Here’s what Yellen DIDN’T say…
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What Yellen Didn’t Say Yesterday…

Janet Yellen made an obvious comment about inflation yesterday — and it tanked the markets.

Investors should have instead taken some comfort in what she studiously avoided mentioning.


May 5, 2021

Dear Fellow Investor,


It may come as a surprise to some people these days, but the credentialed experts in charge of our government and economy don’t always tell us the truth.

Yes, you can wipe that shocked look off your face now.

I’ve found that what’s more revealing isn’t the untruths they say, but the truths they leave out. We had a powerful example of that yesterday, from Treasury Secretary Janet Yellen.

In an interview, the former Fed Chair commented in regard to the massive fiscal stimulus plans recently announced that “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”

She may have been having a flashback to a former job or, more likely, this was a statement pre-approved by her replacement at the Fed, Jerome Powell. Regardless, anyone who still thought that the health of the U.S. asset markets and the entire economy weren’t completely reliant on Fed policy…well, they were quickly disabused of the notion by the market reaction to Yellen’s words.

In short, the markets tanked.

The broader equity markets recovered somewhat, but the more speculative ends — tech stocks and, weirdly, gold — were hit fairly hard.

Gold ended up losing about $13. It had had a very nice day before that and is up again today, so this drop was little more than a bump in the road — but the experience reinforced that the markets are hyper-sensitive to any mention of rate hikes.

They are also sensitive to signs of inflation, which was what Yellen was really referring to. And that issue deserves some examination.

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Inflation Preoccupation

From homeowners trying to buy lumber to renovate…to home buyers trying to find a home they can afford to investors pondering future Fed policy…everybody’s talking about inflation these days.

The issue can be broken down to three questions:

1) Are we going to see significantly higher price inflation?

2) Will it be “transitory” as the Fed insists, or sticky?

3) What will the Fed do about it?

The answers to the first two are easy.

First, higher inflation is already here. On Monday it was reported that the US ISM Manufacturing Prices Paid Index rose to 89.60 — that was up 4.67% from last month and an incredible 153.8% from one year ago.

Today’s ISM services report showed prices paid in that area rose 2.8 pts to 76.8 — the highest level since July 2008.

Second, no matter what the Fed may try to tell us, the market is telling us that it believes much higher inflation is here to stay, for years to come. As our friend Peter Boockvar noted this morning after the ISM data came out:

“…we are seeing today another leg higher in inflation break-evens in the TIPS market. The 3 yr breakeven is up another 3 bps today to 2.82%, the highest since 2006. The 10 yr is breaking out to a fresh 8 year high. Chicago Fed President Evans today that after the base effect impact on inflation in coming months, he thinks ‘achieving our inflation goal may prove more difficult.’ He also said ‘I would not be concerned about inflation moving persistently too high unless we saw some quite outsized movements in financial market pricing at the longer maturities or in survey based measures of inflation expectations.

“Talk like this I believe is losing a lot of credibility.”

The answer to our third question is where the rubber meets the road…



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“You can't always get what you want
But if you try sometimes, well, you might find
You get what you need.”

To the question of what the Fed will do about higher inflation, the answer is, of course, that they’ll raise rates.

Yellen was speaking the honest truth to us, this time at least.

But what she didn’t say is why the Fed wants higher inflation…and the limits as to what they will do.

Essentially the Fed not only wants higher inflation, it absolutely needs it. They need it to depreciate the value of the enormous (and growing) federal debt, and they need it to create some breathing room for rate cuts in the next, inevitable setback in the economy or the markets.

More important to investors like us is that the inflation rate itself is actually the limit for what the Fed will do. As we’ve discussed repeatedly in these pages, the Fed can’t allow interest rates to exceed, or even approach, the rate of inflation.

They simply can’t allow the interest rate on today’s massive debt to exceed the rate that dollars are depreciating (inflation), or the costs of servicing that debt will overwhelm the federal budget.

That is the essential limiting factor.

So, yes, Yellen was correct in that the Fed will eventually have to raise rates as inflation rises. But what she failed to say is much more important: We’ll have negative real rates for as long as the federal debt is so large.

And that means forever.

This, of course, is enormously bullish for gold, silver and mining stocks.

In other words, while other investors might panic over any reference to higher rates, we can take comfort in a long-term view that is extraordinarily bullish for our holdings.

All the best,


Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference

 
 
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