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Boo! Really Scary Tales of Inflation

Even scarier than Elizabeth Warren...!
WANT to hear something really scary? asks Frank Holmes at US Global Investors, glancing back at Halloween 2020.
Inflation, the scourge of the modern economy, may be running much faster than we're led to believe.
I'll use consumer spending on Halloween as an example of what I mean.
Total Halloween spending has fallen for the past three years and was projected to fall yet again this season, to $8 billion from $8.8 billion last year, according to recent data from the National Retail Federation (NRF).
No surprise there. With many people still avoiding large gatherings due to the pandemic, and health officials calling trick-or-treating a "high-risk activity", less is going to be spent on candy, costumes, party decorations and other Halloween-related items.
Indeed, spending on costumes was forecast to plunge a not insignificant $600 million compared to last year, from $3.2 billion to $2.6 billion.
Given this, you might suppose that on a per-person basis, Halloween spending would also be down. And yet that's not the case, according to the NRF's survey. Average spending per consumer was expected to increase almost 7%, from $86.28 to $92.12.
So what's going on here?
There may be a number of possible explanations for this phenomenon, but I believe the most convincing is also the simplest: Inflation.
And as I've said before, the real inflation may be much higher than the official consumer price index (CPI) issued monthly by the Bureau of Labor Statistics (BLS).
The BLS reported that consumer prices were up only 1.4% in September compared to the same time last year. If we remove volatile food and energy prices, they were up slightly more, at 1.7%.
How can this be, when consumers are spending 7% more on candy and costumes this year, despite total Halloween spending declining?
The truth is that the CPI has undergone several changes in methodology over the years. At one time, it was a genuine cost of goods index (COGI). Today, however, it's more of a cost of living index (COLI). So when you see that inflation is up 1.4% year-over-year, you can be sure it's actually higher – potentially much higher.
How much higher? Economist John Williams, who runs the popular website, uses the 1980 methodology for measuring inflation. According to this gauge, consumer prices are up closer to 9% than 1%.
The implication, of course, is that inflation could be eating your lunch faster than you realize. And that's truly scary, whether you're still in your wealth building years or retirement.
There's reason to believe that the rate of inflation could get a boost next year, particularly if we see additional multi-trillion-Dollar stimulus packages. I'll discuss the election more in-depth below, but I'll say upfront that it's being reported that Massachusetts senator Elizabeth Warren is seeking an appointment as Treasury secretary should Joe Biden win tomorrow.
This is the same Elizabeth Warren who, while still a Presidential candidate, said her Medicare-for-all health care plan would cost a staggering $52 trillion.
I've written before about modern monetary theory (MMT), the controversial economic thought that says governments with complete control over their own currencies can spend as freely as it wants. To a proponent of MMT, a $52 trillion price tag means nothing. Just print more money.
Currently the system is just that – a theory – but with the possibility of a Treasury Secretary Warren, MMT may become a reality sooner than we expected.
That said, get ready for unrestricted money printing – and, as a result, hyperinflation.
Recently I shared with you Goldman Sachs' forecast of higher inflation next year. The investment bank recommends commodities, raw materials and other hard assets, which would benefit in a high-inflation environment.
Many big-name money managers are urging investors get exposure to gold. Speaking at the Robin Hood Investors Conference last week, billionaire family office manager Stanley Druckenmiller said he believed a "blue wave" would hurt equities long-term and that bond yields and gold prices would rise.
Also last week, I had the pleasure of co-hosting a webcast with my friend Kevin O'Leary, "Mr.Wonderful". Kevin said he was maintaining a 5% weighting in gold, split between physical bullion and shares of SPDR Gold Shares (GLD). Gold, he said, is "all about hedging against inflation."
The yellow metal's traditional haven status has definitely strengthened this year. The World Gold Council's (WGC) summary of the third quarter shows that total holdings in gold-backed ETFs hit a record high of 3,880 tonnes, having added 272.5 tonnes in the three months ended September 30.
Physical gold investment also hit a new all-time high. Gold bar and coin purchases increased an incredible 49% year-over-year through the end of the third quarter, reaching 222.1 tonnes. Largest volume increases were seen in Western markets, China and Turkey, the WGC says.
Speaking of breaking records, voters in this US election cycle were galvanized like never before.
But we already knew that. For what it's worth, Biden has raised more money than any other Presidential candidate in US history. As of October 12, his war chest stood at a head-spinning $952.2 million, which is one and a half times as much as President Donald Trump had raised over the same period.
The market also appears to be pointing toward a Biden victory. But what should have been working in Trump was stellar economic growth in the third quarter. GDP expanded at a record pace of 7.4% quarter-over-quarter and 33.1% annualized.
Also, manufacturing activity has been incredibly positive. The US ISM Manufacturing PMI has been in expansionary mode for the past three months, and in October it registered a 59.3, the highest reading since September 2018. The manufacturing index for the Federal Reserve Bank of Richmond shows factories growing at a record pace. The index hit 29.0 in October, the highest reading going back to 1992.
Nothing is set in stone, obviously, and there's always the possibility that election results will be contested. However things turn out, be prepared for heightened volatility.

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

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