Funny, isn’t it? Just a few short months ago, when Covid was screaming and supply chain issues were
becoming ‘a thing’ we were being told that, “Well, yes, we do have inflation, but it will be transitory.
Have a seat. And a beer. Things will be fine.”

Now it’s only fair, and also reasonable, to point out that not everybody was on board with that. A goodly
number of highly touted economists spoke forth with the highly touted idea that; ‘Ya know…tossing in a
couple of trillion dollars into the economy might have some hurtfulness on the value of the dollars
already circulating.” And — on top of that – printing up and handing out a bunch of free money to people
who neither asked for it — nor demonstrated any need for it – might even exacerbate the problem.
We are reminded of the words of Milton Friedman, the fellow who was probably the greatest monetary
economist ever: “Inflation is always and everywhere a monetary phenomenon in the sense that it is
and can be produced only by a more rapid increase in the quantity of money than output.”
If you believe, as we do, that Dr. Friedman spent most of his time barking up the right trees, a scan
of the current financial horizon may put a new wrinkle on your forehead.

1. Real output growth among Western economies is falling it may even turn negative with the
next set of reports.
2. The favorite tool for fighting inflation is monetary tightening, i.e., raising interest rates.
3. Raising interest rates reduces the pool of capital available for investment.
4. Reducing levels of investment will further slow economic growth.
5. Now, go back to the top of this list and start over.

One thing that (somewhat) mitigates the effect of inflation is high GDP growth. It is sometimes argued
that as long as GDP growth outruns inflation the spread between the two is still economic growth
so…things are not so bad. But wait. Finding that balance is tricky. Let’s take a short walk down memory

The list above looks a lot like the conditions we experienced in ‘78 – ’79: beginning near the end of the
Carter administration. Then GDP and inflation were running in a tie and invented what we would come
to call stagflation: Inflation and a stagnant economy. A terrible mix.
Carter was replaced by Reagan in 1980. R.R. agreed with his Fed Chair, Paul Volker, to bite the bullet
of high (really high) interest rates to tamp down inflation. It worked. Oh goody, so, we can just do that
again, right? Sorry, not so fast.

There are two important differences between then and now. Our national debt is about 30 times larger
now than it was then. Servicing that volume of debt at high rates would now be a much greater burden
than ever before. The second difference is that Volker knew that once inflation was under control, he
could drop rates and carefully re-supply liquidity, to banks, the consumer, and the markets. Thanks
largely to that strategy the United States began three decades of low interest rates and remarkable
economic growth. The difference is that we don’t foresee that rates will be driven high enough to then
enjoy much of an affect from lowering them.

Ron’s Market Minute — Lots of Things on my Mind

There are certainly many topics we could visit, but our main mission is to give you something relevant
and immediately useful regarding very current market actions.  As I skimmed the morning news
websites today, I find that most of the topics deal with inflation which at 7.5% has everyone newly
spooked. So, despite our eLetter already having focused on that today, I feel there’s more to be said.  If
I were writing a much longer missive, I would also deal with the changes in world bond markets but
guess that needs to be saved for another time, perhaps next week.

Current market conditions are weak for both stocks and bonds. Most economic statistics indicate that
the economy is strong but remember that markets look beyond the current situation. Inflation is running
hot enough to get everyone’s attention, and this week in particular it’s the tale of the two-handed
economists. Some are very certain that inflation will soon peak and begin to decline. Others are equally
strongly convinced that HIGH inflation will be with us for the foreseeable future. My belief is that no one
really knows because what happens will depend on decisions not yet made and events that have not
yet happened. The only way one can make inflation predictions is to make guesses about things that
are at this time not yet knowable. As we mentioned above, inflation can be tamed quickly with
aggressive action by the Fed to raise interest rates to pull back the excess liquidity. However, that kind
of action would very likely result in a recession and a bear market. That would, of course, be a political
problem just at a time when the Biden administration is a) already overloaded with political problems
and b) facing mid-term elections. But without these actions, the bull market might soon resume, but with
inflation likely to continue and perhaps even accelerate. 
In a perfect world, the Fed would like to create a ‘soft landing’ in which the economy slows just enough
to bring inflation down WITHOUT causing an ensuing recession and bear market.  The Fed’s actual
track record regarding soft landings, however, has not been good. (And that’s being generous with my

I don’t know how this current market environment will develop. This is one of those times when
forecasts are difficult. It is also one of those times that we need to be aware that those who are making
firm forecasts are likely doing ‘wish-casting’ or ‘hope-casting’. It’s great to have wishes and to be
hopeful. However, wishing and hoping are not good strategies. Instead, we’ll wait a bit for clarity.


Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk


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