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Beware! U.S. Economy Could Be Setting Up for a Shock Lombardi Letter 2021-05-11 06:42:11 us economy Federal Reserve inflation The U.S. economy could on the verge of a shock that creates headwinds for the financial markets and American consumers. Here’s why and when it could happen. U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2021/05/economic-shock-stocks-stock-market-jobs-laid-off-unemployment-copy-space-concept_t20_Bm7pm9_edited-150x150.jpg

Beware! U.S. Economy Could Be Setting Up for a Shock

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eware! U.S. Economy Could Be Setting Up for a Shock

U.S. Economy Is on Cusp of Wild Shock

Investors beware. The U.S. economy could face a shock, an event in which the financial markets experience wild swings and consumers experience hardships. Don’t be surprised if this kind of event takes place in late 2021 and/or early 2022.

That may sound extremely pessimistic at a time when everything is looking great on the surface. No matter where you look, it’s “good news.” The Federal Reserve is saying the U.S. economy is setting up for robust growth in 2021. Job numbers are decent. The stock market is near all-time highs, the housing market is doing well, and so on and so forth.

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However, don’t ignore what’s happening underneath the surface. Know this: we’re currently seeing a massive disparity, and it may be underreported these days.

There are two camps being built.

In one camp, you have the Federal Reserve, which is sticking to its guns and saying that interest rates need to remain low for a while. Moreover, the Fed continues to print money. It’s very clear that if there’s any inflation, it’s going to be transitionary, and the Fed isn’t worried about it, whatsoever.

In the other camp, there’s a lot of noise about inflation. With the prices of basic items soaring, the case for higher-than-normal inflation continues to get stronger. The bond market is acting on this, companies are concerned about price pressures, and investors are starting to get nervous.

You really have to watch this disparity closely. The bigger this disparity gets, the bigger the shock could be to the U.S. economy.

Where Does the Shock Come From?

If inflation surges in the near term and wages don’t keep up, it will be a recipe for disaster for Americans. Consumers are a major force in the U.S. economy, and higher-than-normal inflation with no income growth could hurt their buying power big-time.

For businesses, inflation creates problems in making decisions. There are only so many costs they can push on to consumers until those consumers stop buying.

Look beyond all this as well. The Federal Reserve fights inflation by raising interest rates. Imagine what kind of issues will arise in the financial markets if the Fed is forced to raise interest rates very quickly. What will happen to stock valuations? What will happen to the behemoth number of derivatives that are floating around?

U.S. Economy Could Get Derailed

Dear reader, I see a lot of complacency out there.

Inflation in the U.S. economy is becoming a problem and the Fed keeps saying it’s not worried. That’s very concerning.

I fear a situation in which we see inflation figures surge five percent in the U.S. economy and the Federal Reserve is forced to act quickly. Imagine a situation in which the Fed is raising interest rates, consumption is taking a hit, and leverage in the financial system is causing investors to panic.

At the moment, the music goes on.

I no doubt expect the inflation in the U.S. economy to be transitionary. But what concerns me is the transitionary period. Will it be a few months? A few quarters? Or could it be a year or two? We could see economic woes, asset prices deflating, and much more.

Be very careful.

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