Tag Archives: Inflation

One Mad Market & Six Cold Reality-Checks, by Matthew Piepenburg

Posted on June 22, 2021 | Leave a comment

There are some commonly held notions out there that in no way comport with reality. From Matthew Piepenburg at goldswitzerland.com:

Fact checking politicos, headlines and central bankers is one thing. Putting their “facts” into context is another.

Toward that end, it’s critical to place so-called “economic growth,” Treasury market growth, stock market growth, GDP growth and, of course, gold price growth into clearer perspective despite an insane global backdrop that is anything but clearly reported.

Context 1: The Rising Growth Headline

Recently, Biden’s economic advisor, Jared Bernstein, calmed the masses with yet another headline-making boast that the U.S. is “growing considerably faster” than their trading partners.

Fair enough.

But given that the U.S. is running the largest deficits on historical record…

…such “growth” is not surprising.

In other words, bragging about growth on the back of extreme deficit spending is like a spoiled kid bragging about a new Porsche secretly purchased with his father’s credit card: It only looks good until the bill arrives and the car vanishes.

In a financial world gone mad, it’s critical to look under the hood of what passes for growth in particular or basic principles of price discovery, debt levels or supply and demand in general.

In short: “Growth” driven by extreme debt is not growth at all–it’s just the headline surface shine on a sports car one can’t afford.

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“Supply Bottlenecks” as an Excuse for Inflation, by Daniel Lacalle

Posted on June 11, 2021 | Leave a comment

The real cause of inflation is monetary, not supply bottlenecks. From Daniel Lacalle at mises.org:

One of the arguments most used by central banks regarding the increase in inflation is that it is because of bottlenecks and that the recovery in demand has created tensions in the supply chain. However, the evidence shows us that most commodities have risen in tandem in an environment of a wide level of spare capacity and even overcapacity.

If we analyze the utilization ratio of industrial and manufacturing productive capacity, we see that countries such as Russia (61 percent) or India (66 percent) are at a clear level of structural overcapacity and a utilization of productive capacity that remains still several points lower than that of February 2020. In China it is 77 percent, still far from the 78 percent prepandemic level. In fact, if we analyze the main G20 countries and the largest industrial and commodity suppliers in the world, we see that none of them have levels of utilization of productive capacity higher than 85 percent. There is ample available capacity all over the world.

Inflation is not a transport chain problem either. The excess capacity in the shipping and transport sector is more than documented and in 2020 new capacity was added in both freights and air transport. Ships delivered in 2020 added 1.2 million twenty-foot equivalent units (TEUs) of capacity, with 569,000 TEUs of capacity on ultra large container vessels (ULCV), ships with capacity for more than 18,000 TEUs, according to Drewry, a shipping consulting firm. International Air Transport Association (IATA) chief economist Brian Pearce also warned that the problem of capacity was increasing in calendar year 2020.

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The Sources of Rip-Your-Face-Off Inflation Few Dare Discuss, by Charles Hugh Smith

Posted on June 9, 2021 | Leave a comment

There are many highly skilled jobs for which AI is completely unrealistic. There is shortage of people who know who do such jobs, and their wages are reflecting the shortage. From Charles Hugh Smith at oftwominds.com:

We’re getting a real-world economics lesson in rip-your-face-off increases in prices, and the tuition is about to go up–way up.

Inflation will be transitory, blah-blah-blah–I beg to differ, for these reasons. There are numerous structural sources of inflation, which I define as prices rise while the quality and quantity of goods and services remain the same or diminish. Since the word inflation is so loaded, let’s use the more neutral (and more accurate) term decline in purchasing power: an hour of your labor buys fewer goods and services of lesser quality than it did a decade ago or a generation ago.

While the conventional discussion focuses on monetary inflation, i.e. expansion of money supply, the real rip-your-face-off sources have nothing to do with money supply. The rip-your-face-off sources are scarcities that cannot be filled by substitution or globalization.

Consider skilled hands-on labor as an example. Let’s say some essential parts in essential infrastructure require welding. There is no substitute for skilled welders. But wait, doesn’t economic dogma hold that whenever costs rise, a cheaper substitute will magically manifest out of a swirl of dust? That dogma is false in cases such as skilled labor.

The only substitute for a skilled welder is another skilled welder, and while theory holds that there will be cheaper welders who can be brought in from elsewhere, this is also not true: due to deficiencies in education and a cultural bias against manual labor, there is a shortage of skilled welders virtually everywhere.

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Is the United States on The Same Calamitous Path as Yugoslavia? by Brandon Smith

Posted on June 6, 2021 | Leave a comment

Imagine living in a country where prices doubled daily. From Brandon Smith at alt-market.com:

This article was written by Brandon Smith and originally published at Birch Gold Group

Of all the inflationary disasters in modern economic history, Yugoslavia’s is the one most ignored by the mainstream. To be sure, the collapse of the Eastern European nation was a slow burn, but with a big explosion at the end. Most people are familiar with the Serbian/Croatian war and the genocide that followed, but few people are familiar with the economic crisis that led to the conflict.

I am not here to present an in-depth analysis of the eventual breakup of Yugoslavia, only to examine the conditions that triggered it. I believe there are some interesting similarities to burgeoning conditions within the U.S., along with some distinct differences.

The First Stage: Inflation

President Josip Broz Tito led the nation in various capacities from 1953 to 1980. He used two powerful tools to clamp down on unrest in the ethnically-diverse nation: large-scale repression of dissenting voices using both police and military forces, and allowing regional foreign borrowing. The latter might not sound particularly important. According to the CIA’s 1983 national intelligence document Yugoslavia: An Approaching Crisis?:

Although self-management in theory permits workers to own and manage their enterprises, in fact the leaders in the six republics and two provinces… became the dominant economic decision makers. They grew increasingly protectionist and isolated from each other in pursuing local interests. Ignoring national economies of scale and ultimate profitability, they built redundant enterprises, blocked competition on the “unified market,” and granted unrealistic price increases and subsidies to favored industries. Thus, by the early 1980s inflation in the 30- to 40-percent range became chronic…

Yugoslavia’s inflation troubles were ever present, with up to 76% in price increases annually from the early 1970’s to the early 1990’s. In fact, the Cato Institute’s Steve Hanke calls it The World’s Greatest Unreported Hyperinflation.

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Inflation: Your Role as a Milk Cow, by Jeff Thomas

Posted on May 26, 2021 | 2 comments

Shut up, ask no questions about the government inflating its money supply, and continue to produce so that the government may tax you. From Jeff Thomas at internationalman.com:

milk cow

Traditionally, inflation has been defined as “an increase in the amount of currency in circulation.” Such an increase almost always causes an increase in the cost of goods and services, since, more plentiful currency units lowers their rarity, as compared to the supply of goods and services, which remains roughly the same. Therefore, it shouldn’t be surprising if a 20% increase in the amount of currency units translates into a 20% increase in the price of goods and services.

Unfortunately, in recent decades, even dictionaries have been offering a revised definition of inflation, as “an increase in the price of goods and services.” This is a pity, as it makes an already confusing subject even more difficult to understand.

This is especially true for the average guy who has a minimal understanding of economics, but does realise that, even if his wages increase (which he regards as a good thing), he never seems to get ahead. In the end, he always seems to be worse off.

Let’s say that you’re paid $4000 per month. You budget for housing, food, clothing, transportation, etc. Let’s say that that adds up to $3800 per month, and you’re hoping to put $200 per month into savings. Often that doesn’t happen, as unplanned expenses “pop up,” and must be paid for. So, in the end, you save little or nothing.

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David Rosenberg: “A Whole Bunch Of People Are Really, Really Wrong” About Inflation, by Tyler Durden

Posted on May 24, 2021 | Leave a comment

The consensus is for further increases in inflation, and SLL is part of that consensus. However, SLL is always interested in views that challenge the consensus. From Tyler Durden at zerohedge.com:

With so much focus on the macro environment as stocks struggle to return to their all-time highs, MacroVoices invited seasoned Wall Street economist David Rosenberg, the chief economist and chief strategist of Rosenberg Research, on the show this week to discus the market’s topic du jour: inflation, and whether or not it will be “transitory,” like the Federal Reserve says.

What followed was a thorough critique from Rosenberg, who just a couple of months ago was warning that rising Treasury yields would soon push the market to a “breaking point,” of what he sees as flaws in the market’s pricing of lasting inflationary pressures.

Instead, Rosenberg essentially agrees with Fed Chairman Jerome Powell that the recent acceleration in inflation seen in April will be temporary.

What’s going on isn’t a fundamental “regime shift”, but rather a “pendulum” swinging back to the opposite extreme following the sudden deflationary demand shock caused by the pandemic. We had three consecutive months of negative CPI prints last year, Rosenberg pointed out. To offset all that, April saw the biggest MoM jump in consumer prices since 1981.

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Inflation is Back… and Here to Stay, by Adrian Day

Posted on May 21, 2021 | 1 comment

You manufacturer fiat debt instruments that function as money, and you get monetary inflation. From Adrian Day at internationalman.com:

Inflation

April’s Consumer and Producer Price indexes, showing prices up 4.2% and 6.2% respectively year on year, were well ahead of expectations and have produced widespread discussion.

Everyone from Ray Dalio and Stan Druckenmiller to my next-door neighbor has chimed in. The Federal Reserve, Democratic politicians and media apologists all proclaim this move to be “transitory.” The usual suspects trotted out the to-be-expected excuses: it’s all because of the “base effect,” starting from a low point last April when the economy first went into lockdown. It’s all because of pent-up demand as the economy reopens. While these factors have some validity—any comparison can be distorted by a low starting point—they are only part of the story. Fundamentally, the Federal Reserve’s unprecedented binge of credit creation on the back of the new administration’s unprecedented spending plans—following the hardly hawkish last four years—is the necessary and sufficient cause of the jump in inflation numbers.

It is important to note that various price indexes are symptoms of inflation; they do not represent inflation itself. Inflation is the creation of excess credit above the current needs of the economy. That excess can show up in increased asset prices or in consumer prices, depending on many factors, including, most importantly, the velocity of money. But usually, these excesses do show up in asset prices (including equities) and, after a lag, in producer prices followed by consumer prices. Events such as the economic lockdowns and restrictions we saw over the past year have the effect of reducing the velocity of money and postponing the rise in consumer prices.

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“This Is All About Stagflation… The U.S. Is Walking Into The Early Stages Of The Fourth Turning”, by Larry McDonald

Posted on May 17, 2021 | Leave a comment

Inflation and a shrinking economy are certainly not mutually exclusive possibilities. From Larry McDonald at The Bear Traps Report via zerohedge.com:

We believe the U.S. is walking into the early stages of the Fourth Turning, a subject entertained below. In this note we break down the ideal 2020-2030 portfolio and why it is so different from the 2010-2020 vintage. Above all, by now it should be clear to a five year old; Global Central Banks are working together in a dollar containment regime. With conviction, we laid out this thesis a year ago (April 2020) in our “Lessons from Omaha” and it became the foundation under our overweight positioning in commodities, global large cap value, and emerging markets.

The good news is, the commodity cycle is still in the early innings.

There are trillions of U.S. dollars married to deflation bets (fixed income bonds and tech stocks) and the lawyers are writing up the divorce papers as we speak. Unintended consequences are popping up weekly, the latest variety points to a significant labor shortage developing in the U.S. with colossal side effects moving our way.

It’s going to be hilarious. Just when the last economist threw in the Phillips Curve towel, wrote the long winded obituary it will come roaring back to life. Wage inflation is about to explode, and this sword is swinging in the direction of profit margins.

Above all, the Fed is staring down the barrel of  runaway inequality, inequality that the Fed itself has created. The American Dream just isn’t the 1950s-2000s bright blue, a touch of grey has moved in forging left wing populism. If you listen carefully to U.S. Treasury Secretary Janet Yellen and Fed Chair Jay Powell, they are focused on U 6 unemployment near 11% and the 9 million Americans who have left the Non Farm Payrolls since January 2020.

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It’s Getting Serious: Dollar’s Purchasing Power Plunges Most since 2007. But it’s a Lot Worse than it Appears, by Wolf Richter

Posted on May 13, 2021 | 2 comments

There are lies, damn lies, and government inflation statistics. From Wolf Richter at wolfstreet.com:

Fed officials, economists “surprised” by surge in CPI inflation, but we’ve seen it for months, including “scary-crazy” inflation in some corners.

The Consumer Price Index jumped 0.8% in April from March, after having jumped 0.6% in March from February – both the sharpest month-to-month jumps since 2009 – and after having jumped 0.4% in February, according to the Bureau of Labor Statistics today. For the three months combined, CPI has jumped by 1.7%, or by 7.0% “annualized.” So that’s what we’re looking at: 7% CPI inflation and accelerating.

Consumer price inflation is the politically correct way of saying the consumer dollar – everything denominated in dollars for consumers, such as their labor – is losing purchasing power. And the purchasing power of the “consumer dollar” plunged by 1.1% in April from March, or 12% “annualized,” according to BLS data. From record low to record low. Over the past three months, the purchasing power of the consumer dollars has plunged by 2.1%, the biggest three-month drop since 2007. “Annualized,” over those three months, the purchasing power of the dollar dropped at an annual rate of 8.4%:

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US Core Consumer Prices Explode Higher At Fastest Pace Since 1981, by Tyler Durden

Posted on May 12, 2021 | Leave a comment

Inflation is in the ascendancy, thanks to nonstop debt monetization since the end of 2019. From Tyler Durden at zerohedge.com:

After March’s blowout 0.6% MoM surge in headline CPI, analysts expected a modest slowdown MoM, but surge YoY due to the base-effect comps from April 2020’s collapse. However, it appears analyst massively underestimated as headline CPI surged 0.8% MoM (4 times the +0.2% expected) and exploded 4.2% YoY. That is the biggest YoY jump since Sept 2008 (and biggest MoM jump since June 2008)

Source: Bloomberg

Core CPI was expected to rise by the most this millennia, but it was hotter than that. The index for all items less food and energy rose 3.0% over the past 12 months; this was its largest 12-month increase since January 1996… and the MoM jump of 0.92% is the biggest since 1981

Source: Bloomberg

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