Runaway fiscal spending threatens markets and the U.S. Economy. Investors hunt for real returns.
Fiscal spending drives monetary policy (the Fed is after all an appendage of the Treasury), and the Fed’s ultra-loose monetary policy is the culprit behind persistent price inflation. Price inflation is the pin that will prick the various bubbles across markets. Price inflation is the straw that will break the consumer’s back, not the Delta Variant. Our view is that the Fed will not take action against inflation this year, especially with real GDP slowing. If consumer confidence gets low enough to the point where Democrats fear a rout at the polls is coming in the 2022 mid-terms, Biden/Yellen will nudge Powell/The Fed to tighten (yes, the cynic in me believes the tail often wags the dog when it comes to politics and economic matters). The Fed has already lost control of price inflation given it has already printed trillions of dollars out of thin air since April 2020 – thereby inflating the money supply – thus price increases are baked in the cake.
Persistent price inflation puts investors in quite a pickle. Inflation is in the low double-digit percentage range in our view. It is questionable as to whether we have real GDP growth at all. Therefore, how to hedge against inflation? Let’s put gold and precious metals to the side for purposes of this discussion. Within the equity markets investors ought to look for growing companies that pay a dividend. Look to companies that have proven management teams, that are not well-followed (small cap vs. large cap). Look to markets outside of the U.S. for value. Eventually the Fed will tighten and when it does so it will tighten faster than investors expect. Only then will bubbles begin to deflate.