Inflation Will Be a Years-Long Battle

Editor’s Note: Today, we’re sharing another insight from legendary market forecaster, Mason Sexton. Mason predicted the ’87 crash weeks before it happened. Now, he fears another threat is looming. Read on…

Anyone who has studied economic history—going all the way back to Greek and Roman times—knows that the ends of those empires were marked by a debasement of their currencies and the ensuing inflation which undermined faith in, and support of, the ruling class.

For instance, at the outset of the Roman Empire, starting in 27 BC, the preferred Roman currency was the silver denarius. Rome’s first emperor, Augustus, minted coins that were 95% silver. This coincided with the Pax Romana, a time of unparalleled peace and prosperity in the early years of the empire.

But the coinage was debased over the centuries. By 268 AD, there was just under 0.5% silver in the denarius.

When questioned about the devaluation of the currency, Emperor Caracalla (who ruled from 198 to 217 AD) held up his sword and declared:

Not to worry. So long as we have these [gesturing to the sword], we shall not run short of money.

Pride comes before the fall. And even non-economists can likely guess what happened next.

Hyperinflation ran rampant in the Empire. Prices during this period rose as much as 1000%. It is often referred to as “the crisis of the 3rd century”.

Over the next fifty years, twenty-six different men would claim the seat of power, often through military force. Rome would limp on for a few centuries yet, but it was the beginning of the end.

The decline was best summarized by the 18th century historian Edward Gibbon when he commented that the great wonder of the Roman Empire was not that it fell, but rather that it lasted as long as it did.

The one thing we know for sure beyond “death and taxes” is that “history repeats.”

Today, the world faces new inflationary pressures. You are told—again and again—that it’s all “under control.”

But let us consider something troubling: What if it’s not? And what if it won’t be for nearly a decade?

Transitory

In the summer and fall of 2021, many investors learned a new term: “transitory inflation.”

The term was trotted out again and again by the Fed Chair, Jerome Powell, to explain away the alarming rise in consumer prices. Powell’s argument—in essence—was that inflation was simply a result of supply chain constraints which, in turn, were caused by the lockdown regimes.

But as Powell spoke those words, we couldn’t help but feel that we’d seen this show somewhere before…

In the early 1970’s, we were studying at Harvard Business School. In 1972, we graduated and joined Morgan Stanley shortly after. But this period was also marred by an alarming rise in the inflation rate. And—like today—the knee-jerk reaction was to “explain it away.”

Below, we quote at length Stephen S. Roach—faculty member of Yale University—who summarized the madness quite well in an article dated May 25, 2021(emphasis added):

When US oil prices quadrupled following the OPEC oil embargo in the aftermath of the 1973 Yom Kippur War, [Fed Chair Burns] argued that, since this had nothing to do with monetary policy, the Fed should exclude oil and energy-related products (such as home heating oil and electricity) from the consumer price index.

[…]

Then came surging food prices, which Burns surmised in 1973 were traceable to unusual weather – specifically, an El Niño event that had decimated Peruvian anchovies in 1972. He insisted that this was the source of rising fertilizer and feedstock prices, in turn driving up beef, poultry, and pork prices. Like good soldiers, we gulped and followed his order to take food – which had a weight of 25% – out of the CPI.

[…]

Burns didn’t stop there. Over the next few years, he periodically uncovered similar idiosyncratic developments affecting the prices of mobile homes, used cars, children’s toys, even women’s jewelry (gold mania, he dubbed it); he also raised questions about homeownership costs, which accounted for another 16% of the CPI. Take them all out, he insisted!

By the time Burns was done, only about 35% of the CPI was left – and it was rising at a double-digit rate!

Only at that point, in 1975, did Burns concede – far too late – that the United States had an inflation problem. The painful lesson: ignore so-called transitory factors at great peril.

Today, Burns is largely remembered as the man who let inflation run away from him. It would not be until 1982 that the year-over-year change in the “official” inflation levels would again fall below 4%.

The New Paradigm

Here is our prediction: Jerome Powell and the Federal Reserve will not be able to tame inflation easily or quickly. The Fed may use the blunt instrument of higher rates to deter new spending. But it can do precisely nothing to address the supply side of the equation.

The Fed—after all—does not build new homes. It does not harvest crops, refine oil, or build new automobiles. All Powell can hope to do is destroy demand faster than new supply. It’s a dangerous gambit, and we do not believe it will work.

We got our start in finance in the ‘70s and early ‘80s. We remember that time. We remember the grinding sideways-and-down movement of the markets. We remember the cautious optimism at the vicious counter-trend rallies. And we remember the dashed hopes when the rally would fail and reverse.

Most importantly, we remember that the real (inflation-adjusted) return from the Dow was negative 62% from April of 1971 to April of 1982.

That was eleven years of terrible losses, unthinkable for most investors today. But that is the danger we believe investors face.

If you take nothing else away, we will ask you to understand this: We have entered a new paradigm of investing. Everything you think you know about investing is now wrong.

Every “lesson” you’ve learned over the past fifteen years since the Great Financial Crisis and the unprecedented levels of stimulus must be thrown out.

If we have entered a new paradigm, then it requires a new type of investor. Because, yes, it is possible to see incredible returns through even the worst markets.

I would like to show you how.

I recently put together a special presentation with my forecast for the markets. This includes the exact day I believe the next downward move will kick off. And I’ll also share what investors should do to prepare and profit from this new paradigm.

You may access that presentation by clicking right here.

Regards,

Mason Sexton
Editor, New Paradigm Research