Rickards: The Truth About Inflation

  • Lumber prices tumble 44% in six weeks (what?!)
  • Jim Rickards challenges conventional wisdom on inflation
  • Job growth? Money printing? Less than meets the eye
  • Interest rates defy the mainstream narrative
  • A home-price milestone
  • “Stimmies” now a quasi-official term… Bitcoin mining in our firm’s backyard… a legendary journalist smeared as a “conspiracy theorist”… and more!

Um, about those soaring lumber prices…

What Goes Up

Per the chart, lumber prices peaked six weeks ago at $1,670 per 1,000 board-feet. As we write this morning, they’re down to $926.50.

Yes, that’s still quite elevated by any historical standard — more than double the pre-pandemic price of early 2020.

But the 44% drop in six weeks tells us 1) The lockdown-scrambled supply chain is starting to straighten itself out a bit and 2) As the saying goes, “The cure for high prices is high prices.” That is, high prices encourage producers to bring more supply to market… which acts to pull prices down.

We bring up the subject this morning to poke a hole in the most conventional wisdom of all when it comes to the markets and the economy in 2021.

“The narrative is straightforward,” says our Jim Rickards: “The economy is recovering. Unemployment is declining. Employers can’t find enough workers. Wages are going up to attract help. Stimulus spending is coming by the trillions of dollars. The Fed is printing money. The economy is pushing up against capacity constraints. Inflation is right around the corner.”

And while a vast array of goods have been rising in price, lumber has been the poster child for this inflation narrative.

“What if every part of the economic narrative is wrong?” Jim asks cheekily.

As we’ve mentioned now and then for a few weeks, Jim is improbably of the same mind as the Federal Reserve right now — that inflation is “transitory,” sure to retreat for the balance of 2021. (Next year, he says, will be a different story; check out yesterday’s 5 if you missed it.)

Here are the investment implications: It’s the inflation narrative that’s driven up longer-term interest rates for nearly a year. Since early August 2020, the yield on a 10-year Treasury note has been rising from record lows… which has had the effect of pushing gold prices down from record highs…

Gold Per Ounce

Here’s Jim’s reality check: “The economy was bound to recover from the pandemic recession of 2020, the worst since 1946.

“But it appears the recovery is now running out of steam,” he cautions. “For the record, the economy was weak before the pandemic hit. What if that weak growth trendline is now returning to form?”

Don’t get us wrong: Jim is not anticipating a return to recession. Rather he’s talking about a slow-grind recovery, perhaps comparable to the 2010–2011 hangover from the “Great Recession.” A growing economy, yes, but nothing comparable to the average of the Reagan-Bush-Clinton decades.

You might object: “But what about all the job growth right now?”

Jim would reply: “The unemployment rate is declining but real unemployment is not. We still have 7.6 million fewer jobs than before the pandemic.” And that doesn’t count the 10 million or more working-age folks who don’t have jobs and aren’t looking for jobs.

Some of them figure it’s better to collect $300 a week in bonus unemployment payments rather than return to work. Some of them are having trouble making child-care arrangements. A few are still afraid of exposing themselves to the virus. But whatever their rationale, they’re not working and not contributing to “recovery.”

You might also object: “But what about all the money printing?”

Jim would reply: “Money printing is practically irrelevant because velocity (or turnover) of money is still declining. What good is new money if the banks just give it back to the Fed as excess reserves so the money is never spent or lent?

“Fiscal policy and handouts are not producing stimulus because debt levels are so high (the U.S. debt-to-GDP level is now 130%, the highest ever). Americans respond with precautionary savings and deleveraging. Data shows that 75% of the government handouts have either been saved or used to pay down debt. Only 25% have been used for consumption. That’s a pathetic amount of bang for the buck.”

And while supply chains are profoundly jumbled, manufacturers and distributors will work it out as long as government doesn’t try to muck it up.

Which brings us back to lumber, and the steep price decline these last six weeks. It’s no coincidence: The mills have been able to ramp up production now that states are easing their social-distancing guidelines for workplaces. In time, the mills might add capacity if prices remain above the long-term average.

Jim’s bottom line and investment takeaway: “The signals are clear.

“The economy is slowing, labor markets are weak, disinflation and even deflation are on the horizon, rates are going down and gold prices are at a great entry price.

“Reality is catching up with the narrative. This is your chance to stay ahead of a changing narrative by buying gold.”

[Ed. note: Tomorrow, Jim issues the inaugural recommendation in his newest premium trading advisory.

After years of development and months of beta-testing, Jim is taking the wraps off an entirely new trading system — one that’s demonstrated potential for average gains of 160% every 45 days. Follow this link to learn how it works and be on board for tomorrow’s trade.]

Speaking of falling rates, we can’t say it enough: Rates did not react the way the narrative told us they would when the Federal Reserve took a more hawkish stance last week.

Alan Knuckman, our floor-trading veteran, has been on the same page with Jim Rickards all year when it comes to rates — even though Alan’s a chart guy and Jim’s a macro guy.

“All of the inflation chatter and the fact that rates may be raised in 2022,” says Alan, “failed to register a reaction in the 10-year note barometer rate — which actually dropped last week to more than three-month lows.”

So what happened? “The markets had priced in a hike next year and two more in 2023 before the Fed’s meeting last week.

“Most importantly, price reaction had the Nasdaq green on a weekly basis — not failing from fear forecasts.”

And that’s carried over into this week: Indeed, the Nasdaq is in record territory as we write — up nearly a half percent, over 14,200.

The S&P 500 is also up on the day, about a third of a percent to 4,240 — about 15 points away from its record close a week ago Monday. The Dow has resumed its role as the laggard, up less than a quarter percent and about 60 points below the 34,000 level.

Gold languishes for the moment at $1,777. Ditto for silver at $25.81. Crude has pulled back below $73. Bitcoin dipped below $30,000 for a while this morning on the heels of the latest China scare (see more below) but is now back above $31,000.

For the record: The median price of an already-built home in these United States has surpassed $350,000.

That’s the standout number in today’s existing home sales report from the National Association of Realtors. The pace of sales fell another 0.9% in May, the fourth straight monthly fall.

Supply remains tight; it would take only 2.5 months to clear out all existing inventory if nothing new came on the market. On the other hand, that figure is up from 1.9 months at the start of the year.

Should the figure keep climbing, that translates to an ease in the supply squeeze and a plateau in prices.

Note we said a plateau and not a decline; as we mentioned at the start of the month, investors now account for about one out of every five home sales — a new source of demand that might well translate to permanently higher prices. Housing is the one sector where inflation likely won’t be “transitory.”

We see the debasement of the currency is coinciding with a debasement of the language. From the White House website…

WH.gov

Moving on…

To the mailbag, where one of our longtimers weighs in on our main topic yesterday of how China’s demographics will fuel U.S. inflation starting next year…

“Inflation comes and goes but the result of inflation remains. If prices rise 10%, they will stay there (at a minimum!) even if inflation drops back to 2%. It is like lead or mercury poisoning… it does not go away. It just accumulates until the next dose of lead/mercury/inflation.

“Trump has actually helped the emerging situation as described by Jim Rickards. Factories have moved to lower wage regimes to avoid tariffs and the ‘Made in China’ label. But the profits and wealth end up in China with the factory owners.

“I am not in agreement with the labeling of the one-child policy as misguided and inhumane… seems like the proletariat have embraced smaller families… the CCP was just a number of years ahead of the population thought.

“Thanks for ‘listening.’”

The 5: You raise a good point, and it dovetails with our main topic today: Just because Jim thinks the inflation rate will retreat this summer and fall, the price increases we’ve already experienced are now baked into the cake.

And so far, the narrative that rising wages will make up the difference (and generate a “wage-price spiral” fueling further inflation) appears anecdotal. Yes, McDonald’s is offering starting salaries of $35,000… but the Labor Department’s figures show average hourly earnings rising a paltry 2% year over year.

On the matter of Bitcoin, a reader inquires: “Eunice Yoon reported on CNBC that China continues to tighten the screws on Bitcoin. They warned banks and merchants to stay away from Bitcoin trading and announced that they intend to shut down 90% of Bitcoin mining in China.

“But here’s the interesting part (if true): Some of the Bitcoin mining machines (Yoon’s term) are being shipped to Maryland.

“Just wondering if your outfit will be dipping its toe into Bitcoin mining?”

The 5: Our Maryland-based firm will stick to its publishing knitting, thanks.

What blows our mind is that it appears some of the Chinese Bitcoin mining will also shift to Texas — despite an electric grid proven more than once this year to be a rickety, unreliable mess.

After we passed along a boatload of links about the U.S. regime-change operation in Libya a decade ago, a reader writes…

“Google ‘Seymour Hersh Libya’ for articles by that Pulitzer-winning journalist.”

The 5: Indeed, Hersh reported in 2016 that as secretary of state, Hillary Clinton authorized the transfer of sarin gas from Libya to rebels in Syria — enabling the rebels to carry out an attack that could be pinned on President Bashar al-Assad, also a target of U.S. regime change.

That was one of several articles Hersh wrote during the previous decade that transformed his reputation in Establishment circles.

No longer was he the hero who exposed the torture taking place at the hands of Americans in Iraq’s Abu Ghraib prison. Because he dared to report facts that made Barack Obama look bad, he became tarred as a “conspiracy theorist.” (We chronicled one of those instances in 2015 as part of a broad take on “conspiracy theories.”)

The New Yorker stopped publishing Hersh’s articles, supposedly because they no longer passed muster with its fact-checkers. (In reality, The New Yorker’s vaunted fact-checking team was already a shambles by the early 2000s, when it let pass many of Jeffrey Goldberg’s most egregious fact-free assertions about Saddam Hussein’s “weapons of mass destruction” and “ties to al-Qaida.”)

We didn’t realize it until you inspired us to check out his Wikipedia entry today, but Hersh was among the hundreds who passed through Chicago’s legendary City News Bureau — a proving ground for young journalists across the decades, renowned for its fanatical devotion to accuracy: Its informal motto was, “If your mother says she loves you, check it out.”

Alas, City News Bureau shut down in 1999…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Did you know there’s a vast market out there in which $6.6 trillion changes hands every day?

Until now, it was nearly impossible for everyday folks to trade this market.

Now Jim Rickards has found a way for you to “skim” your share of this staggering sum… and he’s launched a brand-new trading advisory that aims to help you do just that.

His first recommendation is due tomorrow. Click here to learn how you can get access.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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