Feds losing the War on Inflation
Posted: Mon Apr 22, 2024 1:13 pm
Note from one of our very smart investors. He likes gold, copper and oil because they are "real assets".
Commodity prices are rising since both the U.S.’s and China’s manufacturing have
begun rising in sync—and China’s economy is beyond the Fed’s control. Biden’s proposed steel
tariffs would affect only a narrow part of commodities’ rise—but could raise overall steel prices,
so would itself be inflationary. Commodities may soon feed into goods inflation, heretofore
dampening services and overall inflation. So commodities inflation could soon fuel further
overall inflation. Friday’s PCE report could reinforce or moderate these inflation expectations.
Despite these risks, keeping rates level and hoping that their proverbial long and variable
lag will eventually moderate GDP growth and check the now rebounding inflation seems the
prudent course, since the neutral interest rate is impossible to judge accurately. Patience at the
current rate seems the best policy.
A rotation from relatively straight-line growth stocks, more vulnerable to inflation and
higher rates, to more cyclical areas (e.g., oils, copper, gold) is underway, and such broadening
appears justified by the continuation of inflation and higher rates—plus a still very rapidly
growing GDP. The Middle East conflict’s ebb and flow is an overlay to this outlook, but itself
could potentially reinforce the current commodities uptrend. Straight-line growth stocks can be
revisited as the washout continues; the overall market outlook remains favorable.
Commodity prices are rising since both the U.S.’s and China’s manufacturing have
begun rising in sync—and China’s economy is beyond the Fed’s control. Biden’s proposed steel
tariffs would affect only a narrow part of commodities’ rise—but could raise overall steel prices,
so would itself be inflationary. Commodities may soon feed into goods inflation, heretofore
dampening services and overall inflation. So commodities inflation could soon fuel further
overall inflation. Friday’s PCE report could reinforce or moderate these inflation expectations.
Despite these risks, keeping rates level and hoping that their proverbial long and variable
lag will eventually moderate GDP growth and check the now rebounding inflation seems the
prudent course, since the neutral interest rate is impossible to judge accurately. Patience at the
current rate seems the best policy.
A rotation from relatively straight-line growth stocks, more vulnerable to inflation and
higher rates, to more cyclical areas (e.g., oils, copper, gold) is underway, and such broadening
appears justified by the continuation of inflation and higher rates—plus a still very rapidly
growing GDP. The Middle East conflict’s ebb and flow is an overlay to this outlook, but itself
could potentially reinforce the current commodities uptrend. Straight-line growth stocks can be
revisited as the washout continues; the overall market outlook remains favorable.