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THE INFLATION MONSTER: It’s Much Worse than we Thought … but Wait until this Little Monster Grows Up!

We could all be on the cusp of the most deadly inflation the world has ever experienced, due to a unique setup of global forces that have the power to accelerate that into happening in a surprisingly short amount of time. I’m going to tell you how that could happen more quickly than anyone appears to expect….

First, a short, fun documentary because it is important to understand that — as easy as it is for anyone to foresee what I’m about to tell you — it is highly unlikely our leaders will see it coming. You can assess how likely they are to avert this developing disaster by seeing how well they saw the present inflation coming and how well they averted that because that, too, was not hard to see coming for reasons I need not reiterate, having done so more than enough in the past. First, please watch this fun little video encapsulation of our great leaders’ best thinking — the ideas they believe are so solid they want to publicly stake their ground on them over and over:

Follow the money

Consider how the inflation fuel the Fed has created for years through its record-high balance sheet will pass through global markets when people see the fuel is actually being siphoned off. When the Fed’s past money creation didn’t go into the hands of consumers, it didn’t create inflation, except in assets, where it did flow and built up beyond anything we’ve ever seen in a stored and intentional wealth effect. Whenever it moved from stocks to bonds, it only inflated the prices of bonds, increasing their value as assets.

Monetary expansion only creates inflation where the money flows. So, when the new money doesn’t flow to consumers, we don’t see consumer inflation. When it stayed in financial circles, it created inflation in financial circles where inflation was viewed as a desirable thing. When we did see some of the Fed’s inflated money supply finally flow directly to consumers through various kinds of stimulus programs doled out by the federal government during the Covidcrisis, we saw a lot of consumer inflation starting to build right away. That happened because the new money met a supply shortage head-on due to fewer people being able to work under lockdowns and then due to fewer people being willing to work after they built up their share from the government’s dole via Robinhood-style stock investments. Inflation suddenly went on a tear when that combination of events formed.

HOWEVER, the worst of what can happen hasn’t happened yet. I hadn’t thought about it until recently, but there is an obvious backchannel by which inflation from Fed money printing can pour over into the consumer side of the economy, instead of just inflating stock market bubbles, bond bubbles and real estate bubbles, where it is all asset inflation … even if the Fed only gives its new money to banks and lowers its interest rates. There is a different kind of “asset” that has a major impact on consumer prices, which stocks and bonds do not, even though consumers aren’t the ones directly buying that asset, and it is now becoming the investor’s favorite asset. That is the commodities sector — all the stuff that goes into the things consumers do buy.

That much is the obvious part, but here is what dawned on me: Maybe you’ve already figured it out because it’s not difficult. The fact that it is so obvious but has never happened to the degree that I think is now possible, maybe even likely, is what makes it so scary. A unique alignment in global markets and central-bank action could cause un unstoppable flow of money into commodities.

As big money now flees falling bond values and falling stock values and soon, perhaps, falling real-estate values, we are entering a kind of Everything Collapse, which we’ve never experienced. The largest safe haven for stock investors no longer exists. That would be bonds, but they’re crashing worse than stocks. Like stocks, they have been falling all year (longer really). So, now all that money that the Fed spent years building up as a store of “wealth” creation in stocks and in bonds to create a wealth effect, is looking for somewhere new to chase any yield it can find as those markets fail.

Not surprisingly, a lot of that stored paper wealth has started to pour into commodities. Being short in supply, they were already inflating, and there is good reason to believe they will inflate more due to remaining short in supply. However, we have not yet seen a mad rush out of stocks — an all-out crash — that would normally move into bonds or into precious metals. When that great flush gets underway, some of that will go into precious metals, as one kind of trusted commodity. HOWEVER, for the first time in the lifetimes of most people alive, ordinary commodities like corn and wheat and oil are not only rising quickly but looking like they have a lot more room to run with the longterm threat of war and sanctions and supply-chain breakdowns and droughts and more Covid lockdown threats, and backed-up-shipping all looking like they are going to continue to rage through markets for many more months.

Therefore, we are likely to see all the major markets — stocks, bonds and real-estate — crash together. And the money simultaneously fleeing those markets has to go somewhere as it exits. Where will it go?

Follow the money to the money.

It will very likely pour into the one remaining major market that looks astoundingly strong — commodities. Yes, some of that flow will go into precious metals, but I’m not talking about whether or not your gold goes up, though I’m sure it will. A huge number of investors are about to realize that not only are ALL the commodities that people need or want via all the products they consume, looking like a sure bet; they are increasingly seeing large speculative gains because other speculators are making the same bet.

Currently, many investors appear to be still thinking old-school — thinking they have made vast wealth off stocks and bonds and hoping those markets will bounce back with a return to Fed easing — the “Powell put.” While a lot of money has fled these markets, a lot remains because of that false hope. I’ll show you in a minute exactly why that hope is false — why it cannot even happen without making things unbelievably worse. (And, I assure you, this is not an article promising some great revelation if you get to the end and then order some study or report to learn what you were told the article would deliver. I promise! Never read another word I say if that is where I go with this.)

Should the Fed capitulate with the standard Powell Put and go back to quantitative easing and lowering interest rates, it is almost certain to create hyperinflation, not just inflation, hyperinflation. That is something I, unlike many, have not said until recently. Those who have read me for awhile will know that is true; but there is a new dynamic at play in global markets that will likely function as a supercharger on Fed-fueled inflation if the Fed reverts to QE or low interest.

The least worst-case scenario is the true best-case scenario

First, let’s look at what happens if the Fed just continues its present course as promised. That is the most likely path, and it will be worse than most people think. If the Fed keeps tightening, which it has mostly only talked about doing so far, the market will keep reacting as we’ve seen it react over the course of the first half of 2020, going down, chunk by chunk, as it loses hope and as interest rates climb, driving bond yields up and, therefore, bond valuations down.

At some point, something big like Lehman Bros. breaks. Someplace there is a weakest hand in the too-big-to-fail world, and rarely do we know the garbage that hidden hand has been holding until it breaks. We’ve seen many times over the past two decades how that kind of event can materialize in just one day. Literally one day! That’s when we get one of those spectacular bear-market waterfalls where the Dow plunges 2,000-3,000 points in one day and then falls another 1,500 the next and still keeps stumbling down, crying for the Fed to save it.

Suddenly momentum over the cliff looks like it is feeding on itself and likely to turn cataclysmic. Normally, that is the point where Powell intrudes with his put and saves the market and becomes the reinstated hero of the financial world. Let’s look at what happens to inflation if he doesn’t jump back in this time because that is the best-case scenario for taming inflation. (Not the best for the stock market, but the strongest medicine for killing inflation by sucking down wealth and assuring a recession, which the Fed is hoping will be mild at worst — a soft landing. And this is the path the Fed is currently promising, though many investors do not appear to believe it will happen due to the Fed’s past pattern of capitulating to fear.)

In that kind of rush, where is that money in stocks going to flee this time? Into bonds as it typically has? Not so likely now that the promise of the Fed’ interest-hikes has been lowering bond valuations for months by driving up interest. Yes, there are some who are happy to get the higher interest and just clip interest coupons for the full term of the bond, but there are many who want out of bond funds that are loaded with older, lower-interest bonds, forcing those funds to sell their lower-interest bonds at a loss to pay out those who want to leave.

We’ve watched as both stock and bond markets crashed together recently. We are in a rare time when the bond market is no longer seen as safe haven. People are anxiously waiting to see what is the first major bond fund that will implode. Then there is QT, which the Fed has promised for the week ahead and to continue for months to come, which will begin to drive bond yields up even more as the Fed rolls off its bonds, forcing the bond issuers, such as the government, to attract new buyers in order to roll over their debt, bringing down bond valuations further by driving bond interest higher.

We could easily see, as we already have in spots along the way, a simultaneous rush for safety out of stocks and bond funds, forcing bond sell-offs. If both stocks and bonds crash simultaneously, we will see the greatest amount of money ever piled into stocks and bonds become a shifting load that has rush to find safety somewhere else. Where will it go if Powell doesn’t capitulate and allows stocks and bonds to keep plummeting because inflation is forcing his hand. What will happen if he really is as serious about fighting inflation Volcker style as he says he will be. (We’ll go to the worst-case scenario next where the Fed actually does capitulate, and I’ll show you why that could be the worst thing you’ve ever seen.)

If bond funds are imploding, the money from falling stocks won’t’ be going there. Normally, the money might just wait it out in cash, but cash right now is also losing over 8% in value a year, making it a bitter pill to swallow. It might go into gold and silver, but there is a whole new array of commodities on the market that have begun to look very attractive.

Commodities look like the safest bet for investors right now because we are in a very rare high inflationary environment that is being forced by an EXTREMELY RARE combination of shortage-causing forces all over the world. Everyone everywhere is trying to get their hands on critical commodities that can actually be delivered, and producers have rapidly raised what they will pay because they have to if they want to remain “producers.”

Sure, some of the money money looking for a real return, instead of a guaranteed 8% loss will pile into gold and silver as commodities, but a huge part, owned by people who have some sort of innate aversion to gold and silver, will pile into all those regular commodities that are already soaring because they are in short supply and more essential to immediate human needs than gold. (I’m not downplaying how gold will do here, as I think it will do well, but things you can eat and clothe yourself with and heat your home with and make other need-filling things out of will will have the greatest essential or intrinsic value … or, at least, the fastest rise in value.)

If all that money the Fed has spent years driving up the stored value in stocks and bond piles into the only market sector that still has legs — commodities — you’re going to see those prices inflate like never before. Simultaneous stock and bond crashes as the Fed keeps tightening will drive the flight of capital to the only market that is actually providing large returns at present and that looks safe because the shortage-causing factors are manifold globally and are not receding, making this time VERY different than past times where commodities are seen as risky because there are not all those shortage-causing problems.

That will quickly become a speculative chase just like stocks ran up on when Robinhood traders started piling in and finding ways to jockey the stock market up. Suddenly all the algorithms get programmed (or start reprogramming themselves as they’ve been designed to do) to chase the cash flow into commodities and to learn how to game other speculators in all the ways they did with stocks. The whole investment flow rapidly shifts to commodities as the last place to run if the Fed does not leap in to save stock and bond markets.

What happens to the price of commodities, eventually gets passed along to the consumer.

The true worst-case scenario is the one stock and bond investors are assuming is their best-case scenario

Now, consider what happens in that kind of speculative chase, as people figure this out, if the Fed does cave in and reverts to QE in order to save stock and bond markets as investors brought up in the world of Fed largesse believe will happen again. We’re already in an environment where inflation is burning everyone’s face off and where investors have already started to really like what they are seeing in commodities. As more investors experience new-found adrenaline speculating on the inflation-fueled commodities market and their psychology shifts in that direction, they will all realize, renewed pro-inflationary monetary policy will do more for their commodities investments, especially if it helps avoid a recession as they believe it will, than for stocks or bonds. In that case, why would they use that money this time around to push up stock prices now that they’re seeing they make better money in commodities?

The Fed and feds may not realize this for all the reasons of Fed and fed stupidity highlighted in the video above, but money may not just be streaming out of stocks and bonds at that point because people are fleeing a Fed-caused stock and bond sell-off. It may be streaming out even more because investors have become as adrenaline-charged and testosterone-driven about what they can make in the commodities market as they once were about what they could pile up in stocks and bonds in a world where once-risky commodities now look more like the sure-and-safe bet than either stocks or bonds.

So, what happens if the Fed decides, based on its dinosaur ways of thinking, that it needs to rescue stocks and bonds with a return to QE or lower interest rates when really the flow from stocks and bonds has started to pick up pace because of how investors are getting comfortable with and loving the rush to commodities? For the first time that I can think of, the red-hot market many speculators now want to dive into is not FAANG stocks or any kind of stocks and not the safety of bonds, but the assurance of great and rapid gains in commodities in a time of widespread and growing shortages. So, now where does the free Fed fuel go?

Most of it piles into the commodities market — from things as ordinary as corn and copper to as unusual as lithium, uranium and, of course gold and silver and other precious elements. Suddenly, we have not just the normal flight to safety, but a highly speculative adrenaline rush of irrational-style exuberance streaming into commodities, betting that speculators all over the world as well as industries that simply need those commodities will be sopping up commodities.

So, even by this path, the algorithms reprogram to bet on commodities, and suddenly the flow of all central-bank money that is being created anew in the hopes of saving stock and bond markets from deeper ruin, fuels the greatest speculative market in commodities the world has ever seen because 1) There is no alternative! 2) Commodities are in short supply and will be for some time to come, making them a potentially safer bet than usual, especially in an environment where all other bets look like they’ll certainly lose. 3) Many commodities are a must-have for survival; others are ingredients of things most wanted, so they have intrinsic value. 4) Money follows the money. Speculators move their money where they see other speculators are going.

Central banks may well think based on old-think that their return to money printing will fuel stocks and bonds and real estate again, just as it always has. They may well be wrong! In the present environment all their new money may just just add to the flow of available funds already pouring out of those markets to create a massive hyper-inflationary vortex into commodities.

That means we can, more quickly than anyone realizes, move from the month-after-month collapse of the long speculative stock and bond markets into a shift in capital flows toward commodities that will only become a central-bank supercharged speculative rush into the commodities market if central banks go back to printing money after that shift in investor psychology is complete.

Commodities go into everything sold; so, even if none of the free Fed fuel goes out this time as government helicopter money to the masses, the masses are the ones who will end up paying for it via hyperinflation. They may be losing their jobs so they have less to spend, but that creates even fewer products, as well as less production of commodities, maintaining upward pressure on commodity prices even as demand drops, so the recession does not bring a quick end to inflation as the Fed traditionally hopes.

Instead, the more the Fed lowers interest and expands it balance sheet, the more all that money and financial lubrication pours into the rapidly rising commodities market so that wealthy speculators make money hand-over-fist while those who don’t have enough disposable wealth to play in the word’s last-standing casino, experience the Weimar Republic or Zimbabwe where shortages and unemployment abound, but prices rise anyway because the Fed and other central banks only make things dramatically worse if they try to solve these kinds of problems in their familiar ways by creating more free Fed funds.

A recession in that situation cannot have its usual disinflationary effect because it does not curb the truly massive amounts of money central banks have piled into stocks and bonds and real estate from rushing as speculative investments that drive up the price of commodities even if no one is buying commodities to USE them. Just as we saw useless meme stocks and NFTs (non-fungible tokens) of zero intrinsic value go through the roof solely because speculators suddenly knew all other speculator money was rushing into those things, we can see money pour into commodities just on the bet other speculators will do the same. It may be a risky game because ultimately someone winds up having to take possession of the commodities, but it’s not like we haven’t seen crazier activity.

We saw people buying stuff as stupid as a bottled celebrity fart for thousands of dollars just because the buyer believed someone else would pay a few thousand more for the same rare fart. (Actual event, not made-up example.) We saw Tesla with its small production get bid up to more than the combined value all the other auto manufacturers in the world! When rationality about market fundamentals leaves the market and is replaced by rational deduction about what other speculators will do, markets become supercharged around the ridiculous. Only this time, they are gaming the food you eat and the fuel you need instead of the value of celebrity gas.

Who you gonna believe?

Are you going to trust the overvalued “experts” in the video at the top of this article to be the first to figure out how the market is changing and, so, never go into the kind of past money-printing that this time around will only fuel consumer prices higher by driving commodity speculators to raise the cost of all the basic ingredients that go into consumer products? QE will be an immediate and unmitigated disaster if it happens after the money flow has already re-channeled itself to commodities as the one-and-only place to make a fast buck because there is nothing else now that stocks and bonds and real-estate are all sliding together! That change in mindset is already happening and could firm up quickly, and it may be unlikely money will stream back into stocks when investors are already making bank on commodities.

So, that is how the world will either see 1) continued higher inflation if the Fed stays on its promised path of tightening until markets crash and money in those markets flows into commodities, or 2) potentially the worst global hyperinflation the world has ever seen if central banks start creating more money into that flow, assuming they and their governments remain as bright as they have already shown themselves to be in the video above. The Fed cannot control where the money goes after it has gone into bank reserves. It will go where money can be made the fastest or with reasonable security. In this present world, that my increasingly look like commodities and become a self-fulfilling loop.

Central banks have laid in a trap for all of us, not just themselves — assuring high inflation and a deep recession -or- hyperinflation and a global depression if they go back to money printing when lack of money is clearly not the problem and will actually exacerbate the problem.

Try lowering interest rates when commodity prices are roaring. Do you think people with low-interest credit available won’t think, “I could borrow money on the cheap and invest it into commodities for six months and double my money, easily paying off the loan?” Do you think banks won’t find or create pathways to invest the money flow from the Fed’s re-expanding balance sheet into oil and uranium and copper and zinc and everything that people either want or need now that all those things are the one kind of asset where all inflation is happening — where inflation was consider great when Fed funds were inflating stock prices, is now inflating commodity prices? Commodities become the one asset that keeps up with inflation because they are the one thing where the inflation is forming. Why would all money not flow into the one sector that keeps up with inflation because it IS the inflation? Fed free funds will be a massive accelerator for that kind of virtuous cycle.

The central banks will just be feeding the monster. If that sounds improbable, just think of the black swamps where we’ve seen it happen — in Germany after WWI and in Zimbabwe and anywhere where supplies were short while money was large and made larger by central-banks printing lots more of it.

Money will follow the money. So, if central banks create money or lower interest into the present environment, you’ll see the worst inflation of commodities ever, which will become the worst inflation of consumer prices ever, even if no one is buying, and it will happen faster than you ever thought it could. And the people in the video above certainly will figure it out until it is way too late! That can happen even in a shrinking, recessionary market for the simple reason that no one will produce and sell items for less than what it costs them to make them, even if they are selling a lot fewer of them. You cannot make up a loss on volume! Commodities drive those costs.

Central banks have no power to end shortages, but if they pump money into shortages when stocks and bonds are falling badly, they will certainly drive up the cost of everything just like they once did stocks. And the more that inferno becomes a vortex, the more investor money it pulls into its funnel at the bottom and shoots up into sky-high prices for everyone on earth.

The new thought for me was the realization of how quickly, even in a place like America, hyperinflation could take hold, and all it requires is that the commodities market becomes the last refuge that all money flees to during a simultaneous market crash in stocks, bonds, and real estate now that global shortages have added a level of perceived safety to commodity bets and an acceleration to commodity prices via speculators, gaming the market like never before. How long will it take the people in the video above to realize their new money is only jet fuel on that fiery vortex?

Jan van Rooyen, CC0, via Wikimedia Commons
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