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Soaring Inflation at 40-Year High – Is a 100-Year High Ahead?

Dohmen Capital Research's Photo
by Dohmen Capital Research
Thursday, Mar 17, 2022 - 1:10

By Bert Dohmen, Founder
Dohmen Capital Research Group

 

The market up-move since March 2020 was caused by massive credit and liquidity creation by the Fed, not traditional fundamentals. In fact, it was the biggest money and credit creation of any central bank in history.  

It is amazing what 5-10 TRILLION artificial dollars can do for stocks. The crash of March 2020 turned into a giant stock rally in April 2020. But all good things come to an end. In 2021, the rally faltered, sector by sector. The small cap index of 2000 stocks, the Russell 2000, topped in March 2021, traded sideways until November, and then had a quick breakout to a new high that didn’t last.

At that time we said in our Wellington Letter that if it turned out to be a false upside breakout, as we suspected, it would be an important market top and lead to a painful decline for the bulls.

When the IWM, the ETF for the Russell 2000 Index, turned down in November 2021 and broke strong support (top horizontal blue line), we wrote that the false breakout was now confirmed as it became clear to us that a bear market was ahead. See the 2-day chart of the IWM below, which shows the false upside breakout last November.

IWM

The long “distribution” period of stocks, when stocks go from the big, smart money to the not-so smart money, tells us that the bear market will likely be long and deep.

There will be rallies, as there always are in bear markets. We had several brief market rallies already this year, but none were able to propel the major indices to new highs. Bear market rallies are usually short but sharp to get the attention of the bulls who make their decisions with emotions.

There were the rallies attributed to the “reopening” of the economy, the Fed not tightening severely, inflation being perhaps “transitory,” and then Covid cases declining.

But now the markets face a return to reality. The Russia-Ukraine crisis forced the acceleration of the big selling that actually started in November of last year. The Ukrainian crisis made it easy to make all the heavy selling look like it was emotional and due to the war.

The actual reason for the selloff is galloping inflation. But that is now also being blamed on Putin and his war. However, it’s important to point out that in this phase of the inflation cycle, many stock sectors rise very nicely while others plunge.

In November we wrote that the selling of key stocks was “massive” and so heavy and persistent that we couldn’t recall ever seeing that before. We even wrote that this was probably forecasting a very bad market and economy for 2022. Did the big, well-connected investors know about the planned war for Ukraine? It makes you wonder.

Starting now, the Fed will start hiking interest rates with today’s 0.25% increase, it’s first rate hike since December 2018. Contrary to popular opinion, that is not “tightening” money although for economists that seems synonymous. Therefore, the inflation trades are still “operative.”

In fact, if the Fed does not sufficiently reduce its balance sheet by taking money out of the system, then higher interest rates will actually increase inflation as it increases the cost of doing business.

Currently, the Fed is still adding billions of dollars every month. The Fed is far behind the curve of market and inflation forces.

Today, the Fed did not announce the start of reducing its balance sheet. They instead said they would leave it for the meeting next month. That confirms how timid their inflation fighting is.

Only reducing its balance sheet, or some kind of credit tightening, will reduce inflation. But the current Fed wouldn’t dare do that as it would cause a recession that would jeopardize the mid-term election results this year.

Therefore, as we forecast in our Wellington Letter, inflation will continue to rise, alarmingly. Not wanting to cause “tight money”, the government will try coercive governmental policies to stop prices from rising. Everyone will be blamed, such as “greedy business people,” but the real culprits won’t be mentioned.

We are already hearing about “rent controls.” Count on them. Then gasoline price controls, and then price controls on food.

Price controls were tried by President Nixon in 1971. It was a fiasco.

The ‘Secretary of Interior’ told us several years later that they started with a short list of items for price controls, which soon became a super long list. He gave this example of how they didn’t work: they imposed price control on potatoes. Then growers used potatoes for making potato chips, which had no price controls. There was a shortage of potatoes, but not potato chips.

The free market always tries to adjust. When it can’t, it leads to interesting distortions.

In 1978, we had predicted double-digit inflation, leading to a 20% prime rate in 1980. But Wall Street laughed at our young firm, Dohmen Capital Research, at the time. But the prime rate hit 20% in early 1980.

Late last year we predicted that inflation would first go back to the high of 1980, 40 some years ago. We are there now.

Late last year we also predicted that eventually inflation would hit a new US record high, exceeding that of 1917 when the CPI was 19.6%. The “new official” CPI may not reach that because of the manipulations in how it is calculated. However, actual inflation should get over 20%.

What makes us think that? The stimulus the past two years was much greater than that of the years preceding 1917, which is when the balance sheet tracking began at the Fed, at a time when inflation reached its historic high. Before 1917, the Fed was not even creating any money and credit.

Interestingly, 1917 was also the year of the last true “pandemic,” the Spanish Flu, which is said to have cost 100 million lives. The last two years of Covid was a “fake” pandemic designed by politicians and their puppets in the governmental medical agencies. It had different goals.

The next few years will not be pleasant and investors will try to endure a tumultuous environment. The big money will be made on the short side of the market, but that will require the most experienced guidance. In fact, in a recent article published on Zerohedge, we showed readers how money can be made in volatile markets like this one.

In our upcoming article we will explore what to expect for the markets this year, and next. We will also introduce you to a tool we developed to reveal the true long-term trend of the market and what controls these important major trend changes. It is not what you always hear.

Stay tuned...

 

 

 

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