The SARS-CoV-2 or COVID-19 pandemic devastated the global economy and hit the U.S. especially hard. 

Thirty-two million people in the U.S. have been infected with the coronavirus — nearly 10% of U.S. population — and over 581,000 people have died. For context, these numbers are about 10 times worse than a typical flu season.

That’s a massive macroeconomic shock.

As a result, nearly 10 million people are still unemployed. 

As of data collected in March 2021, nearly one in nine households with children lacked sufficient food, and one in seven renters are behind on rent or mortgage payments.

Previously stable industries like tourism, hospitality, entertainment, and retail have seen extensive if not irreparable damage.

Even with vaccines and the possibility that things might return to some semblance of normalcy over the next year, no one expects the industries listed above to return to full capacity any time soon.

The effective cumulative financial cost of the pandemic is estimated at more than $16 trillion, or 90% of the GDP of the U.S.

[The Gross Domestic Product (GDP) measures economic activity by totaling the value of all goods and services produced by labor and property in a market.]

That’s the damage done to the U.S.’s productive capacity.

The risk in this situation is a deflationary spiral — the opposite of hyperinflation. 

A deflationary spiral occurs when falling demand for goods and services leads to falling prices, which leads to debt defaults, which leads to bankruptcies, which leads to layoffs and wage reduction, which leads to further decreases in demand.

Economic theory suggests that a deflationary spiral can be as bad or worse than hyperinflation. This is the lesson of the Great Depression in the 1930s, and it’s one reason the U.S. hasn’t seen a sustained deflationary event in the U.S. in about 70 years.

To maintain this trend, the U.S. Federal Reserve Bank has adopted the policy of avoiding deflation at all costs. 

I will not bore you with the details of central banking policies…

But to state things simply, the Fed tries to avoid deflation by targeting 2% inflation per year. And in situations like the Great Recession of 2008 and the SARS-CoV-2 pandemic, the Fed engages in a policy of lowering benchmark interest rates and increasing monetary supply through a policy called “Quantitative Easing.”

There’s just a few problems with these policies, it seems.

First off, there’s no universal agreement on how to measure inflation. The Fed targets a metric called personal consumption expenditures (PCE), which measures the change in goods and services consumed by households. 

But the Fed also uses the consumer price index (CPI), which measures households’ out-of-pocket spending on goods and services and has been inflating higher and faster than the PCE. 

And then there is a veritable “Alphabet Soup” of other inflation measures, including the Core PCE, the Trimmed PCE, PPP, Chained CPI, PCEPI, the BPP, the EPI…

The magazine The Economist even measures inflation by observing changes in the price of the McDonald’s Big Mac hamburger.

So the Fed is targeting inflation… but there is no consensus on what economic data to use to measure inflation.

Secondly, why is 2% inflation the goal for all economies, no matter what size or circumstance? 

This number, 2%, actually comes from an experimental and arbitrarily decided policy partially crafted by a kiwifruit farmer and enacted by the New Zealand parliament in 1989. The law was written and decided upon in haste, because the parliament wanted to go home for Christmas. 

By 1991, other countries started copying this policy and 2% became the orthodoxy. In 2012, this became the stated target of the U.S. Federal Reserve Bank.

So the Fed is targeting an inflation rate that seems arbitrary and invented. 

Third and finally, speaking from my own perspective, I think the fears of deflation are overblown.

For instance, innovation and technological advancement is a deflationary economic force. 

If it becomes easier, due to technological innovation, to mass produce goods and provide services at scale, the supply increases, which results in prices going down. 

Voila. Deflation is a natural result of an advanced economy that’s doing well. That’s just logical. 

My sentiment echoes those of the Polish economist Jacek Rostowki: 

Some economists warn that the U.S. is already in deflation because price indices underestimate quality improvements and therefore overestimate price increases by 1-2 percent… True price stability would change people's attitude towards saving and lay secure foundations for growth. We must not throw this prize away for fear of an imaginary [deflationary] threat.

Japan is a good example of this. Japan has experienced protracted deflation in recent decades. 

Economists fear deflation in part because it causes households to postpone their spending, leading to falling consumption and economic demand. 

By this logic, Japan should have high unemployment, dead and dying shopping centers, a lower standard of living than it had in 1990, and no incentive for technological innovation.

Despite deflation, Japan consistently holds a top-5 spot in the Global Innovation Index. Consumption has been rising despite falling prices. The unemployment rate is consistently below 4%. And there’s rarely ever a lack of goods, supplies, or commodities in stores. 

But despite the fact that orthodox beliefs and policy positions about deflation might be wrong or unfounded…

The economists in charge of the Fed have doubled down in their efforts to spur inflation…

And my and many others’ concern is that the Fed’s policy of “Create Inflation at Any Cost” can, of course, backfire. 

Is Hyperinflation Back in the U.S.?

The Federal Reserve has said that it plans to keep its benchmark interest rates near zero for “as long as it takes until the economy starts to recover from the coronavirus crisis.”

This of course follows over a decade of near-zero interest rates. 

By keeping interest rates artificially low for years, the Fed has created massive inflationary asset bubbles. 

Let me explain…

The interest rate we’re talking about is the “federal funds rate,” which is what banks charge one another for short-term borrowing. 

Lower interest rates makes it easier for banks to borrow money, and thus have more money to lend and spend. 

And since banks make money by charging interest, they’re incentivized to attract more and more borrowers. The banks want people to go into more debt, so that the banks can make more money. 

But in order to attract more “customers” — that is, borrowers — banks have to lower the interest rates they charge.

These lower rates are why mortgage rates in the U.S. have reached an unprecedented low over the last year… and also why home prices are now outpacing wages and rents, skyrocketing up 11.2% in the last year — the largest annual gain in 15 years.

These skyrocketing home prices are why new-home construction has soared to the highest level in over a decade.

This surge in home construction is why the price of copper hit 10-year highs and the price of lumber is up 193% in the last year and surging higher.

Because of low interest rates drawing in new creditors, U.S. household debt has climbed to an all-time record of $14.6 trillion.

Non-bank corporate debt is at an all-time high of $7.2 trillion.

And because the Fed has purchased $7.8 trillion in assets from banks to give them cash to enable this low-interest lending, and because Congress has passed about $4 trillion in stimulus, including direct payments to citizens… 

The U.S. government’s debt has hit 130% of its GDP. The sum of all outstanding debt owed by the federal government amounts to $28 trillion.

Data from the Fed shows that the supply of money rose from $15.4 trillion at the start of 2020 to $19.6 trillion in February 2021.

That’s a 27% increase in the amount of money circulating in the American economy. It means over one in four dollars in existence was created over the last year and a half.

Do you see what’s happening here?

We have a macroeconomic shock in the U.S. — the pandemic…

We have reduced productive capacity in the U.S. — the $16 trillion economic cost, the huge number of unemployed people, and the industries and businesses that have gone bankrupt…

We have enormous debt in the U.S….

And we have excessive money printing.

All the necessary conditions for hyperinflation — or even just significant inflation — exist in the U.S. right now. 

Overall inflation (based on the CPI) is up only about 2.6%, but energy and gasoline costs are up 13.2%.

Based on the rising costs of commodities, I expect the overall CPI to increase even more in 2021 and 2022. 

How to Protect Your Portfolio From Inflation

Right now, the U.S. seems like it will be able to avoid hyperinflation due to two reasons…

The U.S. dollar is the world’s reserve currency, so confidence and demand for dollars still remains high. 

And the U.S. economy does seem to be entering the beginnings of a growth phase now that an end is coming to the pandemic lockdowns.

To put it another way, the U.S. might avoid hyperinflation by spurring enough economic growth that it outpaces the rate of inflation.

The economist Paul Krugman says, “Between stimulus checks and vaccinations, we’re very likely headed for a year of growth faster than anything since 1984. Happy times are here again!” 

His argument, essentially, is that the U.S. will be able to avoid the dangers of hyperinflation because the initial cause of the problem, the pandemic, is quite unlike any major economic event in recent memory. 

The recovery from the pandemic, too, will have strange and unusual economic effects. 

Some goods and services will experience deflation. For instance, the cost of certain foods, clothing, medicine, airfare, at-home entertainment, and more have all dropped significantly in price.

While other assets have undergone and will continue to see a lot of inflation in the near term. 

Home values are one such asset experiencing inflation. 

You’ve probably noticed that stock prices, too, have been inflating at a bubble-like pace — especially tech stocks.

Part of this has to do with cheap loans and excessive money printing. 

But this increase in prices is also being caused by investors wanting to avoid inflation by exchanging U.S. dollars for assets that will retain or increase their underlying value.

To quote the MarketWatch columnist Mark Hulbert:

Inflation is good for the value premium because growth stocks are those for which a disproportionate share of their valuation comes from future years’ earnings. So as inflation heats up, the present value of their futures earnings can decline precipitously. Value stocks are at the opposite end of the spectrum, with a relatively greater proportion of their valuation derived from current earnings. So they are relatively immune to higher inflation.

To put that another way…

Right now, inflation poses a serious risk to growth stocks, like those in the Next Boom Report, in the near future.

[A growth stock is a company investors expect to appreciate faster than the overall market. Growth stocks are generally priced based on the anticipation of their revenue potential in the future. For that reason, most of a growth stock’s revenue is reinvested into the company to accelerate short term revenue growth. In contrast, a value stock is priced based on current financial, or fundamental, factors.]

But saying “growth stocks are at risk” is an oversimplification, because not all growth stocks are the same.

The risk of inflation on growth stocks is this: Growth stock prices are based on the anticipation of future revenue and profits.

But with higher inflation, money in the future will be worth less. Therefore, growth stock prices should decline to reflect this.

At the same time, current revenue and earnings becomes more valuable. That is, companies making money now are at less risk than companies expected to make money at some point in the future.

So a company like ChargePoint (CHPT) that earned $146.5 million in revenue last year has less inflationary risk than a company like Joby Aviation (RTP) which has only just begun to generate revenue for the first time in 12 years.

But at the same time, Visa (V) — which has the qualities of both a growth and value stock — has less risk than a more value-oriented company like Cisco (CSCO).

Why? Because Cisco is a profitable company with relatively stagnant growth. Visa, on the other hand, is a profitable company that has averaged close to 16% annual revenue growth for the last 15 years.

Based on the data I’m looking at, we are unlikely to see a major correction or crash in the markets in the immediate future. 

The asset bubble will likely keep inflating for a little while longer. 

But I do anticipate volatility before the end of 2021. In fact, I would not be surprised if we saw a correction in the stock market — a drop of 10% or more. 

We’ve already seen a correction in tech in early March.

But because we are Next Boom investors, a correction is actually an opportunity for us to buy tranches of stocks at a cheaper price, lowering our cost basis and making it easier to produce a profit. 

Right now, everyone is greedy, but some fear is beginning to affect stock prices. 

So be cautious. Add positions slowly, if at all, and capture quick profits when you see them.