2 successive phone calls last night - one with a close friend and one with my youngest brother - found me listening to woes of massively rocketing prices. Meanwhile 5 properties that have been for sale in our village - some for over 3 years - were all bought up in the last few weeks. I like property as a barometer because it's rational and hard for government to jigger around with. Yup I know, all deeply anecdotal but what is life if not a rich tapestry of small stories. Anyway, it prompted me to dig a little deeper.
Yes, cost-push inflation is only one component of the total inflation picture and many of these stories are already well-rehearsed … granted many commodities have retraced significantly in the last few days on an epic sell off but the underlying price strength is still in place.
It is said for manufactured goods the raw materials represent about a third the total cost, for foods about 95%. Additionally, once we fully unlock you may expect the velocity of money to rocket, especially as it becomes apparent supply chains remain “challenged”. I would be happy to take anyone on a bet that most goods from pre to post covid (ok, needs definition) will rise very roughly double to threefold before normalcy returns… there is no exacting here but the point is made. By comparison, property rose fivefold between 1972 and 1983, the cost of goods rose 3.7-fold (measured by the Bank of England inflation calculator) - see here https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator to choose a couple of measures.
The key thing is … government has been trying to cook up inflation for years to deflate away their profligacy and the burdening debt which has now reached epic proportions. The UK’s government debt exceeded the size of the economy last year for the first time in 50 years. In addition, there is massive inter-generational wealth disparity. A serious bout of ‘transitory’ inflation sorts out both in one. Effective government debt will halve or more, younger folk will have to negotiate for higher wages but in time they will adjust to higher prices, while older savers on final salary schemes and pensions who are predominately "locked in" will find their purchasing power crushed. Baby boomers … going boom. We saw this in the 1870s, the 1910s, late 1940s and of course the 1970s. It's called a “reset”.
Onto a more contentious issue … covid. Over the last 2 months the UK has had less than an average of 10 deaths per day from covid … or from people "who have have been tested positive with covid in the last 28 days" … so the figure includes non-covid causes. Yes, 2 months - government figures. https://coronavirus.data.gov.uk/details/deaths Meanwhile deaths from cancer are running at 45 times these levels and likely to accelerate because of missed appointments etc. And yet the boss has locked us down for a further near month. One plausible answer is BoJo is simply deranged (it carries) and in hock to a group of seriously misguided and deluded (… if not scary) statisticians, but a better explanation to my mind is covid has FINALLY given governments the wherewithal to create a ’transitory’ inflationary bang. Politicians are nothing if not opportunistic. Constrain spending and the population, juice them up with cash, induce supply chain shocks … release the handbrake … bang. Not proven, but it resonates.
The simple truth is our basic democracy is flawed … it encourages government to overpromise, then overspend to win our love … and votes … and truth is you don’t deserve the largesse … and we certainly cannot afford it … and its then paid for by additional money printing or if you prefer, debasement of the currency. And it builds up. Well this (again) is the reset.
Long and short. My sense is we are back to the 1970s.
If I am right … and I think I am … then owning hard assets is where you need to be. And out of cash. This is rather a long way around for saying that gold looks a pretty good bet and the massive price correction gives, in my view … a great buying opportunity. Nope … I don’t sell gold … so not vested interest here … just my belief. Between 1970 and 1980 the annual average gold price rose $38.90 to $595 - a 15 fold increase - that’s equivalent to gold being $26,500 today … but of course gold prices had been artificially constrained in the lead up. So nope, that's not a forecast … but hopefully you get the picture.
But of course the 70's were not all bad … for a reminder you see here (turn the volume up) … https://www.youtube.com/watch?v=5sYPg32rBzo