Taps Coogan – December 27th, 2020

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As the debate continues regarding whether or not monetary and fiscal stimulus will overpower debt and demographics in the coming years to produce pernicious inflation, one thing remains clear.

If inflation eventually rises to a level that forces the Fed to tighten again, the two pillars supporting the most expensive market in history (ever more monetary and fiscal stimulus) will be on shaky ground. Keep in mind, there will be neither tax nor regulatory accommodation to ease the pain of a tightening cycle this time.

There are many theories explaining the perceived low inflation of the past decade. Considering that all of the deflationary pressure in PCE and CPI inflation arise from the goods side of the calculations, the relentless bear market in commodities since 2008 is a prime suspect.

As the prior chart from Crescat Capital highlights, commodities are on the verge of breaking out of that 12-year bearish trend. If they break out, one of the foundational justifications for the relative valuations of virtually everything in markets and the economy will start going in reverse.

These sorts of inversions usually end up taking much longer than expected. The Fed, promising not to raise rates in the face of inflation overshoots, will undoubtedly delay the first coupe rate hikes of this cycle. Yet one has to wonder, will refusing to react to rising inflation actually result in fewer hikes when all is said and done?

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