By M. Blake Fortune, II
Lately, the financial media seems to only talk about one thing: inflation. Since the onset of the Covid-19 pandemic and, subsequently, fiscal, and monetary stimulus programs launched in an effort to stabilize the economy, investors have worried about long term consequences of the “easy money” policies.
What is inflation, why does it continue to remain headline news, and what were its origins?
One could argue that inflations origin was a direct result of greed. Dating back to ancient times, emperors constantly debased their currencies in an effort to fund their extravagant lifestyles. In the early 1st century, the Roman Emperor Nero debased his sovereign silver coin until hardly any silver existed! This debasement led to increased currency in circulation.
The United States has suffered many inflationary periods in its short 245-year existence. None, however, have been as brutal as the periods that followed World War I, World War II and the Great Inflation of the 1970’s. Inflation is a decline in a currencies purchasing power due to rising prices. Simply put, when supply cannot keep up with demand, prices go up and, in the case of the United States, the dollar becomes weaker.
The Federal Reserve, the central bank of the United States, is charged with keeping inflation in check. As inflation heats up, the Fed typically raises its benchmark interest rate in an effort to take liquidity out of the financial system and cool the economy. The problem today? Many investors are beginning to worry that the FOMC, the interest rate setting committee, is late to the ballgame. Inflation just hit a four-decade high, tallying a 7% YoY increase in December.
The inflation dilemma of today is fairly complicated. The labor market remains airtight, and the Federal Reserve has a balance sheet that has ballooned to ~$8.5Trillion. On top of the Federal Reserve, the Federal Government will have to service its outstanding debt at higher levels. The servicing of ~$30,000,000,000,000.00 becomes very expensive when you factor in 50-100 basis point rate hikes!
As we move through January, we will be monitoring material changes out of the Federal Reserve and will look at market pullbacks as buying opportunities.
To contact the author of this story:
Blake Fortune at blake@hamiltoncapllc.com
