Deltec Think About This Will Repression Hit The Inflation Target? | Page 2

Think About This INVESTMENT RESEARCH EXECUTIVE SUMMARY Last week was very important for our core ‘Maximum Monetisation’ thesis. Chairman Powell said that the Fed Committee is now comfortable with a period of inflation above 2%. An overshoot relative to mandate to catch up for periods of sub target inflation. This is absolutely no surprise given that inflation is the best remedy for huge government and corporate debt piles. This new, elevated, target for inflation justifies yet more policy action and stimulus, more asset purchases and Central Bank balance sheet expansion. This is likely to perpetuate or extend negative real interest rates, to intensify financial repression which will benefit real assets such as Gold, other commodities, bitcoin, infrastructure and farmland. It benefits our core holdings. Beyond that there is a serious question if the Fed will succeed in generating inflation. Nothing they’ve tried thus far has worked. Through commodities, through dollar weakness and the emerging market stimulus this generates, and through asset prices, maybe they have a chance. But we think they will struggle. High unemployment, weak balance sheets, globalization and technology are strongly deflationary and are significant forces to overcome. We think it is too early to bet that the inflation genie will escape his lamp. Inflation the target. Repression the weapon. The relationship between gold and real interest rates is extremely robust. As real interest rates fall, gold rises. We have been highlighting (and benefitting from) this correlation for nearly 2 years. The logic explaining this relationship is easy to understand. If the yield offered by government issued risk-free assets is below inflation, then the value of that investment is declining. This is financial repression. In these circumstances it pays to look for an alternative that might hold its value. Gold produces no yield nor income and incurs storage costs. But when this cost is lower than the erosion of value suffered by holding government paper, it becomes an attractive investment. Combined with the fact that over thousands of years gold has retained its real value and purchasing power, the appeal is obvious. The economic and behavioral causality, and the investment narrative this all generates, is a powerful force. Deltec Bank & Trust Limited