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A Word About the Current Chaos in Prices and Inflation

A Word About the Current Chaos in Prices and Inflation

Some prices collapsed, others skyrocketed, and the Consumer Price Index went haywire. Here’s what I’m seeing beyond the near term — and it’s not “deflation.”

Amid soaring prices of meat, beverages, fruit, veggies, and other food at home, and surging costs of personal goods, medical care services, and household furnishings, and amid a collapse in prices of gasoline, car rentals, public transportation, car insurance, lodging away from home, and other things – amid these diametrically opposed price movements, the Consumer Price Index went, as expected, haywire today. And we’re going to look at some of those gyrations beyond it.

First, here’s what got buffeted around:

The overall Consumer Price Index fell 0.8% in April from March, the steepest one-month drop since December 2008, when the economy was going through peak-Financial-Crisis 1. This brought the increase over the past 12 months down to 0.3%, the lowest since October 2015 during the oil bust at the time.

The “core” CPI – CPI without the volatile food components and the extremely volatile energy components – dropped 0.5% from March to April but was still up 1.4% from a year ago.

But wait…

What if we take out the most chaotic and largely temporary price movements at both ends to get to what the undying loss of the purchasing power of the dollar might be? Because that’s what consumer price inflation is.

There is a consumer price index that is not buffeted around by the month-to-month collapse of some prices and surge in other prices; The Cleveland Fed’s “Median CPI,” which is based on the data from the CPI, removes the extremes at both ends since these extremes are often temporary and distort long-term inflation trends.

…click on the above link to read the rest of the article…

Core CPI Crashes By Most On Record; Food Costs Soar As Energy & Apparel Collapse

Core CPI Crashes By Most On Record; Food Costs Soar As Energy & Apparel Collapse

Headline Consumer Prices fell 0.8% MoM – the biggest drop since 2008 – as soaring food inflation was dominated by plunging energy, apparel, and lodging costs…

But it was Core CPI, printing 0.4% MoM that made the headlines. That is the biggest monthly decline since records began in 1961…

Under the hood, the changes were dramatic to say the least…

A 20.6-percent decline in the gasoline index was the largest contributor to the monthly decrease in the seasonally adjusted all items index, but the indexes for apparel, motor vehicle insurance, airline fares, and lodging away from home all fell sharply as well.

Goods deflation is accelerating as Services inflation is slumping…

In contrast, food indexes rose in April, with the index for food at home posting its largest monthly increase since February 1974.

Shelter Inflation up only 2.61%, down from 3.01% in March, and the lowest since Feb 2014. Rent inflation up 3.49%, down from 3.67% in March but lowest only since Jan 2019.

Given the near total lockdown of the US, we do question just how “real” this data is (and the fact that rent strikes, mortgage forbearance, food banks, UBI, PPP, and you name the acronym have distorted all the inputs).

The Problem is Not Deflation, It’s Attempts to Prevent It

The Problem is Not Deflation, It’s Attempts to Prevent It

Let’s investigate the Fed’s effort to prevent price deflation.

Here’s a Tweet that caught my eye. 


Real Vision✔@RealVision · 

“We’re about to have deflation and the market hasn’t figure it out yet… when it does, the Fed is going to shit itself.” @hendry_hugh @raoulGMI
https://rvtv.io/3aWzxf4 

Embedded video

david moravec@davidmooravec

Problem with deflation is- Why buy anything if you know it will be cheaper in the future.


Problem with deflation is- Why buy anything if you know it will be cheaper in the future.,” responded one person. 

Let’s investigate that question starting with a look at the CPI basket.

CPI Percentage Weights

CPI percentage weights

Why Buy Anything Questionnaire

Q: If consumers think the price of food will drop, will they stop eating?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes? 
Q: If consumers think the price of gasoline will drop, will they stop driving?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Q: If consumers think the price of taxis will rise, will they take multiple taxi rides on advance?
Q: If people need an operation, will they hold off if they think prices might drop next month?
Q: If people need an operation, will they have two operations if they expect the price will go up?

All of the above questions represent inelastic items. Those constitute over 80% of the CPI.  Let’s hone in on the elastic portion with additional Q&A.

Questions for the Fed – Elastic Items

Q: If people think the price of coats will rise will they buy a second coat they do not need?

…click on the above link to read the rest of the article…

Eurozone Collapse: V-Shaped Recovery Mirage Is Gone

Eurozone Collapse: V-Shaped Recovery Mirage Is Gone

Eurozone Economy Collapses 3.8% in the first quarter, the worst on record.  Spain (-5.2%) and France (-5.6%) GDP were much worse than Italy (-4.7%).

Economist Daniel Lacalle offers his thoughts on the European economy in a YouTube video. 


Daniel Lacalle✔@dlacalle_IA

EUROZONE COLLAPSE

The V-Shaped Recovery Mirage Is Gone.

https://www.youtube.com/watch?v=kO_RxjESCk4 … YouTube at 🏠 ‎@YouTube


What LaCalle says about the Eurozone also applies to the US. 

What’s Next for America?

For a 20-point discussion of what to expect, please see Nothing is Working Now: What’s Next for America?

No V-Shaped Recovery

Here’s the correct viewpoint: The Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.

Simply put, a quick return to business as usual is not in the cards.

Inflation or Deflation?

Meanwhile, the debate over inflation or deflation continues.

Will it be Inflation or Deflation?

If you believe the answer is inflation, then you do not understand the importance of credit and demand shocks. Click on the link for discussion.

Inflation or Deflation? Collapse in Demand Trumps Supply Shocks

Inflation or Deflation? Collapse in Demand Trumps Supply Shocks

The inflationists are coming out of the woodwork, but they are wrong.

Get Ready for the Return of Inflation, says Tim Congdon, in a Wall Street Journal op-ed.

The economists Milton Friedman and Anna Jacobson Schwartz demonstrated in “A Monetary History of the United States” that a collapse in the quantity of money was the main cause of the Great Depression. Hoping to avoid a repeat, the Federal Reserve in recent weeks has poured money into the economy at the fastest rate in the past 200 years. Unfortunately, this overreaction could turn out just as poorly; history suggests the U.S. will soon see an inflation boom.

Friedman and Schwartz used a broad definition of the quantity of money that included all bank deposits, and found that U.S. money stock shrank by 38% between October 1929 and April 1933. Some prominent economists—including Princeton’s Paul Krugman and Columbia’s Joseph Stiglitz—claim that money growth no longer matters much, but they’re wrong. After all, the 2007-09 recession showed that the ever-changing fortunes of the banking system have a significant effect on demand, output and employment. From 2010-18, growth rates of the quantity of money and nominal gross domestic product were virtually identical at 4% a year.

Policy makers have repeatedly called the battle against the novel coronavirus a war. As in wartime, federal expenditures are rising sharply while tax revenues are being hit by the lockdown. Both World War I and World War II—and, indeed, the Vietnam War—were followed by nasty bouts of inflation. If that happens again, policy makers today being cheered for their swift, decisive action will instead have to answer for their grave lack of foresight.

Inflation View is Wrong

The inflation view espoused above is widely held. Some even call for hyperinflation. 

However, the collapse in demand, dwarfs supply shocks and monetary printing.

…click on the above link to read the rest of the article…

How Oil Prices Could Go To $100

How Oil Prices Could Go To $100

Offshore

“We’re in a deflationary moment that surpasses anything seen in most people’s lifetimes,” proclaimed a New York Times byline on Tuesday, the morning after oil prices went negative. The West Texas Crude Intermediate benchmark plummeted to previously unimaginable depths, closing the day at negative $37.63 per barrel.  The novel coronavirus has wreaked unprecedented havoc on the global economy, shutting down entire industrial sectors and bringing countries across the world to a halt as the global community shelters in place to slow the spread of the COVID-19 pandemic. Economists have warned that the fallout is going to be the largest economic downturn that we have seen in our lifetimes, but few could have foreseen the absurdity of negative oil prices. 

Few, but not none. Three weeks ago, on April 1, CNBC published a report titled “Oil prices could soon turn negative as the world runs out of places to store crude, analysts warn,“ which predicted exactly what is happening now. “Global oil storage could reach maximum capacity within weeks, energy analysts have told CNBC, as the coronavirus crisis dramatically reduces consumption and some of the world’s most powerful crude producers start to ramp up their output.”

While the situation is totally unprecedented it’s impossible to say what will happen next for oil markets, some experts think that oil is poised for a major comeback. Even though oil prices are lower than they have ever been, “one energy fund thinks $100 a barrel is achievable,” reported the Midland Reporter-Telegram earlier this week. At the time of the report, oil was only at an 18-year low rather than an all-time low. The article intro continued:  “But first, prices need to fall even further.” Well, they got their wish. 

…click on the above link to read the rest of the article…

The destructive force of bank credit

The destructive force of bank credit 

Commentators routinely confuse the deflationary effects of a contraction of bank credit with the inflationary effects of central bank policies designed to offset it. Central banks always ensure their stimulus is greater, so inflation, not deflation, is always the outcome.

In order to understand bank credit, we must enter the mind of a banker and understand how it is created, why it is expanded and why expansion is always followed by a sharp contraction. 

But we have now moved on from a simplistic credit cycle model, given the global economy was already facing a tendency for bank credit to contract before the coronavirus drove supply chains into the greatest global payment crisis in history. The problem is now so large that to maintain both economic stability and price levels for financial assets the central banks, led by the Fed, will have to issue so much base currency that fiat currencies will become almost worthless.

In these conditions the banks that survive the next several months will then begin to expand bank credit anew to buy up physical assets instead of their normal financial fare, sealing the fate of fiat currencies with a final expansion of bank credit as the banks themselves dump worthless currencies for real assets.  

Introduction

Never has it been more important to understand the psychology and motivation behind changes in the level of bank credit at a time when governments and central banks are relying on commercial banks to transmit Keynesian stimuli to distressed borrowers. And never has it been more important for analysts to differentiate between deflationary forces that come entirely from the contraction of bank credit and inflationary forces that arise from central banks’ monetary policy.

…click on the above link to read the rest of the article…

Overcapacity / Oversupply Everywhere: Massive Deflation Ahead

Overcapacity / Oversupply Everywhere: Massive Deflation Ahead

The price of a great many assets will crash, out of proportion to the decline in demand. 

Oil is the poster child of the forces driving massive deflation: overcapacity / oversupply and a collapse in demand. Overcapacity / oversupply and a collapse in demand are not limited to the crude oil market; rather, they are the dominant realities in the global economy.

Yes, there are shortages in a few high-demand areas such as PPE (personal protective equipment), but across the entire spectrum of global supply and demand, there is nothing but a vast sea of overcapacity / oversupply and a systemic decline in demand as far as the eye can see.

Here’s a partial list of commodities that are in Overcapacity / oversupply:

1. Overvalued assets

2. Overpriced income streams (as income craters, so will the asset generating the income)

3. Labor: low-skill everywhere, high-skill in sectors experiencing systemic collapse in demand

4. AirBnB and other vacation rental properties

5. Overpriced flats, condos and houses

6. Overpriced rental apartments

7. Overpriced commercial office space

8. Overpriced retail space

9. Overpriced used vehicles

10. Overpriced collectibles

I think you get the idea.

Should China restart its export factories, then almost everything being manufactured will immediately be in oversupply, as the global export sector was plagued with mass overcapacity long before the Covid-19 pandemic crushed demand.

Incomes will crater as revenues and profits crash, small businesses close their doors, never to re-open, local governments tighten spending, and whatever competition still exists will relentlessly push the price of labor, goods and services lower.

Globalization has generated hyper-specialization in local and regional economies, stripping them of resilience. Fully exposed to the demand flows of a globalized class of consumers with surplus discretionary income, regions specialized in tourism, manufacturing, commodity mining, etc.

…click on the above link to read the rest of the article…

Brace for impact

Brace for impact

What a week we just had in the precious metals market.

From a huge drop last Friday–which in the past would have presaged further declines the following week–to a significant rebound in the gold price, coupled this time with a major drop in the US dollar–which I will argue may be the signal for a switch to inflationary conditions.

First the chart

We see the nice deflationary trend of the past 18 months looks to have been decisively broken by last week’s action. Although it will be a few weeks before we can be absolutely sure, last week suggests that we are about to embark on another bout of inflation, no doubt as carefully calibrated by the Masters of the Universe as they can fill a shot-glass of whiskey from a pool of liquidity the size of a football field. Either, like a small child pouring verycarefully, they have poured only too much, or they have sloshed out enough whiskey to fill a large swimming pool, and we are about to see what happens when it all lands in a shot glass.

Now, why the need for some liquidity?

Another chart:

This graph plots the gold-copper ratio against its rate of change. I typically interpret this ratio as an indicator of the real world preference between bricks and mortar and financials. When the ratio is low, it’s a sign that people would rather make refrigerators than chase derivatives. Rate of change is the vertical axis. Near the top of the chart means that the plot is shifting towards the right at high speed. Currently, the system is moving toward the right (ratio is increasing) at the fastest rate in the last couple of years. To me, this means the real economy is degrading very quickly.

Thus the Fed may feel pressured to pump out some liquidity.

…click on the above link to read the rest of the article…

What Will It Take to Get the Public to Embrace Sound Money?

What Will It Take to Get the Public to Embrace Sound Money? 

In the last decade, the combination of virulent asset price inflation and low reported consumer price inflation crippled sound money as a political force in the US and globally. In the new decade, a different balance between monetary inflation’s “terrible twins” — asset inflation and goods inflation — will create an opportunity for that force to regain strength. Crucial, however, will be how sound money advocacy evolves in the world of ideas and its success in forming an alliance with other causes that could win elections.

It is very likely that the deflationary nonmonetary influences of globalization and digitalization, which camouflaged the activity of the goods-inflation twin during the past decade, are already dissipating.

The pace of globalization may have already peaked, before the Xi-Trump tariff war. Inflation-fueled monetary malinvestment surely contributed to its prior speed. One channel here was the spread of highly speculative narratives about the wonders of global supply chains.

Digitalization’s potential to camouflage monetary inflation in goods and services markets, on the other hand, has come largely via its impact on the dynamics of wage determination. It has forged star firms with considerable monopoly power in each industrial sector. Obstacles preventing their technological and organizational know-how from seeping out to competitors means that wages are not bid higher across labor markets in similar fashion to earlier industrial revolutions. These obstacles reflect the fact that much investment is now in the form of firm-specific intangibles. Even so, such obstacles tend to lose their effectiveness over time.

As deflation fades, monetary repression taxes (collected for governments through central banks’ manipulation of rates to low levels so as to achieve 2 percent inflation despite disinflation as described) will undergo metamorphosis into open inflation taxes as the rate of consumer price inflation accelerates. Governments cannot forego revenue given their ailing finances. Simultaneously, asset inflation will proceed down a new stretch of highway where many crashes occur.

…click on the above link to read the rest of the article…

Inflation Is Coming…

Inflation Is Coming…

Investing is all about probabilities. If the perceived odds of an event are high, certain securities will be priced based on those expected probabilities. The corollary is that when an event is perceived as almost impossible, securities do not price in any chance of it occurring. If that event does occur, all sorts of securities need to re-price—often quite rapidly. I like to spend my time pondering what potential events the market completely ignores. Of all potential economic outcomes, the one that is least anticipated and least priced in, is an uptick in inflation.

It is said that generals always fight the last war. In terms of macro-portfolio wars, Japan’s experience with deflation colors all views. This seems odd to me because we have over two millennia of history showing inflation and currency debasements to be universal constants, with one outlier in Japan. The question is if Japan is the new normal or a true outlier?

Academics have studied the causes and effects of inflation ever since emperors and kings fixated on halting its effects. Despite a massive body of work, there is little agreement amongst experts on the causes of inflation. Since I tend to ignore “experts,” let me start by giving you the Kuppy definition of inflation. “Inflation is when too much of a certain currency chases a scarce resource and pushes its price higher when defined in terms of that currency.” Using that definition, we’ve actually had rather dramatic inflation over the past decade—it just hasn’t shown up yet in the core consumer goods that central bankers are often concerned about.

Did they time-stamp the cyclical low in yields?

When a country prints money, no one knows where within the economic ecosystem it will ultimately flow. If a resource is scarce, it tends to experience inflation—when it is artificially scarce, it has even more extreme inflation.

…click on the above link to read the rest of the article…

An Inflationary Depression

An Inflationary Depression 

Financial markets are ignoring bearish developments in international trade, which coincide with the end of a long expansionary phase for credit. Both empirical evidence from the one occasion these conditions existed in the past and reasoned theory suggest the consequences of this collective folly will be enormous, undermining both financial asset values and fiat currencies.

The last time this coincidence occurred was 1929-32, leading into the great depression, when prices for commodities and output prices for consumer goods fell heavily. With unsound money and a central banking determination to maintain prices, depression conditions will be concealed by monetary expansion, but still exist, nonetheless.

Introduction

The unfortunate souls who are beholden to macroeconomics will read this article’s headline as a contradiction, because they regard inflation as a stimulant and a depression as the consequence of deflation, the opposite of inflation. 

An economic depression does not require deflation, if by that term is meant a contraction of the money in circulation. More correctly, it is the collective impoverishment of the people, which is most easily achieved by debasement of the currency: in other words, monetary inflation. Fundamental to the myth that an inflation of the money supply is the path to economic recovery are the forecasts by the economic establishment that the world, or its smaller national units, will suffer no more than a mild recession before economic growth resumes. It is not only complacent central bank and government economists that say this, but their followers in the private sector as well. 

It is for this reason that the S&P 500 Index is still only a few per cent below its all-time high. If there was the slightest hint that Corporate America risks being destabilised by a depression, this would not be the case.

 …click on the above link to read the rest of the article…

Blackrock CIO: The Endgame Is Coming And Central Banks Will Debase Everything To Spark Inflation

Blackrock CIO: The Endgame Is Coming And Central Banks Will Debase Everything To Spark Inflation

Blackrock’s Chief Investment Officer, Rick Rieder, best known perhaps for recently suggesting that the ECB should monetize stocks, writes in the Blackrock blog today and highlights the economic policy state-of-play today, and where it may lead to should economic growth falter, productivity not materialize, and populism continue to thrive.

* * *

The major global central banks continue to draw bigger guns in their battle against deflation, yet in some places, it appears to be of no avail. The fact is that the share of sovereign yields that are in negative territory keeps increasing and the average level of these interest rates becomes ever more negative. Further, quantitative easing (QE) purchases of sovereign debt have transitioned to purchases of corporate debt, and in some places equities; with inflation still elusive and improved growth prospects in question. That all leads one to wonder where (and how) these policies end? What is today’s monetary policy endgame?

Turn to economic history for perspective

In order to envision the monetary policy endgame several years (or a decade) from now, let’s start by stepping back and examining two of the foundational tenets that have driven the global economy and financial markets since the 1970s. The first principle is that the major central banks embraced a roughly 2% inflation target (implicit for the Federal Reserve since, at least, 1995 and explicitly stated since 2012), and the second factor is the end of the Bretton Woods monetary system; marking the shift away from the gold standard and into a world of fiat currency fluctuation.

 …click on the above link to read the rest of the article…

3 Central Bank Shocks Unleash Overnight Yield Crash, With Yuan On Verge Of Collapse

3 Central Bank Shocks Unleash Overnight Yield Crash, With Yuan On Verge Of Collapse

There is just one way to describe the plunge in bond yields overnight and the events behind it: the global race to the currency bottom is rapidly accelerating in its final lap with a global deflationary Ice Age (take a bow Albert Edwards) waiting on the other side.

The main event, of course, was the latest yuan fixing with the PBOC showing a clear sense of humor when it set the currency at 6.9996laughably not to be confused with 7.0000 (for at least another 24 hours that is), but just a fraction of a percent away from the critical threshold, and weaker than the 6.9977 expected. The result was a resumption in the offshore yuan selloff, a hit to US equity futures and a drop in Treasury yields. Of course, once the PBOC does finally fix the yuan on the wrong side of 7, all bets are off and watch as the CNH crashes… as far as 7.70 according to SocGen, especially once Trump hikes tariffs to 25%.

But there was much more in today’s iteration of the global race to the currency bottom, when first New Zealand, then India and finally Thailand shocked investors by being far more dovish than analysts expected. Indeed, the three Asian central banks delivered surprise interest-rate decisions on Wednesday as central bankers not only took aggressive action to counter a worsening global economy, but are now frontrunning each other – and the Fed – in doing so.

As noted last night, New Zealand’s central bank on Wednesday stunned investors by dropping its benchmark rate by 50 basis points, double the expected reduction and sending the kiwi tumbling. Thailand also surprised all but two in a survey of economists, cutting by 25 basis points. Finally, India’s central bank lowered its rate by an unconventional 35 basis points.

 …click on the above link to read the rest of the article…

Is Inflation Inevitable?

Is Inflation Inevitable? 

QUESTION: Mr. Armstrong is there any way we can not have inflation. If so how? If not what would you say 5% or more?
S

ANSWER: It all depends on your definition. The type of inflation coming is more STAGFLATION where prices rise due to cost-push (shortages) but there is a declining economic growth. The more familiar inflation is a DEMAND lead event because the economy is booming. Because governments are desperate for money, they keep raising taxes and are increasing enforcement. This trend is DELATIONARY for it reduces disposable income. The INFLATIONARY pressure comes from the rising costs which are set in motion by raising taxes.

Then we add the impact of the climate chaos creating shortages in food and that furthers cost-push inflation. The end result will be the shift from PUBLIC to PRIVATE where people will run away from government debt on all levels and move to tangible assets to survive.

Olduvai IV: Courage
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Olduvai II: Exodus
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