US Is Already Grappling With Real Inflation Rates Above 10% Kyle Bass Warns

Following the latest hot inflationary print, more investors are becoming skeptical of the Fed’s view that inflationary pressures are “transitory”. Yesterday, famed investor Paul Tudor Jones lamented the deluge of money pumped into the financial system by fiscal and monetary policymakers, and warned that markets might go “bat sh*t crazy” after Wednesday’s FOMC press conference, which PTJ believes could be the most important meeting of Chair Jerome Powell’s tenure, as the Fed sees its grip on a rapidly overheating economy start to slip.

On Tuesday morning, billionaire hedge fund investor Kyle Bass warned during an appearance on CNBC that official gauges of inflation aren’t accurately reflecting how much of Americans’ wealth is being eroded by the Treasury and the Fed’s twin money issuance programs, and that the actual amount by which inflation is eating away at Americans’ savings is already in the double-digits.

Digging into the weeds, Bass said that Fed uses “chain-weighted inflation numbers” which are “designed to be artificially low.” Because of this, Bass believes actual inflation in the US is more than 10% with rates at 0.

“We’re in a new world where unfortunately the wealth gap is going to widen, the income gap is going to widen and we’re going to see more social pressure in the markets,” says @Jkylebass on the Fed maintaining low rates. pic.twitter.com/uO98FOuqID

— Squawk Box (@SquawkCNBC) June 15, 2021

Right now, investors who own stocks need to bank double-digit returns just to keep up, Bass said.

“Typically stocks keep up at about 85% of inflation so you’re not going to lose too much by owning the market vis-a-vis inflation…but you’re going to need to break mid-teens numbers if you want to make money like we’re seeing today.”

He pointed to Tuesday morning’s wholesale price data as an example.

“If you look at retail sales, they’re at all time highs in nominal terms today, much higher than they were pre-pandemic, and we still lack 8 million jobs. It’s fascinating to see the net results of such Fed largess and the money that they’ve printed really generating a monster in this retail sales number.”

As Bass sees it, much of the Fed’s asset buying is actually hurting normal Americans by – for example – contributing to the forces that are pushing home and food  prices higher.

“I think we’re in a new world where unfortunately the wealth gap is going to widen the income gap is going to widen and we’re going to see more social pressure in the markets. but when you look at the fed itself…look at housing, housing is in very short supply in many places in the country and yet the Fed is buying $40 billion in new mortgages per month, they buy $6 billion a day…there’s housing unaffordability everywhere, there are some policies that I deem to be inconsistent with ‘rational’ behavior.”

But what does this all mean for investors?

“We have all seen what’s happened in previous taper tantrums, and you’ve seen 10-12% pullbacks in the market. Will that be healthy? It would probably scare some people but I do think that in the end that you can’t worry about the market’s every move because in real terms, we have negative real rates of more than 10% today, meaning you’re losing 10% of your purchasing power annually at the current moment. Negative real rates are pretty repressive. And when food prices start moving…that’s a huge regressive tax on the poor.”

“Negative real rates are pretty repressive. When food prices start moving, like the UN Ag & Food index has moved in the last 5 months, that’s a huge regressive tax on the poor. The Fed has got to really start thinking about food prices,” says @Jkylebass. pic.twitter.com/B4nTbgUtIB

— Squawk Box (@SquawkCNBC) June 15, 2021

In other words, investors are going to need to book returns in the mid-teens just to tread water in this new inflationary paradigm.

“The US has never increased its money supply by a third in 14 months in the history of our country…is it a new paradigm? It’s a new techtonic shift in the amount of money that’s in the system. The Fed doesn’t know where this is going to end up and neither do you and I just know, it just makes sense to me, with that much more money in the system, it’s no wonder we’re seeing prices move the way we’re seeing them move.”

“When you think about real business movements, you’re seeing a fairly predictable population move,” says @Jkylebass the inflation trade. “There’s a way to stay ahead of it by buying land within 2, 2.5 hours of major metropolitan areas and investing in environmental remediation. pic.twitter.com/h3mNYzid4q

— Squawk Box (@SquawkCNBC) June 15, 2021

Echoing Ray Dalio’s infamous “cash is trash” slogan, Bass warned that people need to be more “defensive” about their capital since cash is hurting them with a massive negative real return. One option, as Bass sees it, is to invest in real estate.

“I think there’s a way to stay ahead of it by investing in land that’s within 2 hours of major metros,”Bass added.

The Fed’s two-day meeting is set to begin Tuesday morning, and will conclude on Wednesday with a press conference held by Chairman Jerome Powell. The market will be closely scrutinizing his every word for any hint that the Fed might be bringing forward its planed rate hikes. If PTJ and Bass are correct and Powell moves the goalposts for the market on Wednesday, expect pandemonium to ensue.