Can China Reverse the Current Inflation Trend?

• Although supply chain disruptions are clearly a contributing factor to current inflation, China’s influence on inflation should not be discounted.
• Prices are still significantly higher, but have recently fallen, coinciding with Chinese authorities cracking down on commodity speculation.
• The recent correction does NOT mean we can stop worrying about inflation.

Last week we spoke about how a hoarding mentality can have a meaningful impact on inflation. Recently, the Chinese government took an important step in attempting to stop that hoarding reaction in China, which is, of course, the world’s primary user of raw materials. When the CCP announced it would have a ‘zero tolerance’ policy toward commodity speculation, commodity markets quickly corrected. But make no mistake, we remain well above pre-pandemic price levels, as shown in the 5-year charts on the following page for key commodities. However, the Chinese action could act as a pressure relief valve for commodity prices and allow more time for supply chains to catch up.

The CCP action is the result of a command and control government, which we can’t do here, but market forces can have a similar effect. Housing starts in April were down almost 10% from March levels, compared to an expected decline of 2%. The decline comes despite a very strong overall housing market and a lack of supply in the existing housing stock. We note that March starts were near a 15 year high, but housing starts, which had been rising consistently from summer 2020, are beginning to waffle. As we said last week, sometimes the cure for high prices is…. high prices. In this case, the rapid rise in lumber and copper costs appears to have put homebuilders on the defensive.

While all of this is interesting (at least to us), it really has little to do with longer-term inflation expectations. We believe there are two things that are critical to watch for longer-term inflation trends. The first is the velocity of money, which is how fast money circulates through the economy. With such massive increases in the money supply, if and when velocity picks up it will likely stoke inflation fears. Velocity has been weakening for many years and it absolutely collapsed in the pandemic. With recovery, velocity is expected to pick up again.

The other is wages. We are certainly seeing increases in the minimum wage across most of the country, but that is not enough. It is harder to see wage pressures with union participation so low, but the inflation lessons of the 1970’s include: 1) it is hard to reduce wages, and 2) wage pressure keeps the inflation merry-go-round going. We envision any meaningful increase in wages in the economic data to spark inflation fears once again.

Finally, with the national debt at historic levels, we view the Federal Reserve as a body that desires inflation to make repayment of that debt easier. The bottom line is that there is little standing in the way of higher inflation over the longer-term, no matter what is happening at the moment.

All charts from Trading Economics.com

Gold and commodities tend to perform well in an inflationary environment, which is why we consistently maintain allocations to both in our portfolios for diversification. If you’d like us to review your 401k and/or 403b plan assets for appropriate diversification, call us and we will help you adjust your allocations.

Some Practical Advice on Identity Theft

Identity theft and other variations of hacking became increasingly commonplace during the pandemic and unfortunately, economic recovery has not reversed the trend. There are some simple steps you can talk to protect yourself. For example, do not use the same password in multiple places. A password manager can be an easy solution. A password manager will not only remember your passwords, it will create strong passwords for you!

One of the more overlooked items to protect is your credit score. If you’re identity is stolen, one of the ways thieves steal your money is to apply for a loan or mortgage in your name and walk off with the proceeds while you are left to pay off the debt. The big problem here is that you have no idea this is happening until it is too late.

The solution is to freeze your credit with the three credit bureaus: Experian, Equifax and TransUnion. This security freeze locks your credit score so anyone looking to approve a loan in your name cannot access your credit score, making it very difficult for any loan to be approved. It’s easy to do, if you are a little bit organized, and if you do want to access your credit, say for that next car, just unfreeze, make the transaction and re-freeze. This article from Kiplinger article provides all the details for this highly recommended safeguard.

What We’re Reading

IAEA chief sounds alarm over Iran’s nuclear program

Senate Republicans Unveil $928 Billion Infrastructure Offer

The Global House Price Boom Could Haunt the Recovery From Covid-19

The Inflation Scare Is Over. The Fed One Is Just Getting Started.

Yellen: government is operating like it’s 2010, calls for more aggressive spending

U.S. weekly jobless claims drop to fresh 14-month low; recovery gaining speed

Budget Calls for Spending Surge Fueled by Higher Taxes; Retroactive Gains Tax

Why former Fed president Richard Fisher is calling for change (6 min. video)

Biden’s Asia Czar Says Era of Engagement With China Is Over

Why the U.S. is facing a housing shortage (11 min. video)

Retirement Planning:

A Young Worker’s Guide to Saving for Emergencies and Investing for Retirement

Beginning salaries may not leave much to stash away, but financial pros say it’s crucial for young workers to make saving a requirement from every paycheck.

Estate Planning:

What Kids Need to Know About Finances

In a digital world, it’s even more critical to teach children how to handle cold, hard cash.

Health:

Mental Health Awareness: A Silver Lining of the Pandemic

If any good has come from this crisis, we have a heightened awareness of the multiple facets of well-being.

Entrepreneur:

How Rejection Can Fuel Your Entrepreneurial Success

It isn’t always a “no”- it may just be a “yes” to a different question.

Disclosures:

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Articles, General News, Weekly Commentary

By: thinkhouse