By Graham Summers, MBA
Yesterday I outlined why the Fed can’t stop inflation.
By quick way of review:
1) The U.S. has $31 trillion in debt.
2) The U.S. is already spending $305 billion in interest payments every year with rates at ZERO.
3) Every 1% increase in rates by the Fed means U.S. debt payments rise another $300 billion.
4) The Fed wants to raise rates to 3%… which would mean the U.S. spends nearly $1 trillion in interest payments… without reducing its debt by a CENT!
5) This would mean the U.S. spends 25% of its current budget on interest payments alone… while its debt pile continues to rise by trillions per year.
Put simply, the Fed cannot raise rates anywhere near the levels it hopes without triggering a debt crisis that would make 2008 look like a joke.
So, inflation is going to rage for years to come. Sure it might come down a bit in the data… but it’s not disappearing anytime soon.
And the markets know it.
Take a look at what commodities (inflation hedges) are doing.
You are looking at a 10-year bear market ending with an EXPLOSIVE move higher. This is where the BIG money is going to be made going forward.
If that chart wasn’t compelling enough, take a look at the ratio of stocks to commodities (the S&P 500 relative to the CRB index). When stocks outperform commodities, this line rises. And when commodities outperform stocks, this line falls.
As you can see, this ratio is crashing. This means the era of stocks outperforming commodities is OVER. Not only has the bull market trendline been broken (red line), but this ratio has broken through multiple lines of support (blue line).
And it’s likely only halfway done! I wouldn’t be surprised to see the entire move from 2011 unwind in the coming months.
Again, commodities and other inflation hedges are likely where the BIG money will be made for months if not years to come.
