Tag Archives: Inflation

Jim Grant: The Fed Can’t Control Inflation, from SchiffGold

Posted on May 12, 2021 | Leave a comment

It’s a comforting notion to many people, the idea that wise bureaucrats can manage something as complicated as the economy. Too bad they can’t do it. From Jim Grant at schiffgold.com:

 

Federal Reserve Chairman Jerome Powell insists inflation is “transitory.” As prices have spiked throughout the economy, Powell’s messaging has essentially been, “Move along. Nothing to see here.”

Peter Schiff has been saying the central bankers at the Fed can’t actually tell the truth about inflation because even if they acknowledge it’s a problem (and it is) they can’t do anything about it.

In a recent talk, Jim Grant, investment guru and founder of Grant’s Interest Rate Observer, echoed Peter, saying the Fed can’t control inflation.

During a webcast sponsored by State Street SPDR ETFs, Grant said he thinks “there’s a gale of inflation of all kinds in progress,” adding that he believes it will take the Fed by surprise and “overwhelm our monetary masters.” Grant said, inflation is “clear and present and will manifest itself in our everyday lives.”

That sounds like the exact opposite of Powell’s “transitory” mantra.

Peter has said that once the Fed is forced to admit that inflation isn’t transitory, it will be too late to take action. Grant made a similar prediction, saying inflation will “catch the Fed flatfooted. In response it will “prevaricate” – meaning speak or act in an evasive way. In fact, that already seems to be the central bank’s strategy.

The question is can the Fed actually control inflation. Grant doesn’t think so.

I think the Fed is under the misconception that it controls events. Sometimes, events control the Fed, and I wouldn’t be surprised if this was one of those times. The Fed thinks that not only can it control events, but it can measure them. It believes it can pinpoint the rate of inflation.”

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The Inflation Monster Has Been Unleashed, by Bruce Wilds

Posted on May 10, 2021 | Leave a comment

Given the copious amounts of debt the Federal Reserve has monetized, rising prices are inevitable. From Bruce Wilds at brucewilds.blogspot.com:

The monster known as inflation has been unleashed upon the world and will not easily retreat into the night. This is reflected in soaring commodity and housing prices. Due to the stupid and self-serving policies of the Fed, we are about to experience a massive shift in the way we live. Bubbling up to the surface is also the recognition the Fed has played a major role in pushing inequality higher. This means that inflation is about to devour the purchasing power of our income and the savings of those that have worked hard and saved over the years.

Over the months we have watched Fed Chairman Jerome Powell time and time again cut rates and increase the Fed’s balance sheet. This has hurt savers, forced investors into risky investments in search of yield, damaged the dollar, encouraged politicians to spend like drunken sailors, and increased inequality. The greatest wealth transfer in history has already begun and the next crisis will only accelerate the process. Sadly, the same policies that dump huge money into larger businesses because it is an easier and faster way to bolster the economy give these concerns a huge advantage over their smaller competitors.

For decades the American people have watched their incomes lag behind the cost of living. To make matters worse, the official numbers of the so-called Consumer Price Index (CPI) have been rigged to understate inflation and not to reflect the true impact it was having on our lives. Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters. Currently, the government understates inflation by using a formula based on the concept of a “constant level of satisfaction” that evolved during the first half of the 20th century in academia. This has skewed expectations and led many people to think inflation is not something they need to worry about.

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What Will You Do When Inflation Forces U.S. Households To Spend 40 Percent Of Their Incomes On Food? by Michael Snyder

Posted on May 10, 2021 | Leave a comment

Perhaps we’ll eat less, or eat lower quality food. Inflation is showing up at the grocery stores big time, and it doesn’t look like it’s going to be “transitory.” From Michael Snyder at theeconomiccollapseblog.com:

Did you know that the price of corn has risen 142 percent in the last 12 months?  Of course corn is used in hundreds of different products we buy at the grocery store, and so everyone is going to feel the pain of this price increase.  But it isn’t just the price of corn that is going crazy.  We are seeing food prices shoot up dramatically all across the industry, and experts are warning that this is just the very beginning.  So if you think that food prices are bad now, just wait, because they are going to get a whole lot worse.

Typically, Americans spend approximately 10 percent of their disposable personal incomes on food.  The following comes directly from the USDA website…

In 2019, Americans spent an average of 9.5 percent of their disposable personal incomes on food—divided between food at home (4.9 percent) and food away from home (4.6 percent). Between 1960 and 1998, the average share of disposable personal income spent on total food by Americans, on average, fell from 17.0 to 10.1 percent, driven by a declining share of income spent on food at home.

Needless to say, the poorest Americans spend more of their incomes on food than the richest Americans.

According to the USDA, the poorest households spent an average of 36 percent of their disposable personal incomes on food in 2019…

As their incomes rise, households spend more money on food, but it represents a smaller overall budget share. In 2019, households in the lowest income quintile spent an average of $4,400 on food (representing 36.0 percent of income), while households in the highest income quintile spent an average of $13,987 on food (representing 8.0 percent of income).

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Three reasons why inflation is rising. Two of them aren’t going away, by Simon Black

Posted on May 9, 2021 | 1 comment

Massive debt monetization, the font of inflation, will continue far into the future. From Simon Black at sovereignman.com:

A remarkable thing happened yesterday that tells you everything you need to know about inflation.

In the morning, US Treasury Secretary Janet Yellen stated bluntly that “interest rates will have to rise somewhat to make sure that our economy doesn’t overheat. . .”

For economists, an ‘overheating economy’ means inflation. So she was essentially saying that rates would have to rise to prevent inflation.

Yet hours later, she completely reversed herself, saying that interest rates would NOT have to rise because “I don’t think there’s going to be an inflationary problem.”

You don’t need a PhD in economics to smell the BS.

Inflation is not some potential issue down the road. Inflation is already here.

As Warren Buffett told investors only days ago, “We’re seeing very substantial inflation.”

Plenty of companies have already announced price increases to their consumers–

Proctor & Gamble, for instance, announced price hikes across the board on just about everything from diapers to beauty creams.

Hershey’s announced in February that it would be raising prices.

Food giant General Mills complained in February about a “higher inflationary environment” and “input cost pressures” due to rising commodity prices.

Clorox, Shake Shack, Kimberly-Clark, Whirlpool, Hormel, and Woka Kola Coca Cola are among the many companies that have also announced price increases.

And according to Bank of America Global Research, the number of mentions of “inflation” on corporate earnings calls has increased 800% compared to last year.

Inflation is clearly a concern of the largest companies in the world. Investors are worried. Consumers can see it.

And in a rare moment of truth yesterday morning, a politician almost admitted that she was concerned about inflation too.

This is not some wild conspiracy. Inflation is real. It’s happening. Let’s look at three key drivers:

1) Capacity Constraints

Last year the entire world shut down. Businesses and factories everywhere closed, and plenty of companies went out of business.

Many companies who survived took radical steps to conserve cash– laying off workers, liquidating inventory, and selling equipment.

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Rising bond yields threaten financial markets, by Alasdair Macleod

Posted on May 7, 2021 | Leave a comment

There is no worse investment on the planet right now than longer-term bonds. If something else doesn’t upset the apple cart first, rising interest rates will raze the financial house of cards, to mix metaphors. From Alasdair Macleod at goldmoney.com:

There is a growing recognition in financial circles that price inflation will increase significantly in the near future, and official estimates that it will be a temporary phenomenon limited to an average of 2% are overly optimistic. There is, therefore, increasing speculation about the need for interest rates to rise.

The bond yield on 10-year US Treasuries has already more than doubled over the last year. It is in the nature of market cycles for equity and other financial assets to continue to rise in value during an initial increase in bond yields. It is the second increase that can be expected to turn bullish optimism about the economic outlook into the beginning of a bear market. Financial markets, already dislocated from fundamental realities, appear to be acutely vulnerable to such a change in sentiment.

This article points out that equity markets are driven more by money flows rather than perceived economic prospects. Bank credit for industry is contracting, commodity prices are soaring, and supply chains remain disrupted. Fuelled by earlier expansions of money supply and further expansions to come, the world faces a far larger increase in price inflation than currently contemplated, and therefore far higher interest rates, threatening to destabilise both financial markets and fiat currencies.

Introduction

There is a rustling in the undergrowth, disturbing the sylvan setting where we complacently enjoy the dappled sunlight, innocently unaware of the prowling bear. The bear heralds another rise in bond yields as we grapple with the inflationary consequences of recent and current events.

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“The Costs Are Up, Up, Up. We’re Seeing Substantial Inflation” Admits A Surprised Warren Buffett As Powell, Yellen See Nothing, by Tyler Durden

Posted on May 3, 2021 | Leave a comment

This is a pretty good summary of this weekend’s Berkshire Hathaway annual meeting and Warren Buffet’s words of wisdom for those who don’t have a day to sit through the video. Note well Buffet’s words on inflation, there’s nobody with a better view of the entire economy. From Tyler Durden at zerohedge.com:

We already touched on two of the more colorful exchanges from Saturday’s Berkshire annual videoconference, both of which incidentally starred the traditionally far more outspoken Charlie Munger, who first crushed a generation’s monetary dreams saying that today’s Millennials will have “a hell of a time getting rich compared to our generation”, and then infuriated tens of millions of cryptofans and diamond hands (such as Dan Loeb) when he said that “the whole damn development” of crytpocurrencies “is disgusting and contrary to the interests of civilization.”

Yet while those two incidents may prompt the most Monday morning watercooler talk, what was most relevant from a macro and markets standpoint was Buffett’s observation of something the Fed and Treasury are terrified to admit: that a tidal wave of inflation has been unleashed upon the US and it’s only getting worse.

Speaking to Berkshire’s millions of shareholders on Saturday, Buffett said that he was surprised by the “red hot” US economic rebound and warned the company was being hit by inflationary pressures.

“We’re seeing very substantial inflation,” the 90-year-old billionaire who apparently does not have a Fed charge card, said in his nearly 6 hour long address to investors. But it’s what he said that was especially ominous:  “It’s very interesting. We’re raising prices. People are raising prices to us and it’s being accepted.”

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Forget 2% Inflation. With Margins Forcefully Squeezed, Big Companies Raise Prices, Point at Massive Inflation Overshoot, by Wolf Richter

Posted on April 27, 2021 | Leave a comment

The only thing dumber than believing that inflation is running at less than 2 percent is putting your money where your lack of brains is and buying the guaranteed loss certificate known as a 10-year treasury note. It nominally yields 1.6 percent and it’s real yield will be negative after inflation and taxes. From Wolf Richter at wolfstreet.com:

Smaller companies too: Boots-on-the-ground view of surging costs in the roofing manufacturing industry. The Fed will brush it off as “temporary,” but the inflationary mindset has set in.

Big companies, such as Procter & Gamble, have used their earnings calls to prepare investors, customers, and consumers for what is coming: Surging input costs are creating hefty margin pressures, and companies are confident they can regain their margins by passing on those surging costs by implementing large price increases. Smaller companies face the same scenario of surging input cost and margin pressures.

Todd Miller, President of Classic Metal Roofing Systems, which manufactures metal shingles in the US, sent me an email today where he goes into detail as to what his industry, and the broader home remodeling industry, is facing, in terms of surging costs, shipping issues, and supply constraints. This is Todd Miller, a long-time reader and supporter of Wolf Street:

“Our industry is dealing with supply chain shortages as well as rapidly increasing prices. While we have not had to go to this extreme yet on the types of specialized products we produce, I have seen the selling prices of “commodity-based” metal roofs increase by 30% over the last six months, with additional increases projected.

“We’re also seeing the industry-leading asphalt shingle market in a pickle. Prices are going up, manufacturers have distributors and contractors on allocation, and lead times of 30 weeks are being reported. We’re also seeing the industry cut back on product offerings.

“The end result is we have a very robust remodeling and construction market, with limited product availability and spiraling prices. Everyone is aware of the lumber issues, but we’re also hearing of major issues with windows, doors, and siding products.

“As a metal roofing manufacturer, here are some of the raw material increases we have experienced over the past six months:

  • Unpainted aluminum: up 15%
  • Unpainted galvanized steel: up 57%
  • Coatings used on our products: up 10%
  • Corrugated packaging: up 15% on average
  • Lumber for packaging: up 34%
  • Fasteners: up 5 to 8%.

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The Only Way to Get Ahead Now Is Crazy-Risky Speculation, by Charles Hugh Smith

Posted on April 22, 2021 | 1 comment

Turn financial markets into casinos and investment becomes nothing more than gamling. From Charles Hugh Smith at oftwominds.com:

It’s all so pathetic, isn’t it? The only way left to get ahead in America is to leverage up the riskiest gambles.

It’s painfully obvious that the only way left to get ahead in America is crazy-risky speculation, but nobody seems to even notice this stark and stunning reality. Why are people piling into crazy-risky bets on speculative vehicles like Gamestop and Dogecoin? The obvious answer is because others have reaped a decade or two of wages in a few weeks, and skimming a couple hundred thousand dollars in a few weeks or months is the only way an average wage earner is going to be able to buy a house, fund a retirement account, afford to have a family, etc.

Look at the reality of wage stagnation: I made $12 an hour in 1986, and I wasn’t some highly paid techno-guru or Wall Street shill. $12 an hour was an OK wage in 1986 but it wasn’t fantastic. Now 35 years later, $12 is still an OK wage. A lot of people make less than $12/hour.

But what happened to the cost of healthcare, housing, childcare and everything else required to have a family in those 35 years? These costs have exploded higher. It was already a stretch to buy a house in 1986 making $12/hour, but now–are you joking? Depending on the region, the cost of a modest house has tripled or gone up five-fold or even ten-fold in the past 35 years.

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Eurozone inflation is high when it comes to the prices of daily purchases, by Daniel Lacalle

Posted on April 13, 2021 | Leave a comment

One way to keep inflation down is to take out the things that people actually buy out of the price indexes. From Daniel Lacalle at dlacalle.com:

For more than ten years, ECB monetary policy has been ultra-expansionary, whether there was crisis, a recovery, economic growth or stabilization. The worst excuse of all that was used to justify endless quantitative easing has been the often-repeated mantra that “there is no inflation.”

Defenders of aggressive monetary policy have always used the same arguments really.

First, they say there is no inflation – as if an average 2% increase in prices during a crisis whereby many salaries fell up to 20% does not constitute “inflation”.

After, they say it is temporary, so to justify maintaining aggressive easing policies.

Next up, the “inflationistas”  seek to blame businesses or some kind of external enemy for the rise in prices, whereby they ask governments to impose price controls.

Important to understand here is that money creation is never neutral. It disproportionately benefits the first recipients of newly created money – governments -, and negatively affects real wages and savings of those that are not able to buy financial assets: the poorest.

There clearly is massive inflation when it comes to financial asset prices. Negative-yielding sovereign bonds of nations with weak solvency ratios amount to massive inflation. Continuous price increases of both quoted and private assets amount to high inflation, and all of this is caused by monetary policy.

Furthermore, anyone can understand that the official headline consumer price index (CPI) is masking the increase in the price of goods and services that we really purchase on a daily basis, relative to the ones we only purchase occasionally, or for leisure. Any European citizen understands that tourism and technology may become cheaper, as a result of competition and innovation, but that the things we purchase every day have increased more in price than reflected by the headline CPI.

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Expect Inflation to Accelerate? Here’s 8 Reasons to Expect Decelerating Inflation, by Mike “Mish” Shedlock

Posted on April 11, 2021 | Leave a comment

There’s been a chorus of commentators and economists predicting big increases in inflation, and SLL has been part of that crowd. However, we don’t mind posting well-reasoned contrary viewpoints. Here’s an analysis of why the crowd might be wrong, from Mike “Mish” Shedlock at thestreet.com:

Lacy Hunt at Hoisington Management has some interesting thoughts regarding the inflation debate.
Case for Decelerating Inflation

In its Quarterly Review and Outlook for the First Quarter of 2021 Lacy Hunt makes a case for decelerating inflation.

Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.

After declining 5.2% in 2020, or the most since World War II, world-wide real per capita GDP is estimated to rise 4.7% in 2021. The United States will perform even better, rising 6.2%, after a contraction of 4.9% in 2020. The U.S. growth rate this year could be the fastest since 1984 and possibly even since 1950 (Chart 1).

Five considerations suggest that such growth is not likely to lead to sustaining inflation.

Lacy said 5. I added a 6th bullet point from his discussion, then added 2 more points of my own.

Six Reasons to Expect Disinflation

  1. Inflation is a lagging indicator, as classified by the National Bureau of Economic Research. The low in inflation occurred after all of the past four recessions, with an average lag of almost fifteen quarters from the end of the recessions. (Table 1 Inflation Troughs Below)
  2. Productivity rebounds in recoveries and vigorously so in the aftermath of deep recessions. This pattern in productivity is quite apparent after the deep recessions ending in 1949, 1958 and 1982 (Table 2 Below). Productivity rebounded by an average of 4.8% in the year immediately after the end of these three recessions and unit labor costs were unchanged. The rise in productivity held down unit labor costs.

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