WIMPY Implications of Massive Government Stimulus
Consider this, taken from www.urbandictionary.com
The Phrase: I'll gladly pay you Tuesday for a hamburger today
Definition: "I'd like you to lend me some money"
Etymology is from the cartoon "Popeye", where the character Wimpy would frequently utter this phrase. He was a glutton, and would consume burgers at a ferocious rate but could rarely pay for his habit.
The phrase implies the underlying feeling that the person will unlikely actually pay for the hamburger (or whatever) on Tuesday (or ever, for that matter).
Unfortunately, there have been a lot of smart phones, burgers, homes and toys purchased with borrowed money. While there is celebration over interest rate reductions and monetary stimulus by the Federal Reserve and other Central Banks during the past seven years, there is more to the story. We can't write it as history yet, because it is likely bubbling up under the surface of the global economy. It's called inflation - the rate at which the prices of the things we buy go up.
The full CPI (see why we refer to this and not the oft-quoted “Core CPI” below next to the * below ) has shown very modest increases for many years. Many market commentators will argue that inflation is low because the full CPI is only running at a 2.1% rate for the past 12 months, based on the government’s data release earlier this week.
Inflation is tame for now, but that’s not necessarily a good thing. During the current economic recovery, many have gone back to work. However, there is a big chunk of the population that is working for only modestly more than they did a few years ago. It takes consumer spending to grow an economy. This has happened more at the high end the wealth spectrum and in the mainstream. As a result, there is an increasing tendency among lower and moderate income earners to borrow money. Credit card debt is skyrocketing. This is not the only sign we see of recently boom/bust history repeating itself.
The question we have is “how are we going to pay for all of this borrowed money?” If you are the government and own the Mint, you can print more money. That pays your debts but devalues your currency, so you replace one problem with another. When you hear that the Fed is "pumping liquidity into the system" there is a good reason - they are the only ones left who can. The consumer’s financial condition is again fading into treacherous territory.
So, the Wimpy syndrome is alive and well. Inflation is out there and it could be unavoidable, well before this decade is over. High inflation is just one of the potential triggers we see that could turn the bond market upside down, with rates rising and bond prices falling. Unfortunately, investors underestimate the ability for this to inflict financial pain on them. We cover this extensively in “The Sungarden Study” which we authored earlier this year, and which is available at http://www.hedgedinvesting.com.
As our clients know, we are aware of these and many more inter-related factors that can push market prices significantly in either direction going forward. We have been aware for some time, and developed an approach that seeks to combat and even exploit higher inflation if it appears in a meaningful way.
In other words, we are not going to be "Wimpy" about it and stay the course. Because several Tuesdays from now, those burgers may cost a lot more.
* Core CPI excludes products related to food and energy. In other words, if you didn't have to heat your home, fill your car, or eat, you would be fine. Bottom line: don't look at the trend in Core CPI to figure out if inflation is an issue - but do be concerned about inflation, because it is a cancer to your wealth. If you lived through the 1970's, you know what we mean.
© Sungarden Investment Research
