CNBC: Fed's Powell Just Talked Up a Classic Buffett Market Bogeyman - Inflation

Article by Eric Rosenbaum in CNBC financial

During extended bull markets, it becomes easy to believe the path of least resistance is up, and harder to see the risks that could whipsaw stocks. Take January 2020, when investors remained confident even as stock valuations were already being viewed as stretched. That was right before reports about a virus in China began to surface. This month, the path of least resistance again seemed up, until Reddit and Robinhood and GameStop gave the market its latest example of a black swan reminder that there is always something out there you won’t see coming.

What’s not a surprise is that investors panicked. Sophisticated Wall Street trading instruments that are opaque to the investing masses and risk of hedge fund failures rippling through the market are flash points for past crashes, from Long-Term Capital Management to the subprime mortgage crisis.

There will always be new market risks. Others, though, should be easier to spot coming. Inflation, for example, which is a classic market bogeyman.

“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures,” Warren Buffett once wrote. “The inflation tax has a fantastic ability to simply consume capital. ... If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker — but not your partner.”

Warren Buffett and the worst inflation

Buffett lived and invested through some of the worst inflation ever in the 1970s. And before the 2008 crash, he warned that $4 gasoline was a not a good sign for anyone. But he also warned that the Fed’s printing of unlimited money after the crash would have unintended consequences.

Buffett has more recently said, no economics textbook of the past 100 years can explain this market.

“Frankly we welcome slightly higher, somewhat higher inflation, Powell said after the Fed’s most recent FOMC meeting.

Inflation is coming.

“We will see higher comps soon,” Colas said. “Powell talked about how a resurgence in consumer spending might drive inflation. The back half of the year we will see consumer inflation higher. ... Powell acknowledged that.”

And in some ways, the setup for inflation is similar to that dark period of the 1970s when Buffett and so many other investors of older generations became permanently afraid of its power.

There are some inflation indicators that investors should keep in mind. Gold demand is one.

Traditional currency markets are also to be watched. In the 1970s .....

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