During “The Great Recession” in 2007-2009, the Federal Reserve teamed up with the U.S. Treasury to put trillions of dollars into the “banking system” so businesses and people had access to borrowing money as needed. Fine idea, but no one was interested in more debt at that time. Instead, both businesses and people started to drastically reduce debt. For that reason, the economic recovery took several years to gain traction.
The Covid induced economic recession was attacked in a completely different way. This time the Federal Reserve teamed up with the U.S. Treasury and created the Paycheck Protection Plan (PPP) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. These two programs put trillions of dollars into “people’s bank accounts”.
There is a huge difference between asking and receiving a loan from a bank who doesn’t want to loan you the money, and a deposit directly into your pocketbook! This means trillions of dollars were immediately available to people who were impacted, so they could pay rent, buy food and as it turns out, make investments.
The Fed measures all liquid cash type deposits in the system using Money Supply-1 or M-1 as their comparison. Google M-1 and you will see a graphic available that shows M-1 jumped an unprecedented +34.20%. We are talking trillions of new dollars in our economy via your bank account, to go out and buy “stuff”. Add in State and Federal unemployment benefits and many workers did not choose to return to their jobs when they were allowed, as they would incur a “pay cut”!
There is a cost to goosing the economy with trillions in new money and that cost is moderate inflation. As I detail below in this month’s update, it is not late 1970’s early 1980’s 14% inflation, but more like 3%-5% per year for the next several years.
The Fed knows this! On August 27, 2020, Federal Reserve Chairman Jerome Powell announced a major policy shift. The Fed will now allow inflation to run “moderately” above their 2% inflation mandate “for some time”. Of course, the Fed doesn’t share what “moderately above” 2% means, nor did Powell explain what “for some time” means!
For today, let’s just suggest that 3%, 4% and 5% inflation rates are real and we need to know where to reallocate our hard-earned assets to best take advantage of what appears to be pretty obvious. History has proven that one of the best inflation hedges is ownership in Corporate America, especially companies that have enough pricing power to raise their prices at the inflation rate level so that “real” profits are not affected. In addition, precious metals and commodities do well. Certain types of real estate will also do well, but in this example, I am thinking of our homes, so residential real estate.
I am interested in your thoughts, comments, and discussion. Call e-mail me or just stop by the office and say "HI"!
Jim Lunney, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.