That's Inflation, Babe

The Today Show is on the case... That's inflation, babe... We've been screwed since the 10th century... The Fed doesn't care about 'We the People'... How angry will Main Street get?... What you can do about inflation now...

'I'm going to need you to explain inflation to me'...

My wife said this to me this morning. The Today Show was on the television. I (Corey McLaughlin) wasn't really watching... but I glanced over and saw the graphic along the bottom of the screen...

"The Fed raises rates..." it read, and something about "inflation." And then I stopped looking.

I had two immediate thoughts...

No. 1... If the show co-anchor Hoda Kotb is now teasing segments about interest rates and inflation, this is a sign we might be nearing "peak inflation," much like stocks that are up 80% are likely about to crash if mainstream-TV folks start to talk about them...

No. 2... The Federal Reserve is not going to save anyone on Main Street. Don't rely on that.

As we've mentioned this week, given the timing of the latest Federal Reserve meeting and decision... raising its benchmark lending rate by 0.25%, the central bank is about a year too late and trillions of dollars too heavy in its attempts to make a difference about inflation in the present.

As prices of homes, food, rent, cars, and now gas have skyrocketed throughout the pandemic... Congress did its part by shoveling trillions of dollars of new spending into the economy through its bureaucratic mess... But let's not forget that the Fed was party to the crime of inflation too.

It just kept doing the same old thing, keeping bank lending rates near zero and buying $120 billion worth of financial assets every month to stimulate the economy, until its backward-looking data only recently confirmed what people on Main Street already knew...

Everything is getting more expensive...

That's inflation, babe. But why?

There's not a straightforward answer, as much as we'd like there to be.

As Stansberry Research partner Dr. David "Doc" Eifrig likes to say, inflation is "mysterious" and not easily explained. Many of our editors disagree on how to best measure "inflation" because there's a variety of factors involved...

But you know it when you see it. Or feel it. Or hear people try to explain it away...

This time, it was the supply chains, they said... The it was the pandemic, they said... Yes, there's no avoiding those as catalysts for higher prices... but the root of all inflation issues is that inflation has been baked into the global financial system as long as paper currency has been used...

That dates to at least 10th-century China, when high demand for coins exceeded supply of precious metals. Someone had the bright idea to create credit notes ‒ or paper money ‒ and enough people trusted in the system that a new way of doing business was born.

We've been screwed ever since...

Today, we live in a 'money printing' world...

And paper is not even needed. One thousand years after a local commodity shortage led to the birth of fiat currency, all a central bank has to do is make a few keystrokes on a computer to alter the fundamentals of the economy.

It's easy to do, probably too easy, and the consequences are grand... Every time a single dollar is "printed," either digitally or in the real green-and-white bills you can hold in your hand, the value of all the existing dollars in the world goes down.

Printing money can put a Band-Aid on a crisis, but the end result is that you get less for your money... because there is more of it. Put another way: Is my house really worth 20% more than it was at the start of 2020? My aging heating system says no, but the market disagrees about the price...

Rising home prices are because of low supply and high demand, yes, (a long-term trend worth investing in, as our colleague Steve Sjuggerud does in True Wealth: Real Estate), but also because of the juice the Fed has pumped into the economy.

Low interest rates and "easy money" monetary policy – until this month, the bank was still buying at least $30 billion in assets since November – ultimately means the prices of in-demand goods and services will go up... because the value of the dollar goes down.

This is why an average gallon of milk cost $1 in 1960... and is closer to $4 today.

Even if something stays the same price, you are getting "less for your money" because the dollars in your pocket are ultimately worth less than they were before.

On a related note, this can also be the definition of a "bear market"... the value of stocks, priced in dollars, is going down significantly over some period of time relative to what these stocks were considered worth before...

That's why owning real, tangible things with value, like a house or anything else "hard" – like a barrel of oil... or an ounce of gold... or a crop of wheat – is such an asset today. So long as dollars are being devalued, the price of things will eventually go up.

'We the People' and the dollar's power...

Inflation is why businesses need to raise prices... to pay employees... to buy raw materials... or to make a living for themselves, if they're a small-business owner.

Inflation, in one way or another, is why you might follow our research to build and protect your wealth in a world where folks on Main Street can't seem to make ends meet in what is supposed to be the most advanced economy in the world.

"The dollar is worth less" makes more people angry every day, whether they know the reasons why or not... If you're reading us, you know more than most.

Inflation (and mismanaged fiat currency) is woven so deeply into the fabric of our financial system that folks just assume it is supposed be there... It doesn't have to be of course, but this is the life the modern world knows.

The only good news is that every country's currency is losing value too, so the U.S. dollar remains in a position of relative strength. For now...

The clock's ticking...

Every time the U.S. makes dollars "cheaper," other countries have to do the same with their own currencies... or risk slowing down their own economies. They don't like this.

This is why China, the world's second-largest economy, has been trying to break away from relying on the dollar whenever it has the chance... even if that means partnering with the Russian government.

We wrote this back in the August 6, 2020 Digest...

The U.S. dollar is, of course, the world's reserve currency. Central banks around the world hold more than $7 trillion in reserves, and it serves as the basis for almost all international trade.

But nowhere is it set in stone that the dollar must play that role. If the past 572 years of history are any indication, the dollar's days as the global standard may be numbered...

Since the world stopped using ancient Roman currencies around 1450, every subsequent shake-up in the global economic order has been caused by excessive debt. And by any possible metric, our debt in the U.S. is unprecedented...

We're not saying the empire will end tomorrow, but we are believers in history meaning something...

The U.S.'s percentage of debt-to-gross domestic product ("GDP"), a measure of how much the federal government owes compared to economic production, sits at a staggering 123% as of the fourth quarter of 2021.

That means the government owes more money than the economy is producing... It's been this way for nearly a decade, when the debt-to-GDP percentage first went above 100% in late 2012.

No wonder the Fed, which can determine how much interest the government (and a lot other people) has to pay, wanted to keep rates lower, longer despite the evidence of inflation everywhere.

In the meantime, not only does the government go more in debt... but Main Street suffers.

Paycheck to paycheck...

Longtime readers know we're not fans of the around-the-clock opining on mainstream financial-news outlets like CNBC, but every so often we come across some useful information there...

Today, we saw these numbers on CNBC.com that reflect just how fragile the financial situation is for most Americans, despite Fed Chair Jerome Powell saying yesterday that "household and business balance sheets are strong"...

High-quality businesses with "pricing power" – the kind we suggest you own shares of – might be in good positions today, but most households are not, according to surveys...

Two-thirds of American workers say their pay is not adequate to cover the rising cost of inflation, according to a report by Credit Karma, which polled more than 2,000 adults in February.

Of the adults who have felt inflation's impact over the past year, nearly three-quarters, or 74%, said that price hikes have hurt them financially, according to a separate report from Bankrate.com.

Roughly 64% of the U.S. population now lives paycheck to paycheck, up from 61% at the end of the last year and just shy of the high of 65% in 2020, another LendingClub report found.

Think about this... Let us work with the idea that roughly two-thirds of the country lives paycheck to paycheck. Gas prices are nearly the highest they've ever been... and the same goes for all kinds of other goods and services. Any relief that stimulus checks provided two years ago is going to be offset by inflation today.

And yet Chair Powell, as he did yesterday, says he's not worried about a recession in the next year, despite several indicators that suggest otherwise... Let's put what he said here for the record...

The probability of a recession within the next year is not particularly elevated.

I guess "this time will be different," and the oil shock we've just seen won't matter... nor will the yield curve getting closer to inverting mean a recession is about to follow, as it normally does indicate.

The question is not if, but 'how angry' will people be this time...

Having a recession during a pandemic makes sense. We had that...

Having a recession two or three years after the worst of the pandemic is over, amid a long run of high inflation? That's not as intuitive, but it could be coming...

Projections within Powell's own Federal Reserve system are showing dramatically slowing growth throughout the rest of the year. Earlier this month, the Atlanta Fed cut its GDP estimate for the first quarter of 2022 to zero...

That's not negative, but it's basically one quarter short of a recession... If Mr. Market ever actually wakes up to this, it's not going to be good...

As our Stansberry NewsWire editor C. Scott Garliss said last week...

The threat of higher costs combined with slower growth... given the Federal Reserve's plans to raise interest rates... could cause market analysts to reduce revenue and earnings estimates across the board.

As we said, that could lead to selling of stocks ‒ because of lower expectations compared with current valuations ‒ which could beget selling... This is one way a bear market might happen...

To this point, keep an eye on 'consumer sentiment' data...

Consumer sentiment – or the outlook people have about the economy – is important, considering consumer spending makes up 70% of economic activity in the U.S.

If sentiment falls by any amount, it's significant... because less spending could eat into economic growth across the board.

The University of Michigan has surveyed people about the economy since the mid-1940s and shared the findings of its Surveys of Consumers data with the public each month. In February, the survey reported...

Consumers evaluated their current financial situation as the worst in nine years, and when asked about their future financial prospects, more households expected worsening finances than any other time since May 1980.

According to preliminary data in March, feelings about the economy among Americans are getting worse... and in some cases, when it comes to personal finances, have never been worse since the Michigan survey began some 80 years ago.

Richard Curtin, the chief economist of the Surveys of Consumers, said in an early report about this month's findings...

Consumer Sentiment continued to decline due to falling inflation-adjusted incomes, recently accelerated by rising fuel prices as a result of the Russian invasion of Ukraine. The year-ahead expected inflation rate rose to its highest level since 1981, and expected gas prices posted their largest monthly upward surge in decades.

Personal finances were expected to worsen in the year ahead by the largest proportion since the surveys started in the mid-1940s. Consumers held very negative prospects for the economy, with the sole exception of the job market. Consumers were slightly more likely to anticipate declines rather than increases in the national unemployment rate.

Curtin then drew similarities between now and the hyperinflation of the 1970s...

This underlying strength in jobs comes at the cost of pushing inflation even higher due to unrelenting pressures on aggregate demand and supply lines. The persistent strength in demand was a critical factor that shaped the last inflationary age from 1965 to 1982, with stagflation peaking only near its end.

Our point is this... If you're looking to bet on "greater growth," and inflation going away anytime soon, now probably is not the best time...

As Scott told us in a note the other day, when consumer confidence has fallen like it has recently – by roughly 30% since this time last year – it has typically coincided with a recession.

I hate to keep being the bearer of bad news, but we share with you what we see... Because it does no good over the long run to ignore the truth, as the Fed kicking the inflation can down the road demonstrates.

So what can you do?

If you've read the Digest over the last few months or over a year, frankly, you've heard our warnings along these lines... and, let's hope, you have taken steps to prepare your portfolio for a run of high inflation and slowing economic growth in general.

Own a truly diversified portfolio that includes exposure to "hard" assets, like real estate and gold... With stocks, if your predetermined stop losses are triggered, sell, and then keep that capital on hand to fight another day...

In general, think about ways to insulate your money from high inflation for a long period of time, paired with slower growth... something the U.S. economy hasn't seen in decades.

It often gets lost in the inflation discussion, but owning stocks is a great way, generally speaking, to protect your wealth from the worst impacts of inflation.

Owning shares of high-quality businesses that sell in-demand, essential, or even addictive products can profit from higher prices and pass the benefits to shareholders. Owning quality stocks can be a cornerstone of any inflation-beating plan.

If you subscribe to our Portfolio Solutions products, The Defensive Portfolio might be a great choice for you right now. At last check, through March 10, it was up nearly 3% for the year, beating the benchmark S&P 500 Index by roughly 9%.

If you're near retirement, another great idea to consider is Doc's Intelligent Retirement portfolio...

I wrote in yesterday's mailbag that the last time we saw an era of high inflation was in the 1970s. At the same time, this portfolio that Doc created outperformed the benchmark S&P 500 and the conventional "60/40" stock-bond portfolio by a wide margin...

And since Doc and his team launched this portfolio to his Income Intelligence subscribers last June, it has outperformed the 60/40 portfolio by 10% and has really taken off while stocks in general have sold off the last few months.

If you already subscribe to Income Intelligence or are a Stansberry Alliance member, you can find Doc's latest Intelligent Retirement allocation here... and how it all works here. And if you don't already subscribe, click here to hear more from Doc in this new video.

In it, he explains all the details... why he's so concerned about inflation today... and how you can beat it. And, just for tuning in, he shares with viewers a low-risk investment you can make in just a couple minutes that will give you an 8% return rate of income.

You're going to need that to beat inflation down.

What the Fed's Rate Hike Could Mean for You

On the latest episode of Making Money With Matt McCall, Matt explains everything you need to know about the Fed's decision to hike interest rates... including how it might influence stocks and other investments.

Click here to watch or listen to this episode right now. And to catch all of Matt's shows, more videos, and podcasts from the Stansberry Research team, you can visit the media section of StansberryResearch.com anytime.

New 52-week highs (as of 3/16/22): AbbVie (ABBV), Berkshire Hathaway (BRK-B), Centene (CNC), and Telekomunikasi Indonesia (TLK).

A quiet mailbag today. How angry are you with inflation? Or do you have another comment or question? Send your notes to feedback@stansberryresearch.com.

All the best, and Happy St. Patrick's Day,

Corey McLaughlin
Baltimore, Maryland
March 17, 2022