What the deflationists are missing
and where your investment dollars should be
Many are still calling for deflation. They point to things like debt and demographics. I will acknowledge that these two factors do play into deflation. As debt gets larger, growth becomes stymied, leading to deflation. As the population ages, less consumption occurs, leading to deflation. However, both of these factors are currently being dwarfed by the factor favoring inflation. The factor pushing inflation through the roof is the Fed’s reckless monetary policy.
They continue to have their foot on the gas well after they’ve hit a wall. After 2020’s massive money pump, 2021 experienced a higher than average year in money printing. We are now beginning year 3. The Fed is slowly reducing their expansionary policy. This means they are reducing the amount of bonds they are purchasing. They have only talked of balance sheet reduction and interest rate hikes. Neither of these will materialize for months. At the earliest, it could be March.
This is putting incredible pressure on the economy. This combined with the port backlogs are showing up at the local level as shortages and empty shelves. This is why hashtags like #BareShelvesBiden are trending.
The regulations that are piled onto logistics companies aren’t helping matters. We are in the early stages of a vaccine mandate for truckers to cross the northern border. This will further exaggerate the problem. It will lead to higher prices as scarcity comes in to play. In addition, California’s trucking regulations are atrociously strict. They have a limit on how old a truck can be before it can no longer be on the road. Currently trucks of model year 2007 or older will not be eligible for registration renewal. The ports are worse! Currently they won’t allow a truck older than a 2014 model to operate at the port.
This is all part of the “zero-emissions” goal. It’s consequences are disastrous. When these programs were put into place, the unforeseen ramifications were fewer available trucks to deliver in the state. New trucks are expensive costing between $150-$250k. This doesn’t include the taxes, registration, and insurance that a driver would need to operate. Another consequence of this legislation is the value of the older model trucks. Since the state won’t register them, no one will be interested in buying them. Their values will plummet.
By requiring logistics companies to update their fleets and private owner-operators to do the same, shipping just became a lot more expensive. This is before we add in the cost of fuel. This is where team “deflation is coming” are getting it wrong. “Green” legislation coupled with loose monetary policy has lit an inflationary fire.
Unfortunately, this is getting compounded by poorly thought out investing principles by some of the largest money managers in the world. I’m speaking of “ESG” investing. I’ve written of the perils of following this kind of investing advice but it seems Larry Fink wasn’t paying attention.
In his latest letter, Mr Fink (who manages over $9.4 trillion dollars) has doubled down on “stakeholder capitalism”. He believes investors need to take responsibility for investing in business that harm the environment. This is putting severe strain on the oil and gas industry. Due to lack of investment, research and development is hampered. This is going to lead to some severe shortages. While it’d be nice if the world could go “green”, the truth is it isn’t ready yet. Renewable energy technology is not yet at a sustainable level. This is going to put serious price pressure on energy. This will be the next big wave of inflation to hit the economy.
When the price of energy goes up, everything goes up in price. Energy is the lifeblood of the economy. This is especially the case for the global economy. Getting products moved from one place to another to take advantage of cheap labor will become prohibitive as the cost to ship rises through the roof. We are at the early stages and oil is already above $80/barrel. This is where my investment dollars are going. Energy will be the next bull market. With the “ESG” crowd at the helm, this theme has legs to run. In an eerie parallel to Covidiocy, they will double down on their failed policies until the ship goes down. Only when others admit defeat for them will they relent.
