Inflate or die
The smart money knows the Fed can’t raise rates, but it’s still dumb to ignore inflation
If the stockmarket were an army, it would be knee-deep in mud… overextended… and far from its supply lines. And now, its scouts are staggering back to camp, wounded and hungry.
Cathie Wood’s Ark Innovation exchange-traded fund is down 40% from its peak last February. Bitcoin is 30% off its peak. Goldman Sachs’ index of unprofitable tech companies is off 25% over the last month.
And yet, there is still no sign of a broad retreat. Stocks rose on the latest inflation news. What to make of it? There are two possible interpretations. One is that investors are very stupid. The other is that they are very smart.
Out of line
You have to be pretty dumb not to see that asset prices are way out of line with economic reality. Despite all the loose talk about “disruptive technology” and the “metaverse”, real output is still produced by people who do real work. And it’s still measured by GDP.
Historically, the US stockmarket was usually worth about 80% of GDP. Between 1950 and today, stocks only crossed the 150%-of-GDP line twice – in
1999 and again in 2017. But recently, they just keep going up.
And now, the ratio stands at 213% – an all-time high.
Stocks are only where they are because the US Federal Reserve has been pumping them up for more than ten years. But with inflation on the rise, the only sensible thing for the Fedtodoisto raise interest rates – which would bring stock prices crashing down. And this is where the very smart investors may be outsmarting themselves.
The Fed only benefits borrowers
The Fed encouraged everyone to borrow. Households are once again “taking out equity” by borrowing against the inflated value of their homes. Corporations do it – almost doubling their debt since 2007.
And who does it most of all? The government. The Feds have tripled their debt load since 2007. And now, so many people have borrowed so much money that the Fed can’t normalise rates.
That’s our “inflate or die” hypothesis. Inflation hurts savers, but it helps debtors. Their debts evaporate as the real value of the US dollar goes down. Who’s the biggest debtor in the whole world? The US government. And with inflation running at almost 7% and the Fed paying only about 2% on their loans, it means they are gaining about 5% on their outstanding debt.
The very smart money is betting that this is too sweet a racket to give up. The Fed suppresses rates. The value of the debt goes down. The value of the elite’s stocks and bonds goes up. Everybody’s happy
Well, everybody except the other 90% of the population that must pay higher consumer prices. What could possibly go wrong with that?
“The ratio of the US stockmarket to GDP is at an all-time high