Interpretive Dancing with Janet Yellen

Janet Yellen spoke today and took the opposite view of several of her peers on the Federal Reserve Open Market committee and struck a very dovish tone by stating a need to “proceed cautiously” on interest rate hikes. While this was not unexpected, the tone of her remarks signals that an April rate hike is almost impossible unless there is some unexpected huge uptick in employment or inflation. She pointed out unfavorable market conditions, international concerns and uncertain inflation expectations.

Interestingly, she also said that the Fed had little room to reverse course. This is another signal to me that unless markets and the economy normalize in the direction desired – which is almost impossible due to demographics and accumulated debt – we are simply waiting for the next deflationary event so that the Fed can take “extraordinary” actions during a crisis event. As I have discussed in the forum and am discussing in an upcoming MarketWatch article, we are on the verge of inflation one way or the other. The central banks are going to create inflation, with or without growth – we know mostly without – so they can devalue debt. That devaluation will in turn diminish the standard of living of hundreds of millions of people.

I believe we are going to see one or two more deflationary events. If there are two, the second will be due to something expectedly unexpected, such as a fracturing in Europe or Japan collapsing or China surprising the world with a recession. The pending deflationary event, which is a run of the mill mini-recession, will be marked by a surge in the dollar as markets panic. That will be a buying opportunity because there is no doubt that central banks will jump into super-banker mode and print trillions – this time in one fell swoop and likely to be helicopter money that bypasses the banks – at least in America since we’ve already recapitalized our banks. 

Helicopter money is supposed to flow straight into the economy. I hope that we build a trillion dollars worth of infrastructure over a decade and forgive a trillion dollars worth of student loans over a couple years. The infrastructure is much needed in general so long as we stay away from building bridges to nowhere and will employ hundreds of thousands. Forgiveness of student loans, while it will raise the ire of some, is the smartest way to bring people who have done a lot of the right things but fallen out of the middle class back to a point where they can regain middle class status. Consider where the money would go if millions were able to dramatically reduce or eliminate their student loans.

A few weeks ago, Ms. Yellen talked about being willing to overshoot the inflation target by a few tenths of a percent to make sure we were going to be at the 2% target. I don’t think there is any doubt that is the intent. Take a look at the chart from above. I want to be very clear in what I am about to say. The inflation data that the government reports is a scam. Anybody who does a budget knows that their cost of living has gone up the past 5, 10 and 20 years by far more than what the government reports.

About a decade ago I did a seminar in which I talked about buying milk and cottage cheese. Those are staples for a lot of people, especially the milk. Think about what you were paying for milk over the years. Then think about health insurance. Cars. Meat. Inflation has consistently been middle single digits for any rolling period of time despite the claims of lower by the government.

Yes, the Bureau of Labor Statistics (BLS) has nice ways of comparing quality in a way that understates inflation, however, that belongs in a different measurement. The necessities of life are getting more and more expensive and it’s about to get worse.

Our investment strategy here is going to be to buy the deflationary events when everybody else is panicking and to focus on those assets which will accelerate most in price from induced inflation. If you want to keep up over the next decade, dramatically reduce your speculating and focus on protecting your standard of living. We will be buying energy stock survivors, healthcare stocks that don’t gouge and attract government attention, technology stocks that improve productivity, agriculture and water holdings, alternative energy, a handful of real estate investments, a few consumer stocks and yes, some gold and silver that I have shunned for four years now. That is my plan and I am sticking to it.



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