This Little-Known Inflation Number Has Washington in a Frenzy

Andy Snyder|April 22, 2021

Inflation is coming.

The big question is when… and what to do about it.

To answer it, there’s an indicator you must watch. It tells a much deeper story than mainstream headlines… and contains much more truth than anything that will ever come out of Washington.

When it comes to inflation, we’ve been talking out of both sides of our mouth for months. On one side, we’ve cursed the free-money bonanza that will surely have painful, long-lasting effects on the value of the dollar in your wallet.

On the other side, we’re taking full advantage of inflation’s powerful oppositional force.

Within Manward Letter, we break our Modern Asset Portfolio into several categories. Where we’re putting our money and how much we’re putting there varies based on “real” interest rates – in this case, the yield on the 10-year Treasury minus the rate of inflation.

It’s an entirely unique model. We know of nobody else doing it.

Right now, the yield is negative (-0.74). It’s just 30 basis points from a record low.

Clearly, the inflationary pressure we’re starting to see in the real world hasn’t trickled into the numbers yet. To take advantage of the situation, we’ve begged our readers to load up on what we dub “Deflation Leaders.”

These are the companies that, for whatever reason, are lowering prices within their industry.

While we don’t own it, Amazon (AMZN) is an ideal example. Its disruptive business model is the top reason prices have sunk in recent years. With so much new technology coming online, there are hundreds of highly profitable companies with similar deflationary power.

This section of our portfolio has treated us very well.

The question now is how long the trend will last.

We’re looking at two things.

A Powerful View

The first, of course, is interest rates.

Again, our system calls for us to adjust our holdings as the real yield waxes and wanes. The next adjustment to our allocation strategy will come when real yields turn positive.

The second thing we’re looking at will tell us how soon that move may come.

It’s a topic that is in the news often. In fact, it’s one of the most politicized topics out there (and that’s saying a lot these days).

And yet few folks are associating it with inflation.

If you recall, the Federal Reserve has a dual mandate. An evolving idea since the late 1940s, the money maestros are in charge of controlling not just our currency… but our job market too.

It’s an idea that baffles many folks.

It shouldn’t.

While interest rates are the Fed’s headline-making inflation lever… it’s the jobs market that history shows can really rough things up.

As we make the turn into the controversial and political, think of it this way…

Donald Trump went head-to-head with Jay Powell and the Fed. He wanted a weaker dollar. He wanted inflation to juice his numbers. But Powell wouldn’t give it to him.

As he tends to do, Trump took things in his own hands.

He tightened the reins on China… slashing our access to one of the largest cheap-labor pools on the planet.

He locked down the borders… making it tough to find cheap migrant workers.

And he froze the nation’s H-1B visa program… eliminating a desperately needed source of hot bodies for the tech industry.

By making labor scarce, he thought wages and, therefore, GDP would surely rise.

Now… the Other Way

Now that the COVID panic has $4 trillion worth of freshly printed money looking for a home, Joe Biden wants just the opposite. Inflation would ruin his massive spending and social schemes.

So what’s he doing?

He’s relieving the economic tension with China.

He’s opening the borders – withdrawing a Trump executive order that stopped issuing new green cards.

He’s let the H-1B visa ban expire.

And, just this week, he made an additional 22,000 guest worker visas available for this year.

It’s not good news for the 9.7 million unemployed in the country… but it does slow the race to inflation.

In fact, it does it in what may be the only way that won’t ruin the economy’s nascent recovery.

No Other Choice

This is a very important theme that we must all pay close attention to.

Of all folks, Janet Yellen knows best what happens when the Fed tries to raise interest rates these days.

The stock market throws a fit.

And as valuations are at record highs and there are so many fiscal gaps to fill, another “taper tantrum” will have dramatic effects. As we’ve said for years, the Fed has gotten itself in a dangerous trap.

It means it will be forced to turn an eye toward the other half of its playbook… jobs.

Look for the acronym NAIRU to soon make more headlines.

It stands for – take a deep breath – the non-accelerating inflation rate of unemployment.

Some economists refer to it as the “natural rate of unemployment,” but the two ideas, while similar, are distinctively different.

Defining NAIRU is simple. When unemployment is above this level, inflation pressure is minimal. When unemployment falls below it, quickly rising inflation tends to be imminent.

The current NAIRU figure is 4.5%.

The current unemployment figure is 6%.

The difference is shrinking fast… faster than most folks thought.

Caution: Surge Ahead

Now… here’s what has us worried.

We’ve heard from many sources that employers are having a terrible time finding folks who want to work.

One popular local restaurant, in fact, just had to cut its hours… because it can’t find enough folks to fill jobs.

“Sorry,” it posted on its door, “until we find more workers, these are our new hours.”

Crazy, right?

But that’s what happens when unemployment benefits are raised and extended, free money is stuffed in mailboxes, and folks don’t have to pay their rent, mortgage or student loans.

For the same money, folks can avoid the “hassle” of clocking in each day.

And, if you ask us, the inflationary pressure it created with trillions in stimulus is the real reason Washington is racing to flood the market with cheap labor.

Karl Marx used to write about the “reserve army of labor.”

He claimed the oh-so-evil capitalist system needed a large class of desperate low-wage workers to keep the system in balance.

When prices started to rise, this “reserve” could be pushed out of the workforce and bring prices back down.

When prices started to fall, it could use the army to build things up once again.

The idea has merit.

Just look around… and use a critical eye.

But Marx did get one thing wrong… very wrong.

It’s not the capitalist system that deserves a finger pointed at it. It’s a government that can’t resist meddling with its economy.

When it allows asset prices to go only one way… something else must give.

So if Washington is to fight the inflation its massive manipulation has created, it’s going to need to draft a lot of folks for a Marxist cheap-labor army.

Keep an eye on the NAIRU.

It’s the real indicator these days. And it appears to have Washington in a frenzy.