Hey guys, it's sasha inflation in the united states is a very serious threat to the stock market. So, if you're investing, you need to pay attention, but nobody out there seems to be talking about it. In fact, last week the media and u.s officials seem to be celebrating that the inflation rate was 6.8 percent just 6.8, because i guess there was a risk that it could be even higher and there is a lot to celebrate. It's only the highest rate that inflation has been since 1982 and if you look at the relative increase in the last 18 months or so, it's going up faster than at any rate since the beginning of the 1950s.

So that's only about 70 years ago, and this is actually, if you look at it with any rational, mind, a huge problem, a much bigger problem than i think. A lot of people realize because here's the thing there are a lot of different sites to inflation and it works differently in different economic scenarios and the deeper you dig into the situation right now, the uglier it looks so over the last couple of weeks, jerome powell, The chair of the us federal reserve has suddenly switched tone from saying that inflation is just transitory to saying that it now might be here to stay and could get worse in ca in case you're wondering when exactly during power did that 180 u-turn and change. The official line that date completely accidentally for no reason whatsoever coincides with the date on which jurong powell got the presidential nomination for another term. So first, let's look at the inflation itself, because there are a few important myths that we need to dispel.

The all items - u.s consumer price index from november was 6.8 percent and a lot of the positive commentaries saying look: this is all down to energy costs. Without energy, it doesn't look so bad i mean it does, but energy is up. 33 percent oil and gasoline are up almost 60 and that is apparently what's driving the index up, and you know that's where the problem lies, but dig a little deeper and in the more detailed cpiu table that nobody reads that comes out at the same time as The cpi release: you will see that the energy only bit contributes about seven and a half percent of the total index. Now energy does indirectly contribute a lot to the index through everything else being more expensive as a result, but anyway, crude oil at the moment is trading at 71, which is much higher than it was last year after we had the flash crash in march 2020.

But if you zoom out and look at the last 20 years, 71 is pretty average and we spend a lot of time at much much higher costs. Over the last few years we were sitting for 90 and 100 for a while. So there is absolutely nothing to say: the crude oil prices won't continue, moving upwards or at least roughly staying in the same place over the future, and the worrying thing is that energy costs are often not translated into price rises. Immediately.

Energy costs often impact the supply chain and more heavily in the final producers, and the impacts can sometimes take a quarter or two to fully propagate and then there's accommodation cost because rent and mortgage costs are not included in the consumer price index and a lot of Data sources point to rents going up by about 20 in the us in the last year, the smart people who compilers data on cpi don't include rent and mortgages, because that is not considered to be a monthly expenditure. You see a mortgage is, in fact a form of capital. Investment and rent is just its proxy replacement, so you're not spending money on rent. You are basically doing a proxy for what is actually an investment form.

You can tell that the thinking here on why it is not included, is done by people whose lives are very, very far away from any sort of reality, but anyway the reality is this. Living costs in real terms, are up about 10 percent year on year. At the moment, when you include that rent and the problem with inflation is that it is a self-propelling torpedo, inflation goes and makes your weekly shopping more expensive. The effective value of money decreases because you can buy less with it and there is a forced increase pressure on wages and cash flow into people's pockets to fund that increase in costs that extra cash flow.

That flows in stimulates further price increases and the speed can often accelerate. If you don't control it, it can very quickly get to a stage where you need a wheelbarrow of money to buy loaf of bread and your currency begins having a huge number of zeros at the end, and i know because when i was growing up in russia, We had official inflation rates at about 85, with real terms, inflation being several times higher than that and trust me, you don't really want to get into that space. Inflation can be even worse if, at the same time as there is general price pressure, the government decides to go and print a load of extra money. This is because freshly created money enters the money stock indirectly after the government goes and does some quantitative easing, and if you look at the financial crisis that we had whenever it was 12 13 years ago, the us government suddenly started printing a whole load of money.

The child began going off the scale, but now, let's add the last couple years into the same chart and the super aggressive money printing that happened after the last financial crisis is here. In may 2020, the us government expanded the definition of the m1 money supply, which sort of should have changed the graph, and you might think that a lot of that big jump is it, but actually the majority of this increase here is literally just printed. Money. 7.2 trillion dollars was printed from march to may 2020 out of the roughly 12 trillion increase on that graph.

So inflation is going completely nuts and at the same time, the us government is continuing to print a whole load of money at a rate which is completely unprecedented and that definitely isn't going to be helping the problem. And at the moment, the discussion is only in the consideration of reducing the amount of cash that they are printing. This is what that tapering mechanism you keep hearing in the news is all about it's just making the graph slightly less steep, but the problem is that money printing is only a contributing factor. It isn't the controlling factor or even the major factor that typically causes inflation.

The last time inflation peaked in 1980. There was no spike in money printing in the run-up at all. So a reduction in money printing by itself is unlikely in general economic terms, to have any meaningful impact on what happens with inflation, and the only real instrument that can actually have a meaningful impact, rather than sort of a bit of help is an increase in the U.S fed rate the next meeting of the fed to discuss tapering and rates, and all of that is tomorrow. It's a two-day event.

So we'll see what the outcome is soon enough, but here is the biggest problem with the current rate of inflation. While inflation is very busy running away, rates, haven't budged and are still set at not 0.25 percent and each month that the rates don't move. The situation gets worse much much worse. Here's the graph of u.s inflation since 1977, and here i have overlapped the u.s rate data for exactly the same period.

You can see that the last time inflation went this high. The rates began reacting very fast, and the rates went above 15 percent for some time to push inflation down, but now look at what's happening on the right side of this chart. Inflation is off again on its way up and the rates are doing nothing and this gap between the rate of inflation and the rate is unprecedented. In modern history.

We haven't seen ever what happens. If you don't try to increase rates in this situation, we literally haven't ever seen this happen before, because each time we have had a display inflation spike, the government of the time thought it would be prudent. You know a good idea to stop it before it gets to wheelbarrow territory, and the latest position is that rates are not going to go up until maybe may or june, and that's six months away, by which point there is a risk that inflation could go up Significantly and each month the fed does not act does not act very rapidly. The problem becomes more acute because if they do nothing, there is a genuine risk of inflation running riot and before you know it you're heating, your house with 100 000 banknotes because they are cheaper than paying for electricity or oil.

I'm exaggerating slightly, but you get the point if you start increasing rates very fast, which is what you'd have to do. If inflation pushes towards double digits, then suddenly, all of the money that you have printed and shipped into the economy becomes more expensive. Business debt costs spiral, non-fixed consumer debt goes up because cost of funds for lending increases very sharply. People with large amounts of unsecured debt on non-fixed terms, get hit and the rate of fixed rate debt skyrocket for new term loans, which exert a massive download pressure on a housing market which can very easily and probably would cause a massive property crash.

So it doesn't look good, whichever of those two routes you take and unfortunately those are the only two routes available other than doing nothing, and the only way of avoiding one of those two scenarios where you could do nothing is to pray that inflation somehow doesn't go In a spiral and decides to just bring itself down, which theoretically is possible, if you read enough economic textbooks, there are some economic scenarios in theory where this could happen, because the market decides that an increase in prices is now sufficient and increased competition. Economic activity can suppress those increases in practice, though we haven't really ever seen it in a major economy, especially one that is driving the world and that the currency that is used as the world's reserve currency. There is one other option, though one other scenario you could also pray or instead maybe pray for a massive stock market crash. That's pretty much the only other solution, a giant all-encompassing market crash, because market crashes also have a habit of slashing inflation and getting rid of the problem.

And given the fed is sitting there patiently and waiting and not increasing rates and not seemingly being too bothered about increasing rates, you've really got to wonder if they know something that you do not because if the way inflation gets solved is through a huge market crash, It definitely won't look very pretty and could have very major economic repercussions, because this one could look more ugly than the recent ones that we've had. If you found this video useful, please don't forget to smash the like button for the youtube algorithm. Thank you. So much for watching, i really really appreciate it and, as always i'll see you guys later, you.