Contrary to Donald Trump’s dire pre-election prediction that the stock market will “crash” if Joe Biden won (the montage above from The Financial Times captures the contrast between the two), the opposite has taken place. Stocks have made one of the sharpest upside moves in history since last November, and they don’t seem likely to make a u-turn at this point as the economy moves briskly apace.
Same is true for the move in farm commodities, with the all-important corn and soybean markets making sizable upside moves in recent months now that the trade has shaken off the Trump-imposed price collapse caused by what he called a “trade war” but was actually more like economic suicide.
But enough of my gloating.
Now that we’re in a brave new post-Trumpian world, there’s some serious business to address, and it has to do with what is looking like some inflationary pressures building up in an economy that is probably going to grow at levels that we haven’t seen in many a year. 2021’s first quarter Gross Domestic Product grew at a 6.4% annual rate, which in conventional economic times would be astounding. Of course, the lowered base created by the pandemic is why the number is outsized. Still, you can probably expect more of the same for the balance of the year.
The problem created by this surge back to normal is inflation. And the problem with inflation is the threat of higher interest rates imposed by a wary Federal Reserve Board (aka the Fed), which keeps watch over inflationary moves and stands ready to squelch them as quickly as possible.
A whiff of higher interest rates is usually enough to slow down gains in the stock market, if not reverse an uptrend altogether. Farm commodities don’t usually react to policy moves by the Fed, so for now the focus is on the stock market, specifically, and the economy, generally.
What we all want to know is this: is the current price run-up in several sectors of the economy the beginning of an inflationary trend? Or is it just the natural reaction to consumer-driven demand caused by the recent easing of pandemic era restrictions? And is it just temporary and not a sign of widespread inflation that will cause the Fed to take some action by raising interest rates?
I think it’s the last of the three, and for the time being at least, the Fed does too.
Analysts at Forbes note that “The Fed has warned the public over these and other supply-chain issues, too, saying that it’ll take time for sectors of the economy to get back to normal. Once these kinks are worked out, the Fed asserts, inflation will stop growing so quickly.”
In other words, price increases that are showing up in various spots in the economy are created by functional issues, basically shortages of products that are in demand by consumers who are spending more freely now that the pandemic’s economic effects are getting behind us.
Recent volatility in the lumber market is a good example. Sawmills had slowed production drastically during the pandemic, causing shortages that forced homebuilders to pay record prices for their lumber needs. The increase showed up as a component of inflation, which caused a few worries until in recent weeks the lumber market took a huge fall as sawmills started ramping up post-pandemic production.
I think we’ll see similar scenarios throughout the economy, and, like the Fed, believe that once the supply-chain issues are resolved and we get the country back on a normal footing, inflation will back off. A parallel is what happened right after the end of World War II, when inflation hit 19% in 1946 and 9% in 1947. By 1948 it fell to 3% and in 1949 it was actually negative at -2.1%.
The pandemic was no multi-year world war, of course, but I think a similar scenario is in play. Dislocations took a while to get ironed out even as consumers were anxious to spend money and buy things.
I note that even as the inflation talk swirls around, the markets are holding their own at or near these all time highs. Nobody seems to be too shook. As my buddy Rosenberg used to say when we were trading on the floor of the Chicago Board Options Exchange back in the ‘80s, “we’re all watching the same movie.”
In this case the flick is about an economy trying to right itself after a shock to its system. So far it’s probably going about as expected and it’s reasonable to plan for more of the same.
John Tsitrian is a businessman and writer from the Black Hills. He was a weekly columnist for the Rapid City Journal for twenty years. His articles and commentary have also appeared in The Los Angeles Times, The Denver Post and The Omaha World-Herald. Tsitrian served in the Marines for three years (1966-69), including a thirteen month tour of duty as a radioman in Vietnam.
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