Vivi Deliciis - Recognizing When Procrastination Will Cost You
Updated: Aug 28, 2022
Fresh off Friday's speech from Jackson Hole, with Fed Chairman Jerome Powell emphasizing that the Fed is going to be firm and unrelenting in their efforts to bring inflation under control and restore what they call "price stability" we thought it would be appropriate to do a blog post today discussing the macro picture around inflation because it effects the prices you pay for Bellarri jewelry.
Long-time customers likely remember all too well how frequently we banged the drum starting in 2018 about how customers should avoid procrastination in gathering whatever Bellarri jewelry you wanted in your collection because of impending price increases. The Fed had attempted to shrink their balance sheet in 2018 after years of quantitative easing since the 2008 crash but did so at far too slow a pace relative to the bloated $4 trillion size of it, and then between a 20% decline in the S&P 500 in late 2018 and the repo liquidity crisis in September 2019 their plans to remove all that excess liquidity got tossed out the window. Gold wasn't selling for much above $1200 per ounce at the time as with tech stocks booming and interest rates at historical lows there was no reason for anyone to care about or need gold as a financial asset. But the Fed's inability to get their financial house in order was the canary in the coalmine that the system was under stress and gold's hibernation was about to end.
Fast forward 4 years, from the Fed starting and then giving up on shrinking their balance sheet to a global pandemic with economic shutdowns and subsequent stimulus programs leading to the Fed's balance sheet more than doubling, to the war in Ukraine with economic sanctions against Russia and their reserve assets being punitively frozen representing an announcement to the world that, basically, "your money is safe only until the United States decides it doesn't like you" and now the system is seriously broken. Countries around the globe watched from the bleachers as we confiscated Russia's financial reserves, and they got the inherent message - our money isn't really ours unless it's in our hands and we actually control it. Now India, Pakistan, Turkey, Egypt, Qatar, Ireland and others are heavily buying gold - and that's setting aside China, which only reports holdings of around 2000 tons while the World Gold Council believes the actual number is 10x higher, and Russia whose reserves are ironically quickly recovering thanks to soaring gas and oil prices (with sanctions come unintended consequences) and is using their newfound surging wealth to buy every ounce of gold their own domestic mining industry can pull out of the ground. Incidentally, the price of gold is exactly where it should be: US money supply is up 42% since 2018 and gold is up 43%. Remember, it's all about the money supply, not the monthly CPI inflation readings.
And gold is, of course, just the beginning of this story. The global shutdowns either bent or broke supply chains, and "green movement" ESG initiatives have made it dramatically more difficult - both politically and financially - to get new supply of anything out of the ground from oil to gas to lithium (for your Teslas) to gold to copper to gemstones. Add it all up, and just as the Fed was miserably wrong in calling inflation "transitory" they will be just as wrong in believing they can bring it back down to their fantasy-world 2% target without levels of economic damage that nobody is prepared for - including the Fed itself. They will ultimately consider themselves heroes if they can get it down to some level north of 4-5% with any level of stability. Meaning that, as far as our little Bellarri club is concerned, prices are unlikely to do anything but climb higher from here.
For many people we know, the priority right now is keeping the lights on, keeping food in the fridge and gas in the car. Anything beyond that is superfluous, which is completely understandable. Bellarri jewelry might be the last thing on your mind. But for those of you looking to add hard assets to your financial base/portfolio/jewelry allocation and wondering if waiting for pre-Covid prices to come back might be the play, let us assure you - it is not. Best-case scenario from here is that we might keep Bellarri prices somewhat steady and avoid additional rapid increases in the near future. But inflation is here to stay, just hopefully closer to 5% per year instead of 10%**.
(**The fact that the "official" CPI numbers likely understate real inflation by possibly 7-10% can be the subject of another blog post...and we can together explore the completely unsexy yet riveting concepts of hedonics and substitution)