November Inflation reading hottest in nearly 40 years

100 dollar bills yo
December 10, 2021 by Matt McCracken

To paraphrase Ronald Reagan, "The FED is not the solution to inflation, the FED creates inflation."  And inflation is hotter than it has been in a generation.  The CPI came in at 6.8% in November, the hottest reading since 1982.  For months, the FED has been insisting that inflation would be "transitory".  It is becoming painfully obvious that this is not the case. 

Isn't it interesting how the language near the end of all bubbles rings such a familiar tune?  They always find a way to define imminent market risks as "temporary",.."manageable"..."no big deal". . anything to convince us, lowly retail investors, that they have it all under control which bides them critical time to reposition their own portfolios.  Remember when an uptick in mortgage defaults would "never lead to contagion".  The issues in the mortgage space were always "contained".  Of course, that was until they weren't.   And later we find out, all the folks on Wall Street were scaling down the side of the Titanic and boarding their own lifeboats while the masses were left on the deck.  

The spin doctors will continue to spin a story that suits their narrative.  But unfortunately, economic laws supersede their narrative.  Wall Street can continue to bid up the stock market as they are today, in spite of inflation numbers that continue to surprise to the upside. And while the FED can magically print trillions of dollars, they can't magically produce raw commodities.  They can't force workers to put in long hours for the same pay that doesn't buy the same stuff anymore.  They can't magically unjam logistical bottlenecks.  At some point, there will be reckoning, one the FED can't paper over.  Inflation is the FED's kryptonite.  They can't solve the problem because they are the problem.

In the interim, media outlets like CNBC will produce stories like this one:

Here's an investment option to protect against inflation

In the article, the author pitches TIPS (Treasury Inflation-Protected Bonds) as an effective inflation hedge.  And while I have recommended TIPs to clients in the past and have a holding in iShares TIP ETF in a model portfolio that I am running for another firm, I would argue the advice in this article is misguided.  Over time, the best inflation hedge has proven to be an investment in real physical commodities.  Granted, at times investing in physical commodities can be problematic from a logistical standpoint, but one can easily buy paper contracts on physical commodities by using futures or swaps.  

In 2004, a couple of Yale economists wrote a detailed white paper titled "Facts and Fantasies about Commodity Futures" which succinctly explains how commodity futures best practically all available options when it comes to hedging inflation.  You can download a copy of their paper here.

I have been warning investors about an inflation surge for some time.  Just browse though this blog and you'll find several poignant articles on the impending inflation surge.  Consequently, we have shifted our exposure to inflation-oriented assets over the past few years.  And we'll continue to overweight inflation plays in our client accounts until Wall Street recognizes what Main Street is already painfully aware of.   While inflation may manifest itself in many ways the cause of inflation is singular.  Always and forever, inflation is simply too many dollars chasing too few goods.  So how does the FED, who is addicted to printing too many dollars, going to fix it?