Dec. 29, 2021

When Inflation Becomes Invasive.

Now I have to confess, I'm one of those backyard gardeners. I like to tinker around and see which plants I can kill off this year.

And like every gardener, there are certain invasive species that plague me every year. Weeds that come up again and again, and must be taken care of.

But there's one particular group of invaders that really bothers me: the hornets. There's one group that returns to the same spot under the eves each spring. And I know that I have to get rid of them, or they'll become so invasive that they'll attack me each time I venture out of the house.

Inflation has become just such an invasive plague to our economy this year. It all started in January. At the same time that our new President Joe Biden was inaugurated.

We began the year with inflation running at a very mild 1.6%. Inflation had been below 2%, for years. And most of us on Wall Street, myself included, assumed that would be the case for years to come. Inflation was a thing of the past, and such things as the nation's demographics made it a sure thing that low inflation would continue.

None of us, at the time, realized the full impact of the progressive policies of the current administration. Unlimited free-spending, combined with a restrictive green energy program, which skyrocketed the price of gasoline, in particular, has driven prices sky-high. Gas prices have more than doubled in less than a year. And overall inflation has more than tripled.

Something that we haven't seen in our lifetimes.

And like those invasive bugs and weeds in my garden, this has proven to be a real annoyance. A blow to our way of life.

But up until now, that's all it's been.

It is right now, that we are transitioning to allowing these invaders to take over the garden. We're losing our battle with inflation. It's as if I let the weeds go wild, or the hornets finish their nest. Now is the time when we make the difference between a real garden, and the weed patch.

On Monday we saw just how this transition will be made, as higher interest levels are introduced into the overall financial system.

Now on Monday, we had the latest auction by the US Treasury of the 3 months, and 6 month Treasury bill as well as 2 year Treasury Note. These are the short-term instruments upon which much of the interest rates on our consumer loans are based.

Your credit cards, short-term loans, and eventually even mortgages, all take into consideration the short-duration money market instruments. Like these bills and notes.

And what we saw on this latest auction, is how dramatically yields are rising, to match this dramatic increase in inflation.

Now we started out this year with historically low yields in all the maturities: With the 3-month bill yielding less than ½ basis point. That's .005%.

Pretty low.

The 6-month bill was not much better, its yield was less than 1 and ½ basis points. While the 2 year Note was slightly over 10 basis points yield.

Today, those first 2 bills are yielding 10 times, the level they were at earlier this year. While the 2-year note is 6 times higher.

Dramatic, don't you think?

But here's the part that's concerning, and what makes this a more permanent condition. These short-term rate adjustments are now working their way through the economy.

We all see it.

From the stores where their inventory financing is now higher to the adjustable-rate mortgages, also higher, to the credit card interest, ditto.

We are building a higher overall interest level into the entire financial system. An interest level that will now be with us for an extended period of time. Perhaps years.

The weeds have won.

And there seems to be no one in Washington who has an effective way to meet this burgeoning interest rate crisis.