EC Peak Growth And Inflation

The rates of growth and inflation are now surging in the U.S., but that shouldn't be a surprise to anyone. What else would you expect when the Federal government has sent $6 trillion dollars in helicopter money to state and local governments, businesses, and individuals over the past year. Then, at the same time, millions of homeowners are told they don't have to pay their mortgages. In addition, our central bank has printed trillions of dollars to push asset prices through record-high valuations and continues to create $120 billion each month in order to keep Wall Street happy.

All the above is happening while the economy opens up due to the dissemination of COVID-19 vaccines. The markets have anticipated this economic boom and have now nearly fully priced it all in. For instance, home prices have soared by 12% year over year in February, which was the fastest increase in the past seven years. And, the total market cap of equities is now over 200% of GDP—about twice the level reached at the start of the Great Recession.

Image Source: Pexels

But that rate of change in growth and inflation will be peaking in the next two months. I'll explain why that is and what that means for investors?

First off, borrowing costs and the rate of inflation are much higher than they were a year ago. Consumer Price Inflation jumped by 2.6% year-over-year in March, as compared to only a 0.3% increase y/y in April 2020. And, the rate on Benchmark Treasuries has increased by more than 100 bps since last year. Not only this, tax rates are headed higher on both corporations and on those consumers who are traditionally responsible for creating job growth. A rising cost of living, increased debt service payments, and an attack on capital formation—and indeed capitalism itself--should serve to vastly inhibit economic growth later this year and especially into 2022.

This dovetails into the overall fiscal cliff that is rapidly approaching. The $6 trillion in pandemic assistance over the past year was a powerful adrenaline shot that greatly boosted consumption. But artificial sugar highs are temporary, and there are no more comparable helicopter money drops in the works. Even if all of President Biden's proposed $4 trillion infrastructure and American Families Plan is made into law, it will be spaced out over ten years. Hence, the impact will be much more muted and diffused than the previous two massive fiscal carpet bombs. Also, the total of 18 months' worth of mortgage forbearance ends on approximately 2.7 million distressed homeowners come this fall. And, the Pandemic Emergency Unemployment Compensation Program provided 53 weeks of additional jobless benefits. That extra $300 per week expires the week ending September 5, 2021.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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William K. 1 month ago Member's comment

Interesting and depressing and quite i agreement with what I have been anticipating, except the timing is a bit different. The question is about accountability and control. Who is willing to hold the federal reserve bakers accountable? And who is authorized to implement the firing squad to reward them for their efforts? The damage that has been set into motion is not able to be undone and so it will surely be a rough ride for a while.