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Fleck's Thoughts
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Trickle-Down Inflation


The market was flattish and not very interesting through midday. In the afternoon, the indices nudged a bit higher to close with the small gains you see in the box scores. Away from stocks, green paper was flat, oil lost 1%, fixed income was slightly lower, and the metals were 0.5% higher.

The Road To Inflation Is All Uphill I would like to touch on the topic of inflation. As everyone knows, I have long held that, "In a social democracy…all roads lead to inflation," because that is the path of least resistance when the government can use its printing press. We have now seen the printing press being used extremely aggressively over the last decade, and yet there seems not to be enough inflation to suit the authorities, and certainly not enough to get people upset about the ridiculous yields in fixed income. Just look at Japan, where the 10-year JGB yields less than two basis points and they are doing everything they can to destroy their currency and create inflation.

The problem with printing money is you don't know exactly where the "new money" is going to end up. In this particular cycle, it wound up driving the price of assets of all shapes and sizes into orbit. So folks who owned those assets have been able to create sizeable-to-mountainous piles of wealth. Thus, the things that the high-end wants have gone up mightily, whether that's art, wine, real estate, or whatever sort of bauble might strike the fancy of someone with a lot of dough.

On the other hand, inflationary forces haven't really trickled down aggressively to the masses, although they will at some point. The average person has seen various costs rise, and sometimes a great deal, such as the cost of health care, education, or any number of other goods and services. Unfortunately, both the PCE (the Fed's favorite tool) and the CPI have been concocted such that they will never show much inflation. But I have also felt that people shouldn't need to see the government's report to know if prices are rising. Be that as it may, psychology is certainly not in the inflation camp yet, although it does seem that the deflation camp has finally died a slow death.

"Impossible," Meet "Inevitable" At some point there are going to be inflationary consequences to all of this money printing and it will be clear that there is no free lunch. One of the reasons stocks and bonds have been able to do so well and gold has labored (although it hasn't done too badly this year) is because people are so convinced that these central bank policies are efficacious and painless. Of course, neither of those things is true, but that won't get debated until the stock market starts to head lower for real, which it obviously hasn't even hinted at just yet.

In sum, I believe that there is liable to be a change in inflationary psychology in the coming year. I can't put my finger on what exactly might cause it, it just feels like it will be something that we will see that will be totally understandable and yet very surprising. So I'm putting this out there as food for thought.