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®
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
This weekly article reflects news, commentary, opinions, viewpoints, analyses, and other information developed by Denk Strategic Wealth Partners for use with advisory clients only and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email, please contact us at 602-252-8700 or by e-mail at firstname.lastname@example.org. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.
Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.
Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.
The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations, or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.
Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.
*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.
Please see Denk Strategic Wealth Partners’ Client Relationship Summary here https://denkinvest.com/?page_id=7099 for succinct information about the relationships and services DSWP offers to retail investors, related fees and costs, specified conflicts of interest, standards of conduct, and disciplinary history, among other matters.
LFS’ Regulation Best Interest Disclosure Document, which describes LFS’ broker-dealer services, and other client disclosure documents can be found here <https://www.lfg.com/public/lincolnfinancialsecurities/clientinformation/overview/disclosure>.
Past performance is not a guarantee of future returns.