Inflation Nation

The Dow/Gold ratio was 20 three years ago. It is 16 today; stocks have lost 20% of their real value. They need to lose another nearly 70% from here (in gold terms) before they are real bargains.

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Friday, October 18^th, 2024 

Bill Bonner, writing today from Baltimore, Maryland 

MarketWatch: 

Gold futures top $2,700 an ounce, on track to settle at a record high 

Gold futures climbed above $2,700 an ounce on Thursday, with prices based on the most-active contract poised to settle at a fresh record high. 

"Uncertainty surrounding the U.S. economic outlook continues to drive up gold prices" and the risk of missteps in future Federal Reserve interest-rate hikes has increased, said Dilin Wu, research strategist at Pepperstone, in emailed comments. "Coupled with a massive $1.8 trillion U.S. deficit, these factors have intensified concerns over the economic trajectory, pushing investors toward gold as a safe haven amid rising volatility and unclear monetary policy." 

Gold is doing what it should do. It is anticipating inflation... and protecting us. We caution Dear Readers, however. Gold bulls and gold bugs can become ‘irrationally exuberant’ too. Then, the price goes wild... and buyers pay too much.   

But so far, most of the buying is coming from foreign governments — BRICs — who aim to protect themselves from America’s credit money system. 

There will come a time when people get giddy over gold. Cab drivers will tell you about the mining stock they just bought. People will brag about ‘when they got in.’ And they’ll tell you that gold is ‘going to the moon.’ The price will go up so high you’ll be able to buy the whole list of Dow stocks for just 5 ounces of gold. That’s when we will happily unload our gold and buy stocks. 

But that is (probably) a few years down the road. In the meantime, stocks and gold both set new records.  

And yet, the fundamental picture hasn’t changed. The Dow/Gold ratio was 20 three years ago. It is 16 today; stocks have lost 20% of their real value. They need to lose another nearly 70% from here (in gold terms) before they are real bargains. And we’re counting on the Fed to get us there. 

And Jerome Powell et al. are on the job. They had no reason to cut rates last month…except that they are trying to cause inflation, not eliminate it. Spread over the last three years, price inflation is more than three times what the Fed was supposedly looking for. That is, at a 2% annual gain, prices should be about 6% higher than they were in 2021. Instead, they are, officially, 20% higher.  

Unofficially, prices are even higher. This week’s Wall Street Journal, for example, tells us that cost of medical care insurance has gone up at a 7% rate for the last two years: 

Health Premiums Soar Even as Inflation is Cooling 

Average cost of family coverage reached roughly $25,500 this year... projected to rise rapidly again in 2025. 

Or, just look at transportation. The Ford F-150, the most popular pickup in history, left showrooms at $30,000 in 2021. At 2% inflation, the price of this year’s model ought to be $31,800. It’s not. It’s $38,000 — a 26% increase... or four times what it ought to be. 

And how about housing? Lower mortgage rates suckered home buyers into big mortgages based on inflated prices and low monthly payments. Then, in 2008, housing prices fell... mortgage lenders went broke... and millions of families lost their homes. 

So, the Fed lowered rates even further... and anchored them below zero, in real terms, for a 10-year period. This, of course, led to more housing inflation... and then, to the absurd situation where people had a hard time either buying or selling a house.

With big mortgages, locked in at low rates, sellers couldn’t afford to sell. And with big, new mortgages at much higher rates, buyers couldn’t afford to buy. New housing starts are now back to the level of 1974 — fifty years ago, when the US had 120 million fewer people. 

The average house cost about $300,000 in 2007. At 2% inflation, it should cost about $420,000 today. Instead, it’s close to $500,000. And now the Fed has begun a new loosening cycle to make it easier for people to buy a new house. The result? Anticipating more inflation, lenders increased long-term mortgage rates making housing less affordable than ever! 

NPR: 

Just 15.5% of homes for sale were affordable for a typical U.S. household, the lowest share since Redfin started tracking this a decade ago. A home is deemed affordable if the estimated mortgage payment is no more than 30% of the average local monthly income. Affordability plunged 40% from before the pandemic, and 21% from just last year. 

In other words, real consumer price inflation is way beyond the Fed’s 2%. And in order to get it back to the target, the Fed would have to bring the actual price inflation rate below 2% for several years. 

Instead, as expected, it is inflating. 

Regards, 

Bill Bonner