Inflation Is Sparking Economic Growth

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Inflation Is Sparking Economic Growth
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In his Daily Market Notes report to investors, while commenting on inflation sparking growth, Louis Navellier wrote:

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Q3 2021 hedge fund letters, conferences and more

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Equities continue to blithely scale the Wall of Worry. The S&P 500 is now up 20 of the last 24 days. This is despite the highest inflation report in 30 years, surging pandemic numbers in Europe, continued logistics bottlenecks, fears of defaults in China’s property developers, and cracks appearing in the US Treasury market as the Fed begins to taper its QE.  Stocks are near all-time highs around the world as living with the pandemic and a return to a new normal takes hold.

Morgan Stanley wrote a report that concludes both stocks and bond prices in the US will be lower this time next year thanks to lower pandemic support spending and the wind-down of QE.  They suggest better returns should be found in Europe and Japan.

Global Asset Bubble

McKinsey reported that worldwide net worth tripled in the last two decades to $514 trillion with China grabbing a third, going from $7 trillion to $120 trillion, and now stands over the US whose net worth doubled to $90 trillion.  In both countries, more than two-thirds of the wealth is held by the top 10% of households, a number that has been growing.  A problem here is that over two-thirds of wealth is held in real estate which has ballooned on the back of falling interest rates.  Asset prices are now 50% above their long-term average relative to income.  This is what fuels the fears of a global asset bubble.  

The best solution is to grow GDP through investments in profitable enterprises.  Hopefully, governments will see the light and incentivize rather than discourage continued investments in the stock market and business formation.  As it is, the stock market is trying its best to catch up with soaring real estate values.  Perhaps another solution would be for governments to discourage real estate speculation while encouraging business investment.  That could give a major unexpected boost to equity investment and lead to more jobs, higher wages, and higher tax receipts.  Growing income would be a whole lot better than deflating the asset bubble, we all know that.

Inflation Sparks Growth

Even though economic growth remains strong, the University of Michigan’s consumer sentiment index recently fell to a 10-year low and both inflation and shortages are making folks angry.  When President Biden cites robust economic growth for the surge in inflation and shortages, no one believes him.  It is obviously very odd for a President’s popularity to plunge when economic growth is resurging, but that is exactly what is happening.

The U.S. economy's GDP growth is forecasted to reaccelerate from an estimated 2% annual pace in the third quarter to a whopping 8.2% annual pace in the fourth quarter according to the Atlanta Fed.  Although the Atlanta Fed can be too optimistic early in a quarter sometimes, there is no doubt the economic growth is reaccelerating.  Believe it or not, inflation is sparking economic growth and there are plenty of indications of inflation lately.

Inflation makes retirement much more difficult.  The poor and middle class are increasingly frustrated every time they go to the gas station or the grocery store.  Due to a turkey shortage, many Americans are going to be eating chicken for Thanksgiving, but the price of chicken has risen as well.  It will be interesting how long consumers will tolerate inflation eroding their wealth.

No Fossil Fuels by 2035?

At COP26, the U.S. agreed to stop using fossil fuels for electricity generation by 2035.  Folks, this is not going to happen, since we will still need lots of natural gas in 2035.  The California war against natural gas is stupid.  The federal government declaring to the world that they will stop using natural gas by 2035 is even more stupid.  The Build Back Better bill that includes money to cap natural gas wells leading methane in the Permian Basin that were caused by the Biden Administration’s drilling ban on federal land is beyond stupid.

The Biden Administration is not expected to get the Senate to pass the House of Representatives’ proposed infrastructure spending.  After the outcomes of the Virginia and New Jersey elections, many politicians are tacking to the center like Senator Manchin or hiding.  Already, many members of the House of Representatives are not running for re-election in anticipation of a defeat, so a big leadership change in Congress is anticipated next November.  It will be interesting if the Biden Administration tacks to the center like Bill Clinton did, which in turn boosted his popularity.  Wall Street likes a “balanced” government, so the latest political developments are being well received and boosting investor confidence.

In this inflationary environment, millions of Americans are pouring money into the stock market seeking higher yields and protection from inflation.  Also notable is that gold is at a 5-month high.  Internationally, the Chinese economy is now in disarray and Europe is struggling with another Covid-19 outbreak.  The truth is as you look around the world, the U.S. is looking better due to higher interest rates, a capitalistic culture and 50 states that compete with each other for business.

Heard & Notable:

After a 52-year chase, authorities ID the man behind an infamous Ohio bank heist. Theodore John Conrad was only 20 years old when he robbed the Society National Bank in Cleveland on July 11, 1969. U.S. Marshals based in Cleveland made the discovery after matching paperwork that Conrad had filled out in the 1960s with documents that he had filled out later in life using his new identity, Thomas Randele. Source: NPR

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