Christine Lagarde Lets It Slip
It’s done; central banks have given up.
At first, they didn’t think it would happen. After all, inflation was thought to be dead.
Courtesy: Bloomberg Businessweek
On April 22nd, 2019, four years ago, Businessweek published a piece called “The Death of Equities” just like in 1979 right before the greatest bull market in world history, making it the ultimate contrarian indicator.
Inflation is alive and well, so much so that central banks have waved the white flag and are ending their rate hike cycles while knowing that inflation is still well above the arbitrary 2.00% goal they’ve set where they state the economies function at their best.
Christine Lagarde, one of the most influential women in finance, has recently given a speech where she hinted that what central banks should consider doing next is raising their inflation targets.
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When I said that this is probably what’s going to occur, people said that the FED and other major central banks can’t afford to do that, but I argued that they can’t afford NOT TO.
The right way to think about it is to say that if the FED would raise the target to 2.5% or 3.0%, it wouldn’t look so incompetent when CPI data consistently comes in at 4.0%.
What does the future hold, then?
Because China’s labor pool is shrinking, Russia’s cheap oil and gas have gone away, and globalization has peaked, the Western World must increase its capacity to manufacture and produce, and that is a process that takes about 4-5 years.
What I think will happen is interest rates will continue to remain above 3.5% on the FED funds rate until such a time the CPI numbers consistently stay below that.
American businesses will have to serve consumers much more than at any other time during the past 40 years because multinationals will struggle to meet demand and keep prices low.
By 2027 or 2028, and certainly by 2029 when the millennials have fully joined the working class as peak earners in the age range of 35-49, we will be behind the inflationary boom.
In the next 4-6 years in the meantime, inflation will be higher by definition.
If you’re thinking about how to safely navigate this environment, know these facts:
- Labor shortage: there is absolutely a major decline in the number of participants in the pool of workers, and you are more valuable today than at any point in the past 50 years.
Don’t underestimate how important your skills are to the workforce. Keep in mind your bargaining power with your employer assuming you are an over-deliverer that’s devoted to advancing in your profession.
Your day has come.
- In a world that deters growth by raising interest rates and pinning them to the upper end of the range, cash is important.
While inflation is running at 6%-10% in real terms, real estate and stocks might fall by 20%-30% in real terms, offering an opportunity to liquid investors.
If the FED capitulates and raises the inflation target, anything and everything will be repriced.
Governments Have Amassed ungodly Debt Piles and Have Promised Retirees Unreasonable Amounts of Entitlements, Not In Line with Income Tax Collections. The House of Cards Is Set To Be Worse than 2008! Rising Interest Rates Can Topple The Fiat Monetary Structure, Leaving Investors with Less Than Half of Their Equity Intact!
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