will happen in the next 12 to 24 months), our instincts will be to do the easy thing and fix prices by fiat rather than to take our medicine and raise interest rates. Of course, this will make things worse. For now, this is the beautiful deleveraging part of the inflation, where asset prices go up. We can worry about the stag part later. Sticky Wages $45 an hour to paint a house. $93,600 a year, tax-free. Can you imagine? More to the point, can you imagine turning this down? This is the type of work that used to pay minimum wage. It is said that economics is the only profession where you can be upset about people making more money. And that’s because economists have to view things from the standpoint of the employer and the customer. When the worker gets paid more, the employer raises prices on the service/product offered, and... then the consumer pays more. That’s how this works. And if you think, “Oh, this is temporary. We can just bring wages back down,” then my response is: Try it. You’ll end up with a strongly worded letter at best and a riot at worst. Wages are sticky. Long Haul Inflation isn’t a 3–4 month phenomenon. This is a secular trend that will last 10 years or more. Sure, there will be corrections along the way, but at this point, the trend is irreversible. Russell Napier, a well-known independent financial strategist, recently said that we are going to (paraphrasing) experience a period of time with low bond yields and high inflation, leading to deeply negative real rates as a political necessity. He’s not really predicting the future; he’s simply describing what is happening right now. Let’s think through this: inflation continues to rise to 6, 7, 8, 9%, and interest rates are held artificially low. What do you think will happen then? My conviction level on inflation is off the charts. I will change my mind when the circumstances change. I will change my mind when we start balancing the budget or hiking interest rates. That is nowhere on the horizon. This thing is an unstoppable freight train. -EXCERPT END- Like I said at the beginning of this email. I don’t offer problems without solutions. It may sound far-fetched, but I’m not really worried about inflation. I’ve positioned myself correctly and plan to not only offset but outpace rising inflation. If you’re interested in doing the same, I have eight inflation-based investments you can make today. I’ve done all the research for you and laid it out in an easy-to-read report that you can access here. These are serious times, to be sure. But if we’re going to labor under high levels of inflation, why not make some good money off it? Jared Dillian
Editor of The 10th Man, Street Freak, and renowned daily letter for institutional investors The Daily Dirtnap
Mauldin Economics | 