(Kitco News) – Interest rates and expectations for interest rate cuts have dominated financial headlines for several months, and while traders are occupied with dot plots and Fed speak, sentiment among U.S. consumers regarding inflation offers a potential warning sign that the Fed may actually be forced to hold or raise the benchmark rate if the cost of living begins to tick higher again.
“US consumers' inflation expectations for the next 5-10 years skyrocketed to 7.1% in October, the highest in over 40 years,” noted analysts at The Kobeissi Letter. “This metric has DOUBLED in just several months, according to the University of Michigan Consumer Survey.”
“To put this into perspective, median inflation expectations have been at ~3% for the last 3 years,” they highlighted. “Consumer sentiment has been severely damaged by rising prices of necessities, and expectations are getting worse.”
“This comes as core CPI inflation has been above 3% for 41 months, the longest streak since the early 1990s,” the analysts added. “Inflation is still a major concern for Americans. We are beginning to see some signs of inflation reaccelerating again. Last week, Core CPI inflation jumped for the first time since March 2023. The Fed is playing a dangerous game with 50 bps rate cuts.”
Author Lawrence McDonald also highlighted the recent spike in inflation expectations, noting that the last time they were this high was right before the collapse of Silvergate Bank.
Inflation Expectations
US 5-Year Inflation Swap - 5-week change, largest jump since March 2023 ahead of SIVB bank collapse.
Chart from @parrmenidies pic.twitter.com/KXpf9c9RNa— Lawrence McDonald (@Convertbond) October 14, 2024
And while Fed speakers and financial pundits have pointed to a variety of reasons for ‘sticky’ inflation – ranging from the after-effects of the COVID-19 pandemic to the rise in geopolitical tensions and conflicts – one explanation that doesn’t get the acknowledgment it deserves, at least across mainstream outlets, is the connection inflation has with the money supply, which has once again started to climb higher.
“The US money supply hit $21.17 trillion in August, the highest level since January 2023,” analysts at The Kobeissi Letter highlighted. “This also marks a fifth consecutive monthly increase for the US money supply. Over the last 10 months, the amount of US Dollars in circulation has jumped by a MASSIVE $484 billion.
“In effect, the money supply is now just $548 billion below a new all-time high,” they said. “After a brief decline, the quantity of money in the financial system is surging again, raising concerns about another inflation wave. Is inflation set for a comeback in 2025?”
According to Spencer Hakimian, founder of Tolou Capital Management, the origins of the current problem date back to 2008, and unless drastic measures are implemented, inflation will continue to be an issue moving forward.
“Largely due to the scars of 2008, and largely due to the fact that the conventional wisdom was that policymakers didn’t do enough after 2008, Washington goes crazy in response to COVID,” Hakimian said. “$6T of stimulus across multiple bills (from 2 different administrations) on a $20T economy. 30%. 3x what we did for 2008.”
The real difference came in how the money was spent. “[T]his time, the majority of the money was given directly to consumers. And consumers spent all of it. Meanwhile, the majority of this newly issued debt was bought by the Federal Reserve (which means its new money being created - and not being funded by the private sector - AKA no crowding out effect),” he said.
“The result? A very quick recovery, but almost just as fast, a near 50 year high in inflation,” he highlighted. “This is because, unlike 2008, the money was directly given to consumers and coincided with a 50% growth in the money supply. New money being given directly to consumers, and being encouraged to spend it. Demand for goods & services > supply of goods & services = inflation.”
“The slow recovery from 2008 was replaced by the way too fast recovery from 2020,” Hakimian said. “Stock markets were back to all time highs by August of 2020. If you blinked, you missed it. Nominal GDP is almost 50% higher than pre-COVID, and real GDP is almost 25% higher.”
“And here’s where it gets really crazy. Unlike 2012-2019, we aren’t returning to normal deficits (2-3%). We are running 2008 like deficits permanently now,” he stressed. “Most of it is structural (social security, Medicare, etc. - related to an aging population). But a lot of it is also tactical. Politicians realize spending more and taxing less is the best strategy in a system where everybody votes every 2 years.”
Hakimian predicted that, eventually, the U.S. would “get a new demagogue. This demagogue will be someone that capitalizes on fears of us losing our reserve currency status as we spend money we don’t have and devalue ourselves away into irrelevancy - just like the Dutch and the British did before us.”
“These are massive problems. I don’t think any issue is more pressing for our time,” he concluded. “But, I am saying to beware of this future demagogue. He/she certainly does not have the answer and just wants to be remembered by history as President of the United States/have an airport named after himself/herself.”
According to entrepreneur Jason Bunnell, the performance of gold in recent months is a sign that the Fed is starting to lose control and could soon have to deal with runaway inflation.
“Gold price 2019 = $1,394. Gold price 2024 = $2,305,” Bunnell noted. “CAGR of gold over 5 years is 12.9%, so the inflationary rate during the current administration is roughly 13%. Which is to say, in 5 years gold prices have nearly doubled.”
“The FED is not able to overcome inflation stemming from printing money by using quantitative easing as the target inflationary rate is 4%,” he said. “There is no example in history where this does not lead to runaway inflation.”
All of this leads to a stark reality that investors need to understand amid the rising cost of everything and why referring to assets like Bitcoin and gold as a store of value is coming into focus.
It’s not that #Gold or #Bitcoin are gaining value — it’s harmful central bank policies eroding the value of money. #Inflation #MonetaryPolicy #SoundMoney $BTC $XAU
— Wojtek Kaszycki (@wkaszycki) October 6, 2024
