Casualties of Donkeys

By Tony Jacoby of Shelton Capital Management

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. or Shelton Capital Management.

A Soldier’s Declaration

July 30, 1917: Hastings Lees-Smith representing Northampton rises to speak in the British House of Commons. It takes him no time to lay accolades on Second-Lieutenant Siegfried Sassoon of the 3rd Battalion Royal Welsh Fusiliers attempting to ease the contempt from fellow Parliament members for his words to follow. "This young officer, I think, appears to have one of the finest and most gallant records of service in the Army. He enlisted as a private - without waiting for the War to break out - on 3rd August, 1914, and I imagine would be one of the first 1,000 men to enlist. He has been wounded, and has been awarded the Military Cross for conspicuous gallantry." Some few words later, he begins to read Sassoon's letter, titled A Soldier’s Declaration, written to Sassoon’s commanding officer which rationalized his refusal to return to battle.

"I am not protesting against the conduct of the War, but against the political errors and insincerities for which the fighting men are being sacrificed," the letter read. The house must have been a muddle of grumbling and silent shock. How could a war hero write in such defiance to his commanding officer? The letter was scandalous and borderline treasonous.

The next day Sassoon's letter was published in the London Times. It was met with mixed support from the lower class whose boys had been marched towards the Western Front and with disgust from the elites who were left behind to debate how soon Britain would secure a victory… though many echoed Sassoon's words in private.

Lions Led by Donkeys:
Sassoon had acted in defiance of the King's Regulations, which would have otherwise meant court-marshal had he not been a decorated war hero. On one hand, the British high command had been publicly humiliated for their hubris in the debacle of the Western Front, but on the other hand, any attempt to punish Sassoon could be met with enough public backlash to embarrass the military even further. Sassoon was quietly hospitalized by the army, diagnosed with “shell shock” until they could figure out what to do with him, but the proverbial genie was already out of the bottle. The competence of British high command on the Western Front was now up for public debate. “Lions led by donkeys” some would say, referring to the brave soldiers marching though Belgium Flanders at the command of the fumbling officers.

The recent failings of American policy makers seem to be echoing those of the British during WW I. When history looks back on the inflation crisis of 2022, it's likely that the casualties -- the jobless, those who can't afford houses, and underfunded retirement plans -- will be battered and laid at the feet of the Federal Reserve. Jerome Powell had the opportunity to act in the summer of 2021 as inflationary pressures began to creep into the public's daily lives. However, he chose to parrot the administration's talking point of "transitory inflation" until after his reappointment that fall. By pandering to the administration to secure reappointment, The Fed lost several valuable months that could have been used to gradually raise interest rates and tame a smaller but growing inflation beast. Instead, the Fed was forced to make a mad dash to catch up, utilizing an unprecedented series of 75 basis point moves. Leadership failed the public and the casualties so far are employees in tech and real estate sectors, aspiring retirees, and anyone hoping to become a homeowner soon.

Entrenched Warfare:
If you listened to Powell's past few press conferences, it’s evident that one of his top fears is that inflation may become "entrenched." This is the idea that consumers will eventually capitulate to higher prices and normalize them as part of their daily lives. In the short-term, consumers may change their spending habits and find substitutes for higher priced items. Lower demand for higher priced items should result in the product’s price coming back down. But if the expectation is that higher prices are here to stay, then the consumer has no reason to change their spending habits and higher prices become "entrenched."

To prevent entrenchment, reacting swiftly to rising prices is critical. As such, The Fed was forced to act aggressively to hammer prices back down after pretending that the fire would put itself out through the last half of 2021. If consumers aren’t willing change their spending habits, then The Fed will do it for them. "How?" you may ask? By making financial conditions more difficult for your employer to keep paying your salary. Once consumers are rationing an unemployment check, spending decisions become less discretionary and more survivalist.

Fighting inflation is a battle of attrition. Especially in cases of supply shock, the consumer needs to dig in to wait out the price disruption. Otherwise, we lions risk being led by donkeys in this fight against inflation.

Tony Jacoby, CFA is a portfolio manager of the Shelton Nasdaq-100 Index Fund.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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