As noted many times inflation is a two-part phenomenon…too much money chasing to few goods fearing higher prices tomorrow. It is monetary and psychological.

The Federal Reserve Bank of New York is projecting the Federal Reserve’s holdings of bonds and cash could reach $9 trillion by 2023.  This compares with the current level of $7.9 trillion and just over $4 trillion at the end of February 2020.  This amount is unfathomable and based upon Economics 101 is extremely inflationary.

It is widely accepted that if monetary velocity or the turn over of money accelerates to 50% of its norm, inflation would be close to double digits. As noted many times, the annual growth in money supply or M-2 is surging a record 27%, approximately 13x higher than the stated inflation rate. Historically there is a close correlation between M-2 growth and inflation.

Based on the above, the first element of inflation is present. The economy is awash with liquidity.

The second element is psychological…fearing higher prices tomorrow…aka inflationary expectations. May’s consumer confidence missed forecasted levels, primarily the result of rising inflationary expectations.

The data validates the University of Michigan’s statistics that consumers are expecting inflation to rise. This survey states consumers expects a 6.5% inflation rate in the next 12 months, considerably higher than the 4.6% rate anticipated in the University of Michigan survey. These expectations [and readings] are the highest in over a decade.

As widely discussed the Fed is adamant that inflationary pressures are only transitory. I rhetorically ask what will change in the next 12 months…the monetary component or the psychological component?

Changing topics, the volatility in Bitcoin is incredible. Bitcoin is still on the financial fringes. What is not on the fringe is the massive use of energy the mining of bitcoin requires. The current power demand for the cryptocurrencies is now greater than the power demand for many countries according to Bloomberg.

As noted the other day, the increased demand for cryptocurrencies is forcing utilities to ask state governments permission to reopen shuttered coal fired plants to meet electric demand. The reopening’s is riddled with political risks.

Bloomberg cites one 2020 study indicating for each $1 of Bitcoin value created such was responsible for $0.49 in health and climate damages in the US and $0.37 in China.

This shatters the virtuous narrative of a decentralized currency that promises future utopia while delivering present dystopia.

The above costs do not include the losses associated with malicious activity, activity that includes tax evasion and cybercrimes. Bloomberg states the cost of cybercrime exceeded $1 trillion in 2020 and could potentially double in the next 18 months if there is greater acceptance of cryptocurrencies for economic purposes.

Regarding tax evasion, I am not aware of any estimates but such is the now a focus of the US Treasury.

The emerging cryptocurrency narrative is adding to inflationary expectations via the increased demand [and cost] for power, potential climate and health costs, greater financial crimes and increased tax evasion.

Commenting on yesterday’s market activity, equities reversed gains following comments from the Fed that it may be able to begin discussing the appropriate timing of scaling back its bond buying program “at upcoming meetings.”

Wow! Just the mention of possible tapering caused a sudden reversal. I rhetorically ask what will happen when the eventuality occurs? Will prices already be discounted?

What will happen today?

Last night the foreign markets were mixed. London was down 0.24%, Paris up 0.10% and Frankfurt down 0.08%. China was up 0.35%, Japan up 0.31% and Hang Seng up 0.88%.

The Dow should open flat. The 10-year is off 1/32 to yield 1.57%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.