The Fed Is Playing With Fire. Here’s A Closer Look.

Stanley Druckenmiller, one of the greatest investors of our generation, made the case earlier this week that the Fed is playing with fire because it still has emergency “easy money” measures even though the economic emergency is over. Based on the the evidence, shown below, in my humble opinion, Stan is right, and the Fed is wrong.

Before we jump into the numbers, I am a big fan of stepping back and looking at the forest, not just the trees, when investing. That means, I like to look at market action on a longer-term horizon, not just the last few days or weeks. If you step back and look at the price of just about any “asset” in the economy over the past year or two, you will most likely see the price of that item soar in value – especially, if you look at food and energy which is the core of what the Fed looks at for inflation.

The Fed’s Dual Mandate: Jobs & Inflation

As a quick refresher, the Federal Reserve has a dual mandate: keep unemployment low and keep inflation near 2%. Since the March 2009 low, the Fed has done a good job on with unemployment but it has not been able to get inflation near its stated goal of 2%.

In late 2020, The Fed changed its stance and said it wants higher inflation and will look for an average of 2%, which means that inflation can run above 2% for some time before the Fed raises rates, or ends its emergency easy money stance.

Here is a closer look at some of the popular assets so you can decide for yourself:

S&P 500: +93.35%

2020 Low 2191.90

2021 High: 4,238

Percent Gain +93.35%

Bitcoin: +1,456.29%

2020 Low: 4,210

2021 High: 65,520

Crude Oil: +579.80%

2020 Low was negative -40! But let’s use $10

2021 High $67.98

RBOB Gasoline: +489.63%

2020 Low $0.376

2021 High 2.217

Copper: +133.51%

2020 Low 1.9725

2021 High 4.6060

Lumber: +580.40%

2020 Low 251.50

2021 High 1711.20

Soybean: +103.74%

2020 Low 818.40

2021 High 1667.40

Sugar: 109.28%

2020 Low 9.05

2021 High 18.94

There are a lot more “prices” that I can show you, but suffice it to say, prices have soared over the past year. Clearly, the evidence shows us that inflation is running way hotter than 2%.

Economy Is Growing, Not Contracting:

The other major point to focus on is that the economy is growing, not contracting. In March 2020, the economy was contracting and it was in a state of emergency. Now, however, the economy is growing nicely, yet the Fed is still printing money like we are in a steep economic crisis.

Bottom Line:

Clearly, the Fed should slowly start removing its emergency measures. We all know, that anything can happen, but going forward but, in my mind’s eye, the key will be to see how the Fed handles the delicate task of tapering/eventually ending its emergency easy money policies, and to see how the market(s) reacts when that happens.