Inflation = Higher Commodity Prices - August 11

[dan_s]

Comments below are from Adam Rozencwajg's blog at: http://blog.gorozen.com/blog/is-inflati ... e=hs_email

Over the last year, the US government has borrowed and spent $2.4 trillion to replace $800 billion of lost economic activity resulting in a US savings glut of nearly $1.5 tr. Not content with the massive surge in government spending, the Biden administration is proposing an additional $3 tr in stimulus spending.

With the economy now starting to recover, the press is filled with stories of shortages that have developed in countless markets from lumber to semiconductors to restaurant workers to ketchup packets.

Economically sensitive commodities such as copper have entered into new bull markets while surging grain prices warn of significant food inflation ahead. Consumers are in excellent financial condition and have signaled their strong desire to engage in a huge catch-up consumption binge as vaccinations are successfully rolled out.

The COVID-19 economic shock has been unique in another way. Historically, large drops in GDP, such as the 32% annualized drop experienced in 2Q20, have been associated with financial panics and banking crises (for example, the 2008–2009 global financial crisis). An impaired banking system often hindered economic growth for years following the panic — again think no further back than the 2008–2009 financial crisis as a great example.

Because banks were impaired post 2008–2009, central banks were unable to stimulate lending, credit creation, or economic growth even with massive money printing efforts. Instead, most of the money printed by central banks after the 2008–2009 financial crisis ended up as “excess reserves” on central banks’ balance sheets — all that printed money went nowhere.

As opposed to 2008, today’s global economy is emerging from a huge economic contraction with a fully functioning banking system. Although the COVID-19-related economic lockdown caused a stock market panic (the S&P 500 dropped almost 35% in 30 days), the global banking system emerged from the economic turmoil last year in excellent shape. Thanks to that, the creation of new money is already finding its way into the economy. M2 growth is now surging at unprecedented rates — 27% at last look.

The inflation signal, first delivered by the April 2019 BusinessWeek/Bloomberg cover story, is now being confirmed by underlying economic and financial data. Money supply growth is surging and physical shortages are developing. The banking system is in excellent shape and stands ready to lend.

Despite these trends, investors continue to pile into technology stocks, SPACs, cryptocurrencies and long-term bonds; each of which will perform terribly in an inflationary environment. In stark contrast, inflation hedges such as commodities and natural resources remain priced at record low levels relative to financial assets and are ignored by almost all investors.

The countdown to inflation is ticking and we are getting closer and closer to an explosion in inflationary pressures. All economic signs point in that direction, yet few investors are prepared to protect themselves, yet alone profit from an investment landscape that is about to suddenly and radically change. It’s 1979 all over again — except in reverse.

[dan_s]

Treasury yields moved higher after U.S. released Producer
Prices data which indicated that Producer Prices grew by 7.8% year-over-year
in July compared to analyst consensus of 7.3%. Bond traders remain worried
about inflation and sell Treasuries, which pushes their yields higher and puts
pressure on precious metals. If gold declines towards the nearest support
level at $1720, silver will find itself under more pressure.