Dear Reader,

Over the past couple of months, I’ve been taking steps to get ready.

My personal portfolio was already organized with inflation in mind, but now every position I’m in could be labeled as an “inflation play.”

Why?

Because I believe a period of higher inflation is on the way.

And, if there is anything I learned from the 2009–2011 experience, it’s that the market responds to the fear of inflation rather than actual inflation.

It goes back to that phrase, “Buy the rumor, sell the news.”

If you wait for the actual inflation, the trade will be ⅔ over (that’s ⅔ of your profit potential flushed down the crapper).

…I’m not waiting.

This is one trade I intend to be on the right side of.

Because when it comes to inflation, you either get run over, you get out of the way, or you make a lot of money.

I’ll take Option #3.

I’ve been shouting it from the rooftops

I’ve been talking to my readers, and even my family, about inflation for months now.

In a recent issue of my newsletter, The Daily Dirtnap, I shared a conversation I had with a friend (July 7th): 

“Inflation is coming, are you ready?” I asked this as a test case. I told her that, “The market is pricing in 40bps of inflation in 10 years. Will it be higher or lower?”

“For sure, higher,” she said.

“Why?” I asked.                     

She responded, “Because of all the money printing and deficit spending.”

Everyone knows this to be true, even my friend, whose work is about as far away from finance as you can get.

And though quite a few folks agreed with me from the outset, others took longer to warm up to the idea.

Even if you totally disagree with my call, what you can’t disagree with is this: People are finally starting to talk about inflation.

(And, as I mentioned, the populace responds strongly to the fear of inflation. From a psychological standpoint you could say inflation goes up because people think inflation is going up.)

If you recently threw you laptop, phone, Apple watch, desktop computer, or Kindle in the water because you are fed up with the news and have thus been “hiding under a rock,” lemme give you a rundown on why I believe a period of higher inflation is sneaking up on us quicker than Wile E. Coyote:

We Broke Up with China

With the US imposing tariffs on China, and looking to bring more manufacturing back home (no judge)—we’ve essentially broken peace with one of our strongest deflationary forces.

Of course, businesses will always look to move production to another country that isn’t China, but a lot of things are going to end up coming home. And when things come home (or have to be moved to an entirely new low-cost country), they get more expensive to produce. That increase in cost is then passed on to you and me.

We Started Messing with Fiscal Policy

The pandemic has reinforced what the Fed and Congress have been in the pattern of doing for the last 30 years—responding disproportionately to a crisis by printing money and passing it out like the paper it is.

We’ve had a first round of stimulus (How many more rounds will we have? I’ll leave it to your imagination…), PPP loans, and unemployment “bonuses.” The Fed and Congress have essentially messed with our fiscal policy in a way that is utterly unprecedented.

We haven’t seen money supply growth like this since the Civil War.

We Reignited Our Love Affair with Gold … and Crypto? 

Precious metals? You’ve seen the news… Gold hit its highest valuation, ever, early in August at $2,000 an ounce. Silver? Copper? They’re on their way up as well.

In fact, I’ve been watching people (online) who don’t own a single stock suddenly decide they need to be invested in gold or silver. 

The current instability, the weaker dollar, and the rumor of inflation are going to mint a new generation of gold bugs. And that may not be a bad thing (presently).

Look at the things that are rallying—gold, silver, base metals, energy, real estate, and stocks. This smells like inflation to me. This isn’t gold as a safe haven. This is gold as a risk asset. Going forward, gold is going to be a risk asset, for better or for worse, and if stocks crash, gold will crash, too. It is all the same trade—it is the inflation trade.

—The Daily Dirtnap, July 20 issue

And yet others are looking to cryptocurrencies as a hedge against a falling dollar.

Overall bitcoin is up 70% this year, while the dollar is down 3% (YTD). 

And I’m in no way saying, “Ugh. What a dumb move.” In fact, I’m down with some of these moves in a big way.

I’m just sharing the signs with you.

On we go…

The Fed Tries to Tame a Rabid Squirrel

The Fed has been talking about offsetting a period of “previous underperformance” by letting inflation run over 2% for a while. This assumes they’d be able to just snap their fingers and stop it at the percentage point they like (3%–4%)... which I would define as the pinnacle of hubris.

The Fed is going to allow inflation expectations to get out of control. They already have—look at precious metals. This is just the opening act.

—The Daily Dirtnap, July 23 issue

Mortgage interest rates may be down (which is awesome), but your grocery bill is on its way up.

I don’t know if you noticed, but your overall grocery bill has been 4.5% more expensive than it was in February. Common items like beef showboated by shooting up 20%.

We Lose Our Favorite Mom & Pop Shops

And very sadly, over 100,000 small businesses have permanently shut their doors since the pandemic began. That’s a little under 3,000 a week, and you can bet more will be added to that number.

When fewer companies are around to provide goods and services, the price for those same goods and services will rise.

So, what does this mean to you?

The answer is simple: Don’t be on the wrong side of this trade.

Positioning yourself correctly now offers you a chance to reap some serious profits.

I intend to make plenty of money off this. I’ve already made money off it, and these are just the early stages.

In fact, on a recent call when I was discussing my inflation plays with a couple of fellow investors, I said, “This is a lot of fun. It's the kind of environment I do really well in. I’ve already made gross amounts of money, and we’re still very early in this.”

So, how do you make sure you come out on the right side of inflation?

I Can Help

…and I’ll tell you exactly how I plan to help you over the next couple of days.

Episode 2 of “When Money Dies” will hit your inbox tomorrow.

Jared Dillian
Mauldin Economics

P.S. Even if after reading my arguments “for” prolonged, higher inflation, you completely disagree with me, you still have a chance to profit off the current mania. Remember, people react to the thought of/ threat of inflation, and they are acting now. The way I see it is this: I’m making money now off these plays, and I intend to make more. If I’m right about inflation, I’ll make an absurd amount. If inflation dies down, I’ll still made a hefty amount. Either is good.