The Fed and Hyperinflation

“It is after a trend has been reversed that the full effect of the preceding excesses is felt.” -George Soros

For the last 5+ years we have seen a massive attempt by global central banks to prop up asset prices. The Federal Reserve has spearheaded the effort, increasing their balance sheet from less than $1 trillion in 2007 to over $4 trillion today. One of the main threats that QE allegedly posed was that printing trillions of dollars would lead to runaway inflation, the complete collapse of fiat currency. Now obviously that hasn’t happened, in fact we’ve seen almost the exact opposite. Check out the chart below which graphs Google searches for “hyperinflation.” You’ll notice that fear is abating.

Consider that in 2013, 18 of the 21 biggest economies in the world had inflation rates of less than 2%. Who could have predicted that after 3 rounds of easing and one twist, people would be more worried about deflation than inflation? Bernanke has done a masterful job no doubt; Ray Dalio has gone as far to say that America is experiencing a “beautiful deleveraging.”

The fed is now of the mind that the economy can stand on its own and Janet has begun peeling the band aid off. The market has thus far welcomed the scaling back with open arms; the S&P 500 is up ~6% since December 18 when Bernanke unleashed the Taper.

Asset prices have inflated to be certain, the S&P 500 is up around 115% since the Fed’s first round of “Quantitative Easing”, fine collectors are back collecting, and $80M diamonds are being auctioned off. A key ingredient that has been missing from this recovery is wage growth.

But alas, just last week we saw average hourly earnings increased 0.4%, more than double expectations and up 2.2% y/o/y. Check out the chart below from Deutsche Bank.

In 1987 George Soros said “It is after a trend has been reversed that the full effect of the preceding excesses is felt.” Wouldn’t it be something if we only start to smell inflation after QE has been reversed, after all the hyper inflationistas have crawled back into their cave? Markets have a unique ability to forecast the future, don’t look now you guys, but the CRB commodity index is up 10% YTD.

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