Investors Should Prepare for Inflation

CUSTER, SOUTH DAKOTA – If the Federal Reserve can get the economy going again, they’re going to let it “run hot.”

The Fed hinted at this in a speech last week. It’s a very important signpost about what we can expect from the future.

What does “let the economy run hot” mean?

More below. But first…

Greetings From the Black Hills

Greetings from the Black Hills of South Dakota…

I’m writing to you from our campground just outside Custer State Park. We’ve just got back from hiking the Cathedral Spires Trail in the park.

Kate is cooking rice on our camp stove. The kids are playing on the big rock next to our campsite. And I’m writing this message to you by hand in my little notebook while listening to the Allman Brothers Band on a little portable speaker.

Here we are out on the trail…

Also today, on the recommendation of a Postcards reader, we visited the Mammoth Site in Hot Springs.

The Mammoth Site was a muddy sinkhole 120,000 years ago. Mammoths would be attracted to it to drink and eat grass, they’d slip in, get stuck, and die in the mud.

The bones of hundreds of mammoths are now preserved there, suspended in dried mud.

Family Meeting

We had a family meeting this weekend.

“I want to propose a new plan,” I said.

For the last two years, my family and I have been traveling around the world by public transport, living out of a suitcase. We’ve been to India, China, Africa, Japan, and many other places.

This year, because of coronavirus, we’ve had to trade overseas travel for domestic travel.

We bought a third-hand pop-up camper from Craigslist in May in Florida for $1,500. Since then, we’ve been roaming across America, aiming at Alaska.

“Let’s spend the winter in Fernie,” I said.

Fernie is a small, little-known ski town in British Columbia. It’s deep in the Canadian Rockies, five hours from the nearest city.

“At the speed we’re going, we’re not going to make it to Alaska before winter. Fernie looks like a really cute town and it gets more fresh powder than almost any other ski resort in North America.

“We’ll rent a little apartment and spend the winter learning to ski and snowboard. It’ll be awesome. Maybe we’ll even make some homeschool friends? Then we can go to Alaska next year.

“We’ll just follow the Rockies north in our pop-up camper until we get to British Columbia, which should be sometime in the Fall”…

An Important Signpost

Turning back to the signpost I mentioned earlier…

In these Postcards, I’ve been making the argument that investors should be preparing for inflation. This is somewhat of a contrarian, “fringe” idea right now because there’s no inflation.

(With $13 trillion in negative-yielding debt, clearly, the credit markets aren’t afraid of inflation. And with commodities at 120-year lows relative to the Dow, clearly, equity markets aren’t positioned for inflation, either.)

However, I’d argue if there ever was a time where the pre-conditions for inflation were in place, that time would be now. We’ve got the money supply rising at the fastest rate in history (more on that tomorrow)… meeting the shortages of goods and employees I wrote about yesterday.

And finally, we’ve got a Fed who will welcome, nurture, and foster inflation until it’s “running hot.” This is a very important insight. It means inflation – if it arrives – will have long legs.

Deflation: The Fed’s Worst Nightmare

The Fed considers a little inflation to be a healthy thing.

It keeps asset prices rising, they say. It keeps people spending, borrowing, and investing. And it keeps the economy growing.

Since 2012, it’s specifically targeted an inflation rate of 2% a year.

But despite the Fed’s best efforts to stimulate the economy and boost inflation, it has hardly touched 2% since 2012. It has even threatened to go negative a few times.

Negative inflation – or deflation – is the Fed’s worst nightmare. Deflation triggers a doom loop of recession, debt liquidation, and defaults.

So here we have the Fed pouring fuel on the campfire and fanning the flames of inflation as hard as they can, trying to set what is, effectively, damp wood on fire.

I don’t know if the Fed will succeed. I suspect it will.

What I do know is that if the Fed can stimulate inflation, it will nurture that growth. It will maybe even let it rise to 3% or 4% before it does anything about reining it in, lest the fire goes out again.

In other words, it’s going to let the economy “run hot” for a while… before it raises interest rates or tightens monetary policy, even as inflation accelerates.

Last week, Fed governor Lael Brainard hinted at this policy change in a speech. You can read the full speech here, but here’s Bloomberg with the highlights…

For the Federal Reserve, this time really is different. Having learned a hard lesson in the last recovery – don’t tighten monetary policy too early – the central bank is leaning in the opposite direction. In practice, that means the Fed will not just emphasize actual inflation over forecasted inflation, but will also attempt to push the inflation rate above its 2% target. It’s a whole new ballgame.

What this means is, inflation – if it does get off the ground at some point – will have the strong tailwind of Fed policy behind it, possibly for years to come.

– Tom Dyson

P.S. The Fed acts as if it can control the economy by pushing pedals and twisting knobs. But economics is psychological. For example, once people lose faith in the future purchasing power of a currency, it’s very hard to get them to trust it again. Or once they begin to expect inflation, it’s hard to get them to expect disinflation. So I think the Fed is playing a dangerous game here, and any increase in inflation or decline in the dollar could quickly turn into a disorderly stampede. We’ll see.

P.P.S. Disorderly stampede or not, there is one way to play all this to your advantage… You see, the next five to 10 years are going to be a fantastic time to be a “fringe” investor, just as the 1970s were. I don’t want to miss it. That’s why I created an entire trade to capture this opportunity… and invested nearly $1 million of my own money into this strategy. Now, I want to help others get on the right side of the inflation trade, too. I explain it all in this video presentation…

Like what you’re reading? Send your thoughts to [email protected].

In Monday’s postcard, Tom wrote from Custer, South Dakota, where he and his family explored The Black Hills and Mt. Rushmore. One reader responds… while another asks Tom about his thoughts on digital currencies…

Reader comment: Staying in Custer, you are only a few miles away from French Creek – the mountain stream where gold was discovered in the Black Hills and what started the Black Hills gold rush. 

The Black Hills had been ceded to the Indians in the Laramie Treaty of 1886 but not withstanding the treaty, prospectors poured into the Black Hills and the gold rush was on. Indian tribes to this day are still demanding the return of the Black Hills as well as reparations for damages. 

The only vestige of the treaty is that Bear Butte, near Sturgis, is preserved for Indian ceremonies. More recently, the name of the highest mountain in the Black Hills was changed from Harney Peak to Black Elk Peak in acknowledgement of the original inhabitants of the area. 

In regard to the settlement of the Black Hills, gold was the impetus that started it. Most of the residual gold activity is in the Lead/Deadwood area, where there is still of the Homestake Mining infrastructure still standing, maybe an open pit mine or two still going, and numerous small claims where shafts can be found (I think there is one near Deadwood that you can tour through).

Reader comment: Hi Tom and family. I’m 71 and still have an incredible wanderlust. So needless to say, I love your Postcards. There was a question asked about digital currency and you failed to give a response. What are your thoughts about a cashless, digitalized currency and time frame?

By the way, my wife and I have been into gold and gold stocks for over 15 years. Our time horizon is about 10 years from now to use any of the accumulation, so thank you for your insights.

Tom’s response: I don’t like the idea of digital currencies. The free market ones have no intrinsic value. They’re just bytes of information in unlimited supply. I couldn’t possibly pay $10,000 for a bitcoin, especially when it doesn’t even appear to function all that smoothly as money, and there are new “bitcoin” incarnations entering the market everyday.

And the government ones… Well, aren’t the government currencies already digital? I don’t understand what new purpose a digital currency issued by a central bank would achieve, other than to reduce our personal freedoms.

There’s only one substance I recognize as money and that’s gold. (But I suppose I’d endorse gold-tethered electronic tokens, for convenience, if I was satisfied I could trust them.)

In this postcard, Tom mentioned that he and his family are indulging in fast food as part of their road trip across the United States. Since then, readers have expressed concerns for their health (here and here)…

Reader comment: Hi Tom, keeping gut flora healthy is a good idea for anyone who is prone to depression because serotonin is not just a brain chemical. Much of it is found in the intestinal tract! Lots of things, or combinations of things, can create “bad chemicals” in your body, whether it’s spirit-numbing stress, too much exposure to violence, a lousy diet… etc. The list is long. All the other positive things you are doing with your family are making the good chemicals – why sabotage that with so much fast food? No need to be extreme. Best wishes to you and your family.

Tom’s response: Thanks for the message. I understand your point. I’ve taken (extreme) counter measures to restore my health after so much drive-thru food.

Other readers continue offering Tom travel suggestions and sights to see… another asks for a travel guide…

Reader comment: I am enjoying your Postcards so much. I began reading about halfway through your world travel. I am retired and live in Arizona now but grew up in Kansas City, Missouri. I had a woman on an airplane who was from New York ask me if I rode a horse to work. I just smiled and told her that I lived in a suburb and drove a car to my office. It is good that you and your family are taking the time to see “flyover country.” I wouldn’t trade my Midwest childhood for anything.

Things are different now. The middle class is struggling. Wall Streeters do not understand why people who need to help themselves financially do not have a “mere” $2500 to invest in stock, bitcoin, or gold. You are seeing a sample of folks who do not have an extra $100 for emergencies. Most people have a good heart, though. Enjoy and cherish your travel experience. We readers are cheering you on. Be safe and learn a lot.

Reader comment: It sounds like you may be quite a ways north of Minden, NE, but if you can, go there and see the Pioneer Museum. They have a campground that is very cheap and a motel adjacent to the museum. I suspect that this is out of your way, since it’s near the southern border of NE and a ways east of Valentine. I guess you can save it for another trip. It’s well worth it.

Reader comment: Hi Tom, as a fellow Brit, I have really enjoyed your Postcards series x2. My wife and I have a road trip in the making for when the kids leave home (teenagers are not interested in this activity so I’m hoping I can scoop your travels together as a guide for when we get down to mechanics). Are you going to collate the experiences anywhere? It’s still 4-5 years off yet (will be loads of road trips and sea trips in different countries as soon as I’m financially free). As part of that process, I’m gradually shifting my portfolio – which is heavy in tech (and done very well) – into gold- and silver-based equities.

Tom’s response: Thanks for the kind words. I wasn’t planning on making a guide because I feel like we stumble from one place to the next with very little research or conscientious planning. We have learned to accept whatever we find. Of course, if there’s a place you’d like any info on, I’d be happy to share all we know about it. 

Reader comment: Dear Tom, Kate, and kids, love the Postcards and videos. I’ve been following you since The 12% Letter and Palm Beach Letter. I was intrigued by your train travels. Also been buying gold and silver for about 16 years. South Dakota’s Black Hills are beautiful and Mt. Rushmore is awe-inspiring. As you travel west, don’t miss “Devil’s Tower” in Wyoming. It’s a natural phenomenon. Enjoy America’s backroads and stay safe!

Tom’s response: On our way there tomorrow!

Reader comment: We live in the foothills in Littleton, Colorado, and have a townhouse in Winter Park, Colorado. I know you have colleagues in Colorado, but we’d be happy to put you up either place. We’ve lived in the front range of Colorado for almost 50 years and know our way around. More importantly, my two sons and I run three small hedge funds that invest in minerals, timber, precious metals, real estate, and the like, and would enjoy trading ideas with you.

Tom’s response: Thank you very much! We’ll be in Colorado next week. If we make it to the foothills, we’ll look you up.

Reader comment: Howdy Tom! I’d like to welcome you to Wyoming. I’ve been following your postcards and enjoying each one. I was pretty excited when I realized you’d be headed to Wyoming eventually. I’ve been with Palm Beach Research Group almost since the beginning (I think the project had been going about six months before I jumped on) and I’ve always liked your writing. I noticed you left, but I had no idea why until you revealed it in your Postcards. It’s GREAT to have you back.

I live in Cheyenne. I wish I could invite you to the great Frontier Days rodeo, but our RINO governor canceled everything he could cancel to help stoke up the COVID Panic. Anyway, I am at your service. If there’s anything I can do to help you out here in Wyoming, please let me know. Cheyenne isn’t really the “pretty” part of Wyoming, so I suspect you may be headed for the Cody/Jackson/Yellowstone area. But if you need any intel on Southeastern Wyoming, I’d love to help.

Tom’s response: Thanks! We will be passing through Cheyenne on our way to Colorado. We’ll look you up on our way through…

And as always, please keep writing us at [email protected]! We’re very thankful for your messages, and we read every note you send us.