The Economy’s Rapid Reversal: When Rising Prices Lead to Falling Value

[00:00:00]And again, we have that special video countdown to crisis. There's a link below learnreal.tv/jim where you kind of go into what's going to happen with this crash, why it's going to be fast, bloody, unavoidable, but also how you can position yourself to profit from that in 2022. So, thank you for that. Um talk to me about inflation because, you know, I was looking at some of the inflation numbers and you have to go back to the '80s to see anything that's approaching double-digit. You know, I remember being a just a kid hearing about double-digit inflation. I could kind of remember the the the gas pumps, you know, the lines at the gas. It's like a distant memory of me in the '70s and but, you know, how do you talk to you know, younger people these days about what inflation is or it means because I don't think people really grasp what it actually means to your savings or to the economy in a even a medium term.

[00:00:50]>> Well, that's exactly right, Brian. And if you um uh you know, you're you're a little younger than I am, but I I lived through it. I was I started my career uh in banking in 1976 and so I start I remember my my wife and I used to kid each other. She was in advertising, I was in banking and the inflation was so bad, you'd get a raise every like four or five months and you didn't have to ask, they would just give it to you because they knew that you were going to quit if they didn't keep up. So, she would get a raise and she was making more than I was at the time. So, we'd go out to dinner and then I would get a raise and I was making more than she was. So, we would just tease each other about that. But, that's how it was.

[00:01:27]Um and the psychology was, you know, if you needed a whatever, you know, a TV set or refrigerator, new car, whatever, you say, "I better buy it now because the price is going to be higher. If I wait a month or two months, the price is going to run away from me." So, it it had huge behavioral effects. Of course, gold was, you know, going to the moon.

[00:01:45]There there was a lot going on at the time. But, but Brian, you're right when you say we're putting up inflation numbers today that are the highest in 40 years. That is correct. A little 41 Actually, it was 1981 before we saw these numbers, but I remind people the inflation in 1981 was the end of a 10-year period of inflation. It wasn't the beginning. It's like, "Oh, there was some inflation in 1981." Yeah, we did, but it had started. I mean, some ways it started 1968 and it really took off in 1974-75.

[00:02:17]So, '81, these numbers, that was when Volcker finally got it under control.

[00:02:23]But, you go back to '80 70 Well, between '77 and '81, so that 5-year period, the dollar lost 50% of its purchasing power, not 15, 50 in that 5-year stretch. So, you were putting up numbers, you know, 10%, 11%, 13% and higher year after year. And yeah, 1981, it was you know, 9 or 10, which is what they're comparing it to today, but that was that was on the down slope. It had been higher than that in '77, '78 and and you know, and '79. So, the question is is this the beginning of an inflationary surge or it's going to get even worse than it? Is going to last 5 years? Or is it is it different than that? But, I but keep that in mind because the the 40-year comparison, it is correct, but that was the tail end of an even worse episode.

[00:03:17]>> And I think Jim, you've actually said that this inflation is going to turn to deflation faster than most people realize. Can Can you explain what that means and then what that looks like and then maybe the the ramifications of that?

[00:03:30]>> Sure.

[00:03:31]That is my view. I'll be happy to explain it. And that catches a lot of people by surprise. They're like, "Wait a second, Jim. You know, it's inflation.

[00:03:37]You just look at 2022, you know, starting in January. It was kind of like 7% and then it was like, "Oh, it's 8.1. It's 8.6. Now it's 9.1." Which is true, that is the It is going up. So, people extrapolate that and again, there is this comparison to the '70s. By the way, I think the situation we're in today is very different from the 1970s. The And I'll explain why. But, um uh Well, let's explain why right now because in the 70s it was triggered from the supply side with first the Arab oil embargo in 1973 as a result of the uh uh the 1973 Arab-Israeli War. Um and then the price tripled, but it went from like $2 to to uh to to $6. Okay. But, you know, in percentage terms, that's a huge jump, but it was still $6. And then it got to 12, and then in 1979, you had a second uh oil embargo because of Iran and the Ayatollah and the revolution and the hostages and all that. And then it went from kind of 12 to 20. So, uh oil went up by factor of 10 um in the course of the late 70s for because of the two different embargoes.

[00:04:47]So, that's coming from the supply side.

[00:04:49]But, what happened was the other source of inflation is on the demand side. So, you have what's called cost-push inflation. That's where, you know, supply's choked off or there's an embargo or there's a shortage or natural disaster or lot of things coming from the supply side and demand is inelastic, so you just pay up or, you know, kind of do without. Um but the demand side is much more psychological. That's called uh demand-pull inflation. That's when consumers behave the way I described it. As I say, I lived through the 70s. Um where, you know, hey, I better buy it today, I better buy now. You're pulling all this demand forward and bidding up prices because you're worried that it's going to get even worse.

[00:05:27]So, as that applies to today we are starting with the cost-push inflation.

[00:05:32]You know, mainly the price of energy, but the price of food is a big factor.

[00:05:35]And of course, they're related. You know, it's like uh it's like here's the energy, here's the food. You know, where do you think the food comes from? You To get the food, you got to feed feed the pigs and cows. What do you feed them?

[00:05:44]You feed them corn. Uh how do you get corn? Well, you grow it on a farm. You need nitrogen fertilizer. You need diesel in your tractors. Uh you get the food, you got to put it in a truck to get it from point A to point B. That [snorts] requires diesel. The higher the diesel price, the higher the cost of food because you're moving it by truck, etc. So, these things, as I say, are linked.

[00:06:05]Um but but food prices are going up substantially and you can't The two things you can't do without are gas in the car and food. So So, you have that um that that cost-push inflation.

[00:06:16]We're not quite at the stage where it's demand-pull. We're not quite at the stage where individual consumers are behaving the way I described in the 1970s saying, "I had better better spend the money fast cuz it's it's losing value."

[00:06:29]And that and you see that in inflationary expectations and in very yield curves. I'll come back to that cuz that's a that's a really big deal.

[00:06:38]If you thought inflation was going to run away as it did in the '70s, uh yield curves would be steeply sloping uh and people would be in a frenzy to buy stuff. They're not and the yield curves are not sloping uh upward sloping, they're inverted, they're going down.

[00:06:55]That tells you that uh and and we also see this in inflationary expectations.

[00:06:59]Inflationary expectations don't drive inflation here and now.

[00:07:05]But what does is inflation here and now.

[00:07:07]Inflation here and now can feed on itself. Inflationary expectations don't drive it, but they tell you a lot. Their information is to tell you a lot about what people expect. What the yield curve is telling us, what inflationary expectations are telling us, and other factors are telling us is that yeah, there's inflation now, but the Fed's going to kill it and they're going to kill it by destroying demand and throwing us into a recession.

[00:07:27]And here's where it gets interesting cuz you could flip from this kind of inflation to disinflation or even deflation very quickly. And and people are definitely not prepared for that. Well, I'm sorry, I shouldn't shouldn't say that. Can everyday consumers are prepared for it. I'm not sure Wall Street and mainstream economists and policy makers are prepared for it. They're just extrapolating the inflation, saying, "Well, the Fed's going to kill it."

[00:07:49]Yeah, they might kill it, but at a price, at a very steep price, and consumers are really bracing for that.

[00:07:55]So, um you know, this even J. Powell has said the soft landing is is is is a myth. It is not It's not going to It's not going to be a soft landing.

[00:08:04]It's going to be a hard landing, but that's not priced into markets. The The markets are kind of pricing in a squishy landing or soft landing off the runways.

[00:08:13]They're not pricing in a really hard landing, and that is what we're going to get.

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