Wealth Outside of Cash

Macro Perspectives: Mon 31 May 2021

As we've discussed here in my daily Macro Perspectives notes, we are entering a period where we could very well see a huge spike in inflation (maybe double-digits). On Friday morning, we looked at the inflation component of Q1 GDP, and we talked about the prospects of a double-digit number when the Q2 data arrives.

During the day the report on the Fed's favored inflation gauge, core PCE, showed a spike to 3.1% (chart below). Going back through monthly core PCE data to 1960, this 1.2 percentage monthly change in the YOY Core PCE number is the biggest on record...

Now, let's juxtapose this to the personal savings rate at 15% - that remains near pre-pandemic record levels, thanks to government subsidies.

So, the policies that have driven record levels of savings are now destroying the buying power of those savings. That's why, despite easy access to money, and despite rising stock and housing prices, and despite a tightening labor market, this type of economy is not a "feel good" economy. In an inflationary economy consumers feel like they are sprinting on a treadmill just to maintain the status quo.

That's why consumer confidence tends to plunge in high inflation times, as you can see in the chart from the early 70s and early 80s.

These are the moments when wealth can be destroyed, by holding cash - and wealth can be created in key asset classes.

With that in mind, I do my best to navigate the path in my daily Macro Perspective notes.  If you have family and friends in mind that might benefit from reading my notes, please forward this along and we'll get them added to the distribution list.