High Inflation is Always “Transitory” and Always Ends in Recessions or Depressions

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by Dohmen Capital Research
Saturday, Jun 26, 2021 - 9:08

By Bert Dohmen, Founder
Dohmen Capital Research

An interesting article on Zerohedge on Friday was titled: “BofA Crashes The "Transitory" Party: Sees Up To 4 Years Of "Hyperinflation."

Such a headline gets my attention. Bank of America shocked some observers by saying it expected a period of 2-4 years of “hyperinflation.”

I don’t agree with “hyperinflation.” Generally it is defined as a 50% rise in prices PER MONTH. We won’t have that. However, double-digit inflation should be considered, except for the faulty measures from Washington. What are my reasons for that conclusion?

Over the past year I have given my view on future inflation. Here is what I see now.


The most recent inflation numbers are the highest in 29 years. Fed Chair Powell calls that “transitory.”

He could be right, depending on the definition. It is true that all high inflation periods eventually end. In that way, they are all “transitory.” Life is also “transitory.”

What causes high inflation periods to end? Only one thing ends inflation: tight money, meaning the unavailability of credit, and a resulting deep recession-depression.

Given the current attitude in Washington, tight money is a long ways off. Any signs of serious economic weakening would be countered by the Fed and Congress. The latter will do what they can to create more money out of thin air to avoid losing votes. And they do it with OUR taxpayer money, to be repaid in the distant future by our children and future generations.

To say that inflation now and in the near future is “short term” is a joke, or intentional deception. All factors for inflation are in gear as never before at this time in an economic cycle, including:

  1. Unprecedented governmental spending programs flooding the markets
  2. Unprecedented federal reserve support programs
  3. Supply shortages
  4. Labor shortages
  5. Unprecedented household savings because of federal programs, all triggering what we call…
  6. “Supermarket inflation,” which eventually trickles down into...
  7. Higher prices for everything, including “services.”

The bottom line is that borrowed money is now “free,” i.e. market interest rates minus actual inflation, is below zero.

That means it pays to borrow as much as possible and put it into good assets, not speculations such as cryptos, NFTs, SPACs, or pump & dump stocks as GME, AMC, among others.

This won’t end until the money for speculation dries up. And the Fed is the biggest factor for that although there are others. The Wall Street Journal once called me a “leading Fed Watcher.” Is that good or bad? Actually, I do more than watch. I determine the impact of what they do.

In our Wellington LetterI compared the similarities of the current environment with 1978 and what the new Fed chair, G. Willam Miller, said when inflation was rising. He declared he would not fight rising inflation with “tight” money, but through interest rates.

For us that was a green light for buying stocks.

At that time, Wall Street analysts turned bearish on the view that rising rates would cause a bear market. My work showed the opposite: I wrote that the Fed chair’s statement was very bullish for stocks because he promised not to tighten the availability of money

You see, our “Dohmen Theory of Liquidity & Credit” formulated in 1977 said that availability of money was the major determinant of stock market trends, not earnings, dividends, or other popular metrics used by the majority of analysts. Those metrics are like driving a car by only looking into the rear view mirror.

Wall Street thought my bullish call was ludicrous. My reasoning was that with availability of money staying plentiful, it would just cost more to borrow, and that was key as it would drive up prices. Companies would raise prices to recoup the rising cost of money, driving inflation up even further. People would borrow more, and speculation by knowledgeable investors would allow them to make great profits.

In fact, at the time, I predicted the prime rate would soar to 20%. In a seminar, the chief economist of Goldman Sachs said that such a high rate was impossible. But in 1980, the prime rate got to 20%.

Then it dropped when the new Fed chair Paul Volker decided to tighten money. But by December 10, 1980, the prime made a new high of 21.5%, as I had predicted in a new forecast in mid-1980.  

How did I predict the new high of 21.5%? There are two reasons for interest rates to rise substantially for shorter periods: 

1. Inflation expectations

2. A scarcity of money to borrow

You see, the tightening by Paul Volker caused a short-term shortage of money, driving interest rates higher.

Because of money tightening, we predicted a bear market and a strong recession, and suggested ways that investors could benefit from that. Once again our clients were on the right side of the markets.

Some of our wealthy clients made fortunes with these forecasts, on the way up, and the way down.

Our Theory of Liquidity & Credit still works today, even in the current market environment.

You see, it pays to go against popular opinion. You want to be in the “winning minority.” The majority doesn’t win in the markets.

In September 2019 the Fed announced it would inject massive amounts of liquidity each month to resolve the “repo crisis.” That turned us bullish again in September and we said that market up-move would last until early January 2020. As we know now, that was right on target.

In January 2020, the headline of our award-winning Wellington Letter was, “The Bears Will Finally Get Their Turn.”

The crash of 2020 started the following month, which was precisely called with our “Special Bulletin” on February 23, 2020, one day before the start of the market crash. That issue provided a clear warning to our members in its title, “The Financial Storm Begins.” At the end of the issue, we wrote:

“…based on late last week, there is a chance that the dam may break.”

Here is what happened the next day on February 24, 2020:

  • Worst one-day point drop for Dow in history (-1190 points)
  • Worst one-day loss for S&P 500 since August 2011 (-4.42%)
  • Worst week for S&P 500 since 2008 (so far)
  • Fastest correction in history (dropped more than 10% in just 4 days)
  • 10-year T-bond yield dropped to lowest level in history (1.26%).

The one important thing not to forget: it is a game of musical chairs. When the music stops, you must have a chair.

We have successfully identified “when the music stops” for 45 years for our astute members. Our advanced technical analysis, combined with our “Dohmen Theory of Liquidity & Credit,” has worked for us and investors around the world.

Join the “winning minority” today with our limited-time special offer for new members:

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