About yesterday’s Federal Reserve policy decision and the followup press conference given by Jerome Powell: Let’s face it…it was so boring that if you can’t fall asleep tonight, you might consider a replay if you’ve run out of bennies.

One of the major themes of the press conference is a four letter word - inflation.  He took a lot of questions on the topic and was pressed on the idea that for close to 10 years, the United States hasn’t seen inflation consistently at 2%, though it’s been close and sometimes it has crossed over for very brief periods.

One of the mistakes that everyone at the press conference made, including the press as well as the chairman himself, is that inflation is dependent on job growth, wage growth, low unemployment, and consumer spending.

This is all based on a theory called the Phillips Curve, which has been disproven because at best, there is only an inverse correlation between unemployment and general prices.  The theory says that if you put a fat kid on one side of a seesaw (unemployment), and a skinny kid on the other (inflation), you’ll see one go up (inflation) as the other goes down (unemployment). In plain English, if more people are employed, more money is spent on stuff, and prices will gradually rise. So says the Phillips Curve.

But I want to emphasize that there is only a correlation and it is not the entire story.  If you really understand inflation, then you’ll understand the Phillips Curve and my seesaw analogy. You'll also understand that a positive delta on prices is just a symptom of inflation, not inflation itself.

So let’s set the record straight so that you can identify real inflation and also be able to benefit from it. Real inflation is actually just an expansion of the money supply, or how much money is floating around with potential for being used. In order to get a general rise in prices, there are two more factors.

The first factor is something we call the velocity of money.  Technically speaking, it is how many times each unit of the currency (a dollar) is used in a given period of time, typically a year. But if you want to understand it, velocity of money is just all that money changing from potentially being used to buy stuff into actually being used to buy stuff. Just like the gas in your car doesn’t do anything for the car until you start the engine, all that money doesn’t do anything to prices until it’s actually used.  You see, nothing really happens if the money is printed by the government but it just sits in a bank vault or on a military base. Once the money is circulated and used, then we can see the effects on prices.

The third and final factor that is needed to affect prices is consumer psychology. If individuals, company spenders, and government spenders generally think prices are going to rise, they tend to spend their money a little sooner before prices rise. For example, where I live there is a major shopping area with five gas stations.  If two or three have raised their price from $2.59 per gallon to $2.79, then I know the other stations will follow in the next day or two, and I quickly fill up. So too if I know that there will be a sale on chicken cutlets, I wait until the sale begins and then I stock up. What we think will happen to prices causes us to modify our spending habits accordingly.

All three of these factors are needed, which again are growing the amount of money, using money, and what we think about money.

The Phillips Curve is really only dealing with prices, which is the symptom of inflation, not inflation itself.

So the question is how to profit from it. If we know the Fed wants inflation of 2% per year, where do the opportunities lie?  And if we know that inflation has been below that for nearly 10 years, which opportunities are most likely to do best?

Before you know where to put your money, there’s two important points. First is that you need cash to pay for your living expenses.  It seems obvious, but there are those who believe that completely exiting USD will be beneficial.  That only works if your local grocery, landlord, or gas station will accept Euros, Francs, Pesos, or Yen. Second is that any investment you go into needs to beat inflation in order for it to be profitable, otherwise you will lose ground.  And one more thing...you will need cash to jump at the opportunities that arise, but bear in mind that not all opportunities will suddenly appear at the same time.

Knowing that the Fed wants higher inflation (and rising prices), and that it is disappointed with how that’s been going over the last few years, we can surmise that the Fed will probably do things to increase inflation and prices a little more.  They’ll put the foot on the gas to catch up. In fact the Fed has telegraphed this policy change, beginning this past Fall 2018. Some of the opportunities I see right now from current and most likely future Fed policy are in gold and silver, consumer staples, and midstream energy and uranium, and staying away from autos, housing, and financial institutions like banks and insurance companies.

Until next time remember that there is always a bull market somewhere in the world, and on the opposite side of every crisis there always lies opportunity.