MIGA! (Make inflation great again)

[7 min read]

Dear Reader,

When it’s been a long time between corrections, a regulation sell-off feels frightening. After months…and months…of ‘worries’ about inflation, the market decided to actually worry overnight. From The Wall Street Journal:

‘U.S. stocks extended their losses Wednesday, with the Dow Jones Industrial Average and S&P 500 posting their steepest three-day declines in nearly seven months, after a sharp rise in consumer prices heightened concerns about inflation.

‘The jump in prices was steeper than expected and exacerbated fears that inflation could prompt the Federal Reserve to accelerate its timeline for scaling back its easy-money policies.’

The Dow fell 2%, the S&P 500 2.1%, while the NASDAQ sank 2.7%.

Monetary inflation is great for stocks…as long as the money goes into stocks. But as soon as it works its way into consumer prices and puts pressure on the alchemists to pause their swindle, it’s not so good.

More from the WSJ:

‘The consumer-price index jumped 4.2% in April from a year before, according to the Labor Department, the most in any 12-month period since 2008.’

Hmmm…since 2008 huh?

This was BEFORE the crisis. Year-over-year inflation was heating up to levels that worried the Fed. Year-over-year inflation readings were actually increasing at a time when we subsequently learnt the US economy was in recession.

And in September 2008, the proverbial hit the fan and inflation wasn’t heard of again for a long time.

In other words, it was transitory. This is a theme picked up on by one of the better monetary economists in the world today, Jeff Snider of Alhambra Partners.

Jeff points out that the core CPI (excluding food and energy) jumped 2.96%, the most since 1996. The month-over-month change was an ‘astounding’ 0.92%, the most since the ‘last days of the great inflation’ of the 1970s.

Jeff asks:

‘How can any sane, rational person think this is just transitory?
‘Easy, it’s all transitory given that these things can and do happen. Acceleration of consumer prices during periods of high macro slack and weak demand aren’t gamechangers. In fact, they are most often indicative of outside factors — like helicopters — rather than the underlying facts of the real economy.
‘The monthly gain in the core CPI last month was absolutely impressive, eye opening, but we just did this a few months ago and for all the same reasons! Back in July 2020, after Reopening 1 had reached its frenzied apex bursting at the seams with Uncle Sam’s helicopter deliveries and unemployment bonuses, the monthly increase in the core was 0.54% which had been the highest in just short of three decades. Most impressive (sounding).

‘And it wasn’t just July — June, July, and August 2020 — when consumer prices went on an historic run. The reason we don’t remember or hear much about that run this year is how after the sugar rush wore off, by late summer, the frenzied elevation proved to have been, say it with me, transitory.

‘In fact, by the end of last year consumer price rates were noticeably decelerating all over again. Thus, not inflation. Government on; consumer prices up for a few months. Government off; back to disinflationary normal.
‘This one’s bigger than July, but it’s all the same factors including more helicopters, another round of reopening, plus a greater supply side squeeze pressing commodities toward outer space.’

Here’s the issue for the ‘inflation is here to stay’ crowd.

There is virtually no private sector demand growth for loans right now. Nearly all the growth is coming from government spending.

Let me show you what I mean, and why this matters for inflation…

In the year to March, bank credit in the US grew a robust 6.2%. Without bank credit growth, there is no economic growth. Commercial banks create and disperse money (credit) throughout the economy.

Of that 6.2%, nearly all of it was ‘securities in bank credit’. What does that mean?

Well, it refers to banks creating new credit to buy (mostly) government debt and mortgage-backed securities.

Loans and leases, which includes things like commercial and industrial loans and real estate loans, increased just 0.8% year on year. In other words, genuine demand from the private sector is at recessionary levels.

From here, keep an eye on the yield curve.

If the Fed starts to worry about ‘inflation’ and makes moves to tighten, it’s likely the yield curve will start to flatten. That is, the bond market will realise the move to withdraw stimulus will kill the recovery.

If this happens, you won’t hear about inflation again for a while.

It will be interesting to see whether the Fed has learned its past lessons. That is, will they keep their foot to the floor? Will they, along with the government, maintain massive stimulus to keep the ‘recovery’ going?

If so, don’t expect this correction to last long.

Regards,

Greg Canavan,
Editor, The Rum Rebellion

Warning: Crash Alert!
By Bill Bonner

Oh my…look up.

There it is. Our old, tattered Black & Blue…

Our trusty ‘Crash Alert’ flag, proudly signalling the alarm.

So far this century, the Federal Reserve’s balance sheet (a rough way of keeping track of the supply of dollars) rose 15 times. US GDP (an equally approximate measure of output) only doubled.

That is the classic definition of inflation.

Today, we’re going to look at what kind of inflation it is…and how long it will be with us.

Is it ‘transitory’, caused by a booming recovery and trillions in stimmy money?

Or has it come with big suitcases and its favourite pillow…as if it intends to stay?

We’ll come back to those questions. But first…the big news…

Crash alert!

Our Doom Index is registering an 8 — which is Crash Alert territory.

We created the Doom Index a number of years ago to improve on our (often faulty) intuition. It tracks 12 key indicators to try to detect when there are dangerous excesses in the economy and markets are out of whack.

Yes, you can see the full report on the latest Doom Index Reading here. But here’s the short version from our ace research team:

‘The first chart below shows our Doom Index levels by quarter. The red bars indicate a reading of 8 or higher. That’s when we raise our “crash alert” flag and tell investors it’s time to prepare for a market crash.

‘The last time we raised our “crash alert” flag was at the end of Q2 2019, when the Doom Index hit 8. We stayed in the “Danger Zone” for the next four quarters.

‘Economic conditions improved slightly in the second half of 2020, as evidenced by our Doom Index reading dropping to 7 for Q3 2020 and Q4 2020…

‘Our recent Doom Index reading — based on the Q1 2021 data — is 8…

‘…which means we’re raising our tattered “crash alert” flag.

‘[…]it appears that the stock market is getting way ahead of the economy…

‘Nearly all stock market valuations are at all-time highs, investors are using more leverage, junk bonds are looking riskier, and of course…the feds keep printing.’

More inflation sightings

Meanwhile, we looked at some of the inflation sightings yesterday. Here’s The Wall Street Journal with more:

‘Americans accustomed to years of low inflation are beginning to pay sharply higher prices for goods and services as the economy strains to rev back up and the pandemic wanes.

‘Price tags on consumer goods from processed meat to dishwashing products have risen by double-digit percentages from a year ago, according to NielsenIQ. Whirlpool Corp. freezers and dishwashers and Scotts Miracle-Gro Co. lawn and garden products are also getting costlier, the companies say. Some consumers are feeling stretched.’

No big deal

But don’t worry. Jerome Powell at the Federal Reserve and Janet Yellen at the US Treasury both assure us that inflation is no big deal.

The Fed is still ‘printing’ US$120 billion per month…trying to overcome the ‘low inflation’ threat.

According to Powell, the nation’s economic health is threatened not by inflation, but by the lack of it…that is, by persistent Consumer Price Index (CPI) readings below 2%. He thinks stable prices somehow inhibit growth.

As for Yellen, she believes the feds can hit whatever pitch comes their way. Here’s what she confidently told a Wall Street Journal CEO Council event last week:

‘I don’t think there’s going to be an inflationary problem. But if there is, the Fed will be counted on to address them.’

That settles it for us. Nothing to be concerned about. There is no inflation. And if there were any, just as a hypothetical, the Fed would smash it out of the ballpark.

And Ms Yellen should know. She used to run the Fed.

Intellectual exercise

But…just in case — not that we’re doubting Ms Yellen…or second-guessing the Fed — but just as an intellectual exercise, for our amusement…

…what if they’re all not really up to playing in the Major Leagues? What if they are better suited to the Special Olympics?

Before last Friday’s jobs report came out, Ms Yellen suggested that interest rates might have to go up to contain rising price inflation, caused by a robust recovery. That is, she said she was concerned about ‘overheating’, whatever that is.

Then, after stocks began to fall, she backtracked, letting the speculators know that she didn’t really mean it. In the space of less than 24 hours, she determined that the economy’s temperature was just right after all.

She must have breathed a sigh of relief on Friday. The employment numbers made it clear that the economy is not heating up; it’s cooling off.

Phew! This takes the pressure off Yellen and Powell to ‘address’ the inflation issue.

But only by misunderstanding the nature of the inflation — which both Ms Yellen and Mr Powell are eager to do.

More like ‘Marvelous’ Marv Throneberry than ‘Boog’ Powell, both want to win the game…but neither has any idea how to play it.

They believe that inflation is purely cyclical, caused by rising demand in an expanding economy. (They also believe they can cause the economy to expand by pretending, that is, by inflating the money supply to look like real demand is increasing.)

Double act

But this is no natural cyclical inflation. It is systemic. It is not driven (or, at least, not entirely) by the business cycle.

Instead, it is man-made…caused by the two illustrious strike outs themselves — Yellen weighing down heavily on the White House’s fiscal bench…and Powell heading up the Fed’s monetary team.

The fiscal team spends. The monetary team prints.

And they’ll both keep at it until the final inning…when the game is lost.

Regards,

Bill Bonner,
For The Rum Rebellion