Taps Coogan – October 13th, 2020

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One of the most peculiar features of the current economic landscape is central banks’ strong desire to push inflation higher despite the fact that higher inflation may represent the greatest long term threat to today’s extremely high asset valuations. Discussing this phenomenon is Bleakley Advisory Group CIO, Peter Boockvar, who noted in an interview with CNBC that rising inflation “could handcuff the Fed’s ability to do more easing, lead to higher interest rates would which crimp a very credit dependent economy, and can also hurt those higher PE stocks…”

The paradox of our era is that it is the failure monetary policy to efficiently transmit stimulus to the real economy that has made it so effective at elevating financial markets. The greatest risk to financial markets is arguably the ‘improvements’ in the transmission of monetary and fiscal stimulus to the economy since Covid, things like stimulus checks, payroll protection, small business loans, etc…, that pass more quickly through the banking and financial system (however imperfect/unwise these new programs may be in the long run). That’s because they more directly stimulate economic activity and add directly to the money supply.

The Fed has already started to try to get ahead of this problem by doing the only thing they can: raising the inflation target above 2%. Presumably it will be a decently long period of time before the Fed is forced to tighten and the market has to face the music. In the meantime, we will keep pretending that averaging rapidly rising food, housing, education, and healthcare costs with cheap goods made by slaves in China produces a number that has relevance to anyone but the Fed.

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