Inflationary Recession = Buy Hard Assets

Thinking about the $2 Trillion economic package that the US Federal government has recently authorized had me thinking about how that “money” gets used to stimulate the economy. And my first level of analysis was, inflation. That was not a complete analysis; but I could not nail down what I was missing. Then I listened to the #BloombergSurveillance interview with Robert Kaplan, Dallas Fed President, and it became clear to me.

The Federal Reserve will expand their balance sheet across multiple classes of assets, and they will be easing lending restrictions on banks. Those banks will make massive loans available to their largest of commercial clients which tend to be commercial real estate developers. With the massive influx of “money” available, those hard assets will increase in price. This means of adding “money” to the economy is what any political administration would do as it is the quickest way for a government to increase the supply of money into an economy and hopefully stimulate demand. Those who hold a large portion of their wealth in hard assets will benefit from this increase in the prices of those hard assets.

The government is also taking action to help with the consumer economy which is dominated by the services sector. But the government (any government and any political administration) does not have an effective way to quickly stimulate demand in the services industry. Small Business Administration (“SBA”) loans will help, and small cash payouts to households below certain income thresholds will help, but those will take a lot longer to process and to create demand in the consumer economy. And so the consumer/services aspect of the American economy will fall drastically in the short term and take a long time to return. This is what was made clear to me in the interview with Robert Kaplan of the Dallas Fed. He expects unemployment to spike into the high teens by the end of the 2nd Quarter 2020 and only start to ebb beginning in the 4th Quarter of 2020. The Fed will not be able to take actions until 2021 to assist this part of the economy, per the interview. So we are going to see an increase in the prices of hard assets while we see the consumer/services economy stumble badly over the next year.

To this amateur economist, the Fed’s ability to decrease interest rates when it is time to stimulate the consumer/services economy is no longer available. Federal Reserve-controlled Interest rates are as low as they are going to go. So the consumer/services economy will be reliant on fiscal stimulus from the Federal government’s budgetary spending as a means to re-invigorate demand. That would mean more taxes raised to fund those programs.

It is not up to me to predict if a future Administration and Legislators will have the willpower to increase taxes, but what I see clearly now is that investments in hard assets (commercial real estate and equities) for capital gains, is a better investment thesis than investments into cash cow services businesses designed to kick off free cash flow.

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