Inflation’s Heat Signature Is All Over the Economic Map
Let’s look at what has continued to develop with inflation in the short time since my May articles on the subject because inflation is going to cause the Fed’s “Great Recovery” but burn up in its own incendiary blast. A rapid spread of fiery inflationary data lit up the landscape last week:
The global food fight is on
The UN just reported that global food prices have returned to being their highest in a decade. This is the twelfth straight month of rises, and the cause of the price increases is what I have said will likely cause rampant inflation for twelve straight months now — shortages. Short supply is as essential to high inflation as money printing.
So, the causes: droughts and fires and floods, wars, and especially pandemic shutdowns of farms and processing plants and transportation and borders all over the world. It was the latter set of troubles that I said would come home to rest months down the road as freezer warehouse inventories became depleted during COVID shutdowns.
The freaking Fed
The Fed’s “Beige Book” of economic stats has been freaking out for months over the shortages that are driving inflation:
Here we are supposedly in what the Fed says is a “moderately” expanding economy, and yet we see a sharper and sharper rise over recent months in reported shortages. How can that be? An expanding economy that cannot produce? What exactly is it that is expanding then?
The answer is that the economy (global or US) is not exactly “expanding.” It is recovering from its collapse at a rapid rate, but it is running well below where it was running before the pandemic. That means it is less capable of providing for the needs of the expanding population of this world, the US included.
Because of this, those who have money will bid up the price of available goods and services to get their piece of the smaller pie, leaving those without the surplus of money lacking in goods and services. That equals inflation.
The Fed would like to comfort you by saying it is not worried about your inflation hit because it is presumably “transitory,” and rich people can afford a transitory hit and will easily weather through. That is all that matters.
Oh sure, inflation may be transitory as in the rate of rise will die down in a year or two, but the inflation rate returning to normal still leaves you with much higher prices from the time when it was far above normal, and even a year is too long. It’s more time than markets will weather. It’s more time than the masses are likely to give to politicians and the Fed. The tapering pressure and market worry about tapering will grow.
As I’ve said, the shortages that have been greatly worsened by COVID lockdowns of industry, shipping and borders came at a time when the Trump Trade Wars had already severely impacted global supply chains. So, it is, as the above article calls it a “double whammy.” If you do one thing that cripples the economy, it leaves the economy less robust for weathering the next storm. It doesn’t matter what your politics are; that’s how troubles compound.
The one industry hit most directly by all the trade wars followed on by the COVID border and industry lockdowns is shipping, and the problems there also say inflation is not going to be transitory in the sense of ending, say, after the summer, but will be around long enough to inflict real damage on all kinds of markets.
As demand for products picks back up …
ZH noted that inflation in shipping is already compounding rapidly:
Remember when ships were being decommissioned during the COVIDcrisis and production of ships was stopped? Well, now we pay the price for that shot-term perspective. Demand is coming back. Ships take longer to come back.
Fink is funked
Rich man Larry Fink, CEO of Black Hole , er uh, Blackrock, is worried about inflation’s not so “transitional” nature. He is not worried, however, because of how inflation will eat away at your life energy. He’s worried because he fully agrees with my thesis (though he doesn’t know he does) — that this dawning inflation will easily grow into a monstrous bear that will tear the stock market apart.
Corporate profits slump in Fed’s “moderate-growth” economy
Another indicator that the economy is not rising in real terms, but remains subpar because it is still climbing out of the COVID’s black hole, can be seen in corporate profits:
Yes, how does a “moderately rising” economy along with stellar earnings reports from corporations square with a total lack of profits?
There you go. It’s all about inflation crushing profit margins almost into non-existence. That will put a bear-hug squeeze on stock valuations because it will become harder to profit-share through dividends when there are no profits to share because business is rapidly rising, but inflation in producer costs is rapidly eating all those profits up.
Corporations will, of course, borrow their profits from the future, using the Fed’s cheap credit to keep paying dividends on non-existing real profits. The chicanery and greed continue, but inflation will make it harder and harder for the Fed to keep those rates down, and we already saw a hat-tipping move in the financial tightening direction by the Fed when it announced it would be rolling off its corporate bond holdings.
Occulted inflation is insidiously eating you alive
One way companies have of dealing with producer inflation costs that they have a hard time passing along (or are reluctant to pass along for fear of losing market share to companies that don’t) is to make everything a little smaller and hope you don’t take notice.
Do you remember the times when you were sure your X-brand burger had shrunk in diameter or the patty got thinner or a little mealier or fattier? Well, those ways of trying to hide inflation by keeping it out of the price are a trend right now.
You might not have noticed a fairly high amount of inflation that has set in already because its been obscured as shrinkage, and that might not have been factored accurately into the government CPI numbers either. There probably isn’t any push from either the Fed or the government to get that inflation factored into CPI either as both hope to sustain the government’s high deficit spending a little longer to keep driving markets up and sustaining a badly damaged economy that merely buried all of its fault zones after the Great Recession (“kicked the can down the road”) and because the government doesn’t want to pay more in Social Security benefits tagged to CPI, etc.
The catch for the stock market in months ahead is that companies have already been doing this clandestine re-sizing, so they may not have much room left to use that hidden approach to inflation as you can only trick penny-wise people so far before they begin to catch on. That little bit of slack may be close to used up. Once it is, the inflation rate in prices may pick up pace even more because inflation cannot be hidden any further.
(The article just referenced gives a number of clever examples from our everyday shopping if you want to drill deeper.)
Firing up the grill
It’s not just the food you buy at the grocery story that is either rising in price or diminishing in size. The impact when you eat out may even be greater as restaurants have struggled worse than any industry with mandated closures and then mandated partial closures when they are open (social distancing):
Fed stimulus, of course, is enabling the worker shortage as an unwanted side effect by paying them more to not work, and that is the kind of thing that causes diminishing returns, which ultimately result in stimulus having to end because the medicine becomes more toxic than the disease. You can only take so much chemotherapy.
In a pandemicly overstressed, overstretched market that has little resilience to absorb higher costs on top of all the restaurant losses last year, the one offsetting advantage from COVID, report some restauranteurs, is that customers are drinking a lot heavier, and booze has always been the area where restaurants experience their highest profit margins. If life gives you a lemon, make Long Island Ice Tea!
Used car prices continued to soar since my last report, ascending like a fiery rocket into the stratosphere:
Used car prices are rising at their most rapid rate in thirty years because old cars are not being traded in on new cars because new cars are not being shipped because they cannot get essential parts because of transportation bottle necks that resulted from years of trade wars and COVID closures. That is how things work.
There are always countervailing forces that can bring equilibrium.
Incomes may be about to fall if the government stimulus checks — particularly those that augment and extend unemployment benefits — begin to fall as scheduled. Available income or savings may also fall as (or if) government forbearance on mortgages and rent terminate in September as previously planned, leaving people with less Fed fat to spend.
Personal savings, built up by all the stimulus, have already begun to come back down, probably because its hard to save in a world with so much inflation — exposed and hidden:
Half the savings buffer is now gone. That may be why consumer sentiment is falling, which can also curtail inflation:
Confidence is rising for the present time, but expectations for the future are declining, perhaps because people are suddenly starting to see inflation everywhere and are wondering how far it is going to go:
If the government lets the stimuli roll off, business will rapidly decline; but if it kicks the can on stimulus termination down the road as it already has a couple of times, then government borrowing and Fed money printing will continue to roar right along, driving inflation on longer if stimulus continues at the present levels util the inflated mother of all bears says, “You’re not getting away with any of this. There is no free escape from the troubles you have caused yourselves.”
That’s my thesis: either the Fed tightens because inflation’s jaws narrow its maneuvering room, killing all markets, or inflation grows into the great black bear of a hole that soon eats up all the Fed is doing faster than the Fed can do it. The jaws are closing, and that’s the price you pay for faking economic recovery for more than a decade, rather than actually resolving the numerous and massive flaws in your economic framework.
It is, for example, the end destination for choosing endless bailouts over painful corporate restructuring, which required Fed and government financing. It’s the price of solving every problem with wider rounds of debt to kick the can down the road, instead of clearing out all the dead wood, which required Fed and government financing. It’s the price of designing markets to function as speculative gambling casinos, instead of as actual markets that exist just to buy and own a piece of the American pie in order to share in American profits. Almost all of that casino action was fueled into a conflagration by Fed and government financing. (Translate that into any country of your choosing.) It is the cost of ignoring economic fundamentals until the economies that all markets ultimately rest upon fail. It’s where the Fed’s entire badly designed, greed-based Great Recovery has been headed as its final destination for years. I do my best to warn about it. It ultimately burns up in its own inflation conflagration.
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