In today’s Exponential Investor

  • How inflation called our central bankers’ bluff
  • When inflation is benign (and even beneficial)
  • Your “MegaYield Masterclass” replay

Back in September, my colleague Nickolai Hubble wrote a note to his readers titled “Inflation calls the central bankers’ bluff”.

Nickolai noted that inflation was already spiralling in major economies from Germany to Japan – even though most central bankers still referred to it as “transitory”.

Despite the accelerating inflationary trend, Nickolai noted that, at that time, monetary policy around the world remained “extraordinarily loose”. But he predicted that in the near future, inflation would force the central bankers’ hands and leave them no choice but to raise rates.

Seven months later, we can all see what he meant…

The UK’s inflation rate of over 5% in January represented the highest rate in 30 years. In the United States, inflation hit a 40-year high in January.

And it’s no coincidence that central bankers in both countries have raised interest rates over the last few months – with more dramatic raises likely in store this year.

In the United States, the Federal Reserve raised rates by 0.25% – the first increase since 2018. And the Fed expects another six rate hikes throughout the year, with Fed chair Jerome Powell declaring the Fed is “strongly committed” to preventing rapid inflation from becoming entrenched.

In the UK, Bank Rate was increased from 0.5% to 0.75% last week – a 25 basis point hike that mirrors that in the United States. And the Office for Budget Responsibility (OBR) is warning that rates may rise to as much as 3.5% in the worst-case inflationary scenario.

It looks like the central bankers’ global bluff has indeed been called. As monetary policy tightens around the world, central banks are being forced to throw cold water on overheating economies, by increasing borrowing costs to drive down spending, demand, and ultimately, inflation.

But careful what you wish for… these “cool down” rate hike policies for overheated economies can often turn into recessions. We saw it happen just before the collapse of the “dotcom bubble” in 2000, for example.

And I’ll make one observation I have to word very carefully… I don’t want to seem as if I’m dismissing any of the economic pain you or your family are likely feeling from inflation today.

In trying to understand inflation, it helps to take the long view… and the fact is, it’s not the unambiguously toxic force many people think of it as.

I know it may seem out of touch, or tone-deaf, to try to make that point today…

More than six million British households are expected to experience “fuel stress” from soaring energy costs by this summer – meaning they’ll be forced to spend more than 10% of their income on heating and electric bills.

And the Bank of England predicts that consumer price inflation – a measure of inflation in household costs including energy – will hit a 30-year high of 6% in April. For context, consumer price inflation clocked in at 4.9% in January, the most recent figure available.

I could go on… statistics like these abound in headlines these days. But you surely don’t need any reminders from me on what inflation is doing to families’ budgets and living standards.

Today’s levels of inflation are a major problem for a lot of people (just how big depends on how much of your wealth is in cash, how much of your income comes in at a fixed amount, the nature of your daily expenses, and other factors).

But inflation’s long-term effects can be overblown. Consider this quote from Warren Buffett:

“Over my lifetime, the US dollar has lost over 90% of its purchasing power. Yet even after adjusting for that inflation, the net output of our economy has grown by over twenty times – over 2,000%.”

In the UK’s economy, we see a similar trajectory. In 1948, the UK’s GDP stood at £384 million. In 2021, GDP reached £2.195 trillion. That’s economic growth of 471%.

So as Buffett pointed out, robust growth and economic prosperity can exist alongside inflation. Inflation of around 2% a year – that target many central banks like to set – can even encourage corporate spending and investment, as CEOs and business leaders are incentivised to act before prices are expected to rise.

But I realise all of this may sound academic today, when we’re faced with inflation well above that 2% rate that many central bankers consider ideal. (And of course, many readers will consider the only acceptable level of inflation to be 0%, to do away with that “hidden tax” as the economist Milton Friedman described it.)

And of course, what’s more important than these philosophical debates on monetary policy is what you can do today to counter rising inflation…

Most investors will instinctively turn to precious metals or cryptos as a solution to inflation.

But last week, one of our top analysts, Sam Volkering, held a free “MegaYield Masterclass” to advocate a slightly different approach…

Because while most people consider themselves fortunate to find a 3% dividend yield that ticks up over the years, Sam told a group of readers to think much bigger than that.

On Thursday, Sam showed them how to use an investment vehicle Bank of America says could be “more disruptive than bitcoin.” And potentially “mega yields” are possible.

Of course, you do’t get these kinds of yields by buying Treasury bonds… this is a higher-risk investment. But for readers who can embrace the risk that comes with these potential yields, Sam may have uncovered the most aggressive and powerful way to beat inflation.

Today, Sam is offering a replay of his free “MegaYield Masterclass” – you can watch it here.

Until next time,

William Dahl
Contributing Editor, Exponential Investor