14 April 2022

Yesterday the CPI inflation number came out in the US at 8.5% this is the highest number since 1981. Inflation peaked at 13% in 1981 with the Fed funds rate at 20.5%, that is a real interest rate of 6.5%. The current Fed funds rate is 0.25% and inflation is at 8.5% that is a negative real interest rate of -8.25%.

The implied Fed funds rate is reflecting a peak of 3.5% by the end of 2023.

My take on the fixed income side of the markets is that we will never get to 3.5% as the economy is really not that strong and there is just way too much debt in the economy to allow the economy to fall off a cliff. In 2018 they tried raising rates and got to 2% before all hell broke loose, that was before the giant QE from Covid and the Fiscal debt financed stimulus upwards of $2 trillion. This is all lip service, eventually QE will be back as the need for buyers of bonds will be too desperate.

The key take away from all of this is that inflation isn’t peaking any time soon. Sure we might get some levelling off for a while but the Fed will throw in the towel and high inflation will become something that we are forced to live with. I suspect it will be a very volatile period on the political front as the haves versus the have nots fight it out. This will probably be very good for gold in the long run and maybe just maybe Bitcoin.

Fun Fact

An NFT of Jack Dorsey’s first-ever tweet, which sold for $2.9M last year, was put up for sale & only got 7 offers from $277 to $6.

PS. maybe not such a fun fact for the purchaser at $2.9m.

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