Is Inflation Coming?

One month ago, in my introductory remarks for the January issue of The Wealth Advisory, I took a look at the projections for U.S. GDP growth in 2021. At the time, the consensus was that a good year for growth was on the horizon, perhaps as strong as 4.2%.

While any solid growth would be welcome after 2020, I thought 4.2% was too low, and I said as much: 

The strong forecast for GDP is based on pent-up demand and at least $1 trillion in what I’m going to call “unspent money” sitting in Americans’ bank accounts. I won’t call it savings because saving money is a deliberate act. And I’m pretty sure we all would have rather spent that cash already.

Instead, we’ve mostly just sat at home, doing very little, for the last year. So as far as pent-up demand goes, let me just say this to the grumpy crowd: Well, DUH!

If you think about it, that pent-up demand growth could come in way better than 4.2%. For instance, I wanna sit at a bar, eat a burger, and watch a baseball game so bad, they can charge me $85 for a Tito’s (splash of soda, lemon, no lime — limes suck) and I won’t bat an eye. 

Well, a couple of weeks ago, the strategist types over at Bank of America raised their number for 2021 growth to over 5%. OK, I’m a little vindicated…

Never to be outdone, last week Goldman Sachs jumped the shark, with GDP growth of 7%. 

Seven percent. That would be the biggest annual gain in 40 years.

Eyes on the Prize

Yes, I am bragging a little that my forecast is gaining some traction. But mostly, I am pointing out that it is my job to look ahead, plot the course of trends, sprinkle in what I know of human and investor behavior, and then let you know what we believe will be good places for your money. 

Of course, I won’t always be right. No one is always right when it comes to their investments. 

Now, about that GDP growth thing…

You probably noticed that stocks have been a bit weak lately — kinda hard to miss. And if you listened to the party line of the financial media, you heard stuff about inflation expectations rising, bond yields rising (which means bond prices are falling), and what all that means for equity valuations that are, ahem, on the high side. 

These are all valid concerns. We do not want to see inflation and the Fed go head to head in some kind of economic cage fight. I suspect the Fed would probably lose, and I know investors would. 

Safety or Growth? 

There’s a theory that says that at some point, rising bond yields become competition for stocks. When conservative investors can get the same return that they would get owning stocks, why take on the added risk of stocks? This point is usually said to be when the 10-year bond yield is the same or higher as the yield for the S&P 500. Right now, the S&P 500 is yielding a little over 1.5%, and the 10-year is a little under 1.5%.

The fundamental definition of inflation is too much money chasing too few goods. I do not think that’s the issue right now, but with a couple trillion sitting on the sidelines and more coming in the form of stimulus, you can make the inflation argument work.

But why does anyone want to make this argument and scare the bejeezus out of individual investors? 

A couple of thoughts on that: First, have any of the talking heads warning about inflation made any mention of 5%–7% GDP growth? Probably not. Growth that strong goes a long way toward nullifying the inflation thesis. 

Will prices rise with 7% growth? Yes, they will. So will wages. So will jobs, spending, capital spending, investing, and so on…

When prices rise from increased economic activity, it’s not the same thing as inflation. 

This explosion in GDP growth could be a global phenomenon. And we should be selling stocks ahead of that?

Umm…

That brings me to my second thought: You know the goal of investing is to BUY LOW and SELL HIGH, right? Well, stock prices haven’t exactly been low for a while. The big money doesn’t want to sell. They know what’s coming, so they’re trying to get you to sell. They’d like to get a little fear in the market, so prices will drop some, so they can at least buy lower.

Look, it’s always a good idea to take some money off the table when your stocks make big gains. It’s good to both lock in profits and to have some cash ready for new opportunities and for when stocks sell off, as they always do. 

But the fact remains that the big money is made by holding your investments. And that’s exactly what I think you should do. 

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.