It’s official; inflation has reared its ugly head. There’s a fine line between fishing and just drinking beer on a boat, though, and I’m not sure this degree of inflation has a giant hook in the water.
Concerns over inflation got very high during the 2008 financial crisis-- in hindsight, to the point of being absurd-- but I think it’s a more legitimate concern coming out of the Coronavirus pandemic because the economy in general and household balance sheets are in so much better shape than they were in 2008. Also, Fed Chief Jerome Powell just spent the whole week promising more easy money, and the government has massively stepped up their spending.
We started warning months ago that interest rates were going to move up and that the yield curve would steepen. While the overall stock market’s performance this month has been somewhat surprising in my view, that was a pretty easy call, and expectations for all the things associated with inflation-- rising commodity prices, outperformance from emerging market assets and small-caps, and the surge in breakeven inflation-- have made people a lot of money. …Just about any commodity index or ETF you find is up well over 10% in February alone, the Dollar has been crushed this month, small caps have trounced large-caps and the twenty year Treasury has declined more than 10%.
So, naturally, everybody wants to talk about inflation now; that’s how this game works. Even Michael Burry, of The Big Short fame, got into the act recently and cited everyone’s favorite hyperinflation scenario — Weimar Germany in the 1920’s — as a concern, which is outlandish.
Why? Because that was a totally disparate time and place. Germany was actively pursuing double-digit inflation to cover their war debts and to pay off reparations for World War I. The average weekly wages for a metalworker reached 30 trillion marks by the end of 1923, or roughly 850 billion times the average wage from 1913, and inflation increased 1.25 trillion times over that ten year period.
Yes, yes, the pandemic is its own kind of war in many ways, but Germany in the early-1920’s was not only coming off its own pandemic of 1918, but a war with the entire world. Could we see higher inflation in the 2020’s than we saw in the 2010’s? Sure, we continue to think that’s altogether likely. Will workers see their wages grow 850 billion times? Nope, I feel pretty safe in saying that’s not going to happen.
As we’ve discussed here in Insights previously, the financial pundits’ party is a crowded one, and people seeking attention at such a party tend to shout and engage in hyperbole. I don't know exactly why Burry needs the attention, but I wouldn’t suppose for a second that we won’t see more and more hyperinflation comparisons over the next several months. Because a little inflation just isn’t newsy enough; the whole house has to burn down.
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