Jelly donuts. They’re a tasty treat.
They’re not something you think of when it comes to monetary policy.
And yet, that’s what famed billionaire hedge fund manager David Einhorn discussed at the Grant’s Interest Rate Observer Conference last month.
I was there to hear from some of the top investors in the world. Guys like Einhorn, Paul Singer, and Jeffrey Gundlach.
John at Grant’s, a must-attend event for investors
Together, they’re worth a combined $9.5 billion. So it’s worth listening to what these titans of the hedge fund world have to say.
And there was no better way to kick off the conference than Einhorn and his jelly donuts.
Einhorn takes the stage with his jelly donut speech
You Can Only Eat So Much
It wasn’t the first time Einhorn made this comparison.
His speech at Grant’s was an update to one he gave in 2012. That 2012 speech was about the Federal Reserve’s easy-money policy at the time.
Back then, Einhorn talked about how the economy was hungry. So the Fed kept feeding it jelly donuts in the form of cutting overnight lending rates and injecting it with cash.
We can even see how this played out over the last decade by looking at the Fed’s balance sheet. Take a look…
For years, the Fed fueled a boom in nearly everything. Housing. The stock market. Even in bonds. It did this by expanding its balance sheet.
It was one of the greatest bull markets of all time. And every new “jelly donut” the Federal Reserve fed the economy gave it a nice sugar high. It was a shot of energy that pumped up the market.
Then came 2020 and Covid. This was the crescendo to the steady diet of jelly donuts. Except the Fed wasn’t feeding the economy one donut at a time. The economy was eating them by the dozen.
In just a few short months, the Fed backstopped more than $3 trillion in stimulus. We all know what happened next. It kicked off one of the greatest speculative booms in history.
As Einhorn told the audience, eating a jelly donut or two may taste great at the time. It gives you a nice sugar rush. But after a few dozen, you’re probably not feeling too well.
It’s the same with the Fed. Each round of stimulus provided a boost to financial assets. Then came the Covid crescendo. Eventually, the market had too many jelly donuts. Something had to give.
Now with the Fed reversing course over the past 18 months, the market is feeling the pain.
Time for a Diet
It was always inevitable that at some point, the party would stop. Zero percent interest rates can’t last forever. Because they eventually lead to some unintended consequences… Like inflation.
It didn’t take long for the trillions in stimulus and super-low interest rates to raise the price of everything. At its most recent high, inflation hit an annual rate of 9%.
In fact, the definition of inflation is an increase in the money supply. All that means is when you print more dollars, prices tend to increase.
The official government rate of inflation is down quite a bit from its peak. But the problem is prices are now permanently higher.
It’s like squeezing a tube of toothpaste. Once it comes out, you can’t put it back in.
As the Fed ran its jelly donut monetary policy through Covid, it created enormous distortions between supply and demand. When inflation eventually came, the Fed dismissed it as transitory. It was just a temporary bump.
But not all inflation was transitory.
When the price of a good doubles or triples because of things like supply chain issues, that’s transitory. But when prices of everyday goods rise 10% in a year, that’s not transitory.
That’s permanent. And there’s no going back.
It’s all part of the Great Distortion my colleague Nomi Prins has warned about in these pages. Those distortions are now showing up everywhere we look. At the grocery store. At the hardware store. Even with services like Netflix, Amazon Prime, or Apple+.
And what’s worse, that permanent inflation may continue to rise once we get a wage-price spiral. That means as incomes increase, the cost of goods and services will also increase. Something that started slowly but is accelerating today.
We can even see this wage-price spiral playing out in real time.
Like the recent UPS driver contract. It bumped part-time pay 35% from $15.50 per hour to $21 per hour. And for full-time drivers, they will average $170,000 per year in pay and benefits by 2028.
Not long after the ink was dry on the new contract, UPS announced price increases for its services.
Something similar is happening with the United Auto Workers (UAW). At the start of the UAW strike, the union asked the big three automakers – Ford, GM, and Stellantis – for a significant package.
As I write, Ford looks set to be the first to strike a deal with the UAW. It includes a 25% wage hike over the contract term and starting wages surging 68% to $28 per hour.
The only way to make cars profitably at those rates is to pass on that added cost to customers.
In fact, that’s already happening. Last month, Ford announced its flagship F-150 XL 2024 base model will retail for $38,565. That’s about an 8% increase over the 2023 model.
Looking even further back, when Ford debuted the F-150 in 1948, it sold for $1,279. Accounting for inflation, that’s equivalent to about $16,500 today. In other words, you’re paying 134% more today for the same model.
Sure, you’re getting a few more bells and whistles. But not 134% more.
We can chalk all of this up to jelly donut Fed policy.
But now, with a massive tummy ache, the Fed is trying to go on a diet. Raising rates is jelly donut policy in reverse. Or as Einhorn put it, we’re in Ozempic season.
The Fed gave the economy diabetes, and now it’s desperately trying to find a cure.
Your Move
In the world of economics, you can see what’s coming, but it takes forever to play out.
The problem is, by the time the average investor notices, it’s too late.
That’s where we are today. We can see some major cracks are forming in the system. But it may take longer to play out than we think.
That doesn’t mean sell everything and go into hiding. What it means is looking for the areas of the market that tend to thrive on chaos. Or finding pockets of the market that investors overlooked for the past decade.
Today’s market is tough. It’s not like the heyday of 2020 and 2021 where you got your fill of jelly donuts and everything seemed great. It’s more of a roller coaster that can make anyone green in the face.
Which is why your next move may be one of the most important you make as an investor.
Everywhere you look, there are pockets of distortion. One day, we get bad economic data, like the Philadelphia Fed Non-Manufacturing Index. It measures the direction of change of business activity for surveyed firms.
The most recent number was -20.3 versus a previous reading of -16.6. A sign of business weakness.
The next day, payroll numbers show a pretty solid job market. It sends conflicting signals to investors. It’s easy to get lost in the data and not know which way to turn.
Luckily, there’s no one better at playing those market distortions than my colleague Nomi Prins. She’s a master at reading between the lines and doing extensive, boots-on-the-ground research to stay a step ahead.
And she just released a new video presentation to help you get ahead in these distorted times. In it, Nomi tells you about one such opportunity that investors haven’t caught onto yet. Watch it here.
Regards,
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John Pangere
Analyst, Inside Wall Street with Nomi Prins