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Weekly Commentary: Powell on Inflation

Weekly Commentary: Powell on Inflation

The Treasury yield spike runs unabated. Ten-year Treasury yields rose another 10 bps this week to 1.72%, the high since January 23, 2020. The Treasury five-year “breakeven” inflation rate rose to 2.65% in Tuesday trading, the high since July 2008. The Philadelphia Fed’s Business Survey Prices Paid Index surged to a 41-year-high. In the New York Fed’s Manufacturing Index, indices of Prices Paid and Received both jumped to highs since 2011.
While crude oil’s notable 6.4% decline for the week spurred a moderate pullback in market inflation expectations (i.e. “breakeven rates”), this did not translate into any relief in the unfolding Treasury bear market.

Chairman Powell was widely lauded for his adept handling of Wednesday’s post-FOMC meeting press conference. He was well-prepared and could not have been more direct: The Federal Reserve will not anytime soon be contemplating a retreat from its ultra-dovish stance. It was music to the equities mania, as the Dow gained 190 points to trade above 33,000 for the first time. Treasury yields added a couple bps, but without any of the feared fireworks. Markets were breathing a sigh of relief.

Labored breathing returned Thursday. Ten-year Treasury yields spiked another 10 bps, trading above 1.75% for the first time since January 2020. And after trading as low as 0.76% during Powell’s press conference, five-year Treasury yields spiked to almost 0.90% in increasingly disorderly Thursday trading. The Nasdaq100 was slammed 3.1%, with the S&P500 sinking 1.5%.

The Treasury market would really like to take comfort from the Fed’s steadfast dovishness. It’s just been fundamental to so much. It’s worked incredibly well for so long. Not now. This raises a critical issue: Paradigm shift? Regime change? What’s driving Treasury yields these days? What is the bond market fearing? If it’s inflation, is Fed dovishness friend or foe?

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

credit bubble bulletin, doug noland, inflation, price inflation, fed, us federal reserve, jerome powell

Wrong… Again

Wrong… Again

The Federal Reserve met last week and voted to keep interest rates unchanged. What a shock!

The Fed also gave an upbeat forecast of economic growth, predicting that the U.S. economy will grow 6.5% this year, its highest rate in nearly 40 years. Its December 2020 forecast projected 4.2% growth.

The Fed also expects that the economy could return to full employment next year and that inflation could hit 2.4% this year before declining again.

In effect, the central bank said they were willing to let the economy run “hot” and risk higher inflation in order to capture the benefits of stronger growth.

Zero rates are essentially a given as far as the eye can see. What about that growth forecast?

The Fed has one of the worst forecasting records of any financial institution in the world. My expectation is that growth is slowing now and will get worse as the year progresses.

I believe this will be especially true as the Biden administration policies of higher taxes, more regulation, and open borders that import cheap labor take effect.

Biden has also shut down new oil and gas exploration and wants to push a Green New Deal that will guarantee higher energy prices. Higher energy prices are a burden on the economy.

Little Cause for Optimism

Where’s the evidence that growth is slower than the Fed expects?

Inflation measures remain weak. The annual core consumer price inflation rate moved down from 1.7% in September 2020 to 1.3% in February 2021.

The overall consumer price inflation rate (including food and energy) rose modestly from 1.4% in September 2020 to 1.7% in February 2021.

On a year-over-year basis, the core personal consumption expenditures rate of increase (the Fed’s preferred index) moved from 1.4% in October 2020 to 1.5% in January 2021.

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

daily reckoning, james rickards, fed, us federal reserve, inflation, price inflation, cpi, consumer price inflation,

“Get Ready For Some Serious Sticker Shock Very Soon: This Jump In Inflation Won’t Be Transient”

“Get Ready For Some Serious Sticker Shock Very Soon: This Jump In Inflation Won’t Be Transient”

Semiconductor Costs Could Lead to a Shock This Fall

Consumer confidence is key to how people plan to spend. You can see it in the chart below. And as the chip shortage grows, expect the higher prices to begin showing up in products, which could dampen confidence and eventually stall consumer spending.

The recent surge in chip prices hasn’t affected consumers, and stimulus has kept spending up while confidence has lagged. But that will soon change. Manufacturers have been eating the increase costs and not passing them on to consumers. With chip prices expected to rise every quarter this year, many companies will be unable to keep swallowing it, especially those with tight margins.

Manufacturers order semiconductors six months in advance. The choke points along the supply chain driving up prices and creating shortages will come to a head in the third quarter, when the next orders to replace inventories are delivered, according to the founder of SouthBay Research Andrew Zatlin.

Automakers will struggle to hold the line. At General Motors, for example, roughly 5% of the cost of goods sold is from semiconductors. The company has 11% margins, and a surge in chip prices will hit profits hard, according to Zatlin. And small business who sell to the likes of Amazon and Walmart with tight retail margins will be forced to raise prices even higher.

The impact should only spread from there. Which is why this jump in inflation won’t be transient as the Fed hopes. Every manufacturer with tight margins will be forced to raise and maintain higher prices. So get ready for some serious sticker shock very soon.

Bloomberg Markets Live , Vincent Cignarella, zerohedge, inflation, supply shortages, supply chains, price inflation

 

Look to Prices, Not Official Metrics, for Inflation’s “Smoking Gun”

Look to consumer prices to see where gold and silver are headed

As worries about currency erosion and inflation abound, the question of how to measure these crucial benchmarks has become a cornerstone of the debate. The Federal Reserve’s insistence that inflation is being kept in check and below its annual targeted rate of 2% seems impossible considering the oceans of money poured into the economy. Economics 101 teaches us that, when money supply goes up without a corresponding increase in goods for sale, prices must rise. It’s virtually a law of nature.

Statements by officials have given rise to even more red flags, whether one refers to the Fed’s willingness to let inflation run rampant or former U.S. Treasury Secretary Lawrence Summers’s warning that the Fed would “set off inflationary pressures of a kind we have not seen in a generation.”

But how can the average citizen know whether there has been a sudden spike in inflation, and just how quickly their purchasing power is wasting away?

FAO Food Price Index

The FAO Food Price Index (FFPI) averaged 116.0 points in February 2021, 2.8 points (2.4 percent) higher than in January, marking the ninth month of consecutive rise and reaching its highest level since July 2014. source

 

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

birch gold group, inflation, price inflation, food price inflation, fed, us federal reserve, consumer prices

The Fed’s Most Convenient Lie: A CPI Charade

The Fed’s Most Convenient Lie: A CPI Charade

Despite a penchant for double-speak that would make a politician blush, the Fed tells us that its primary focus is unemployment not inflation.

Let me remind readers, however, that an openly nervous Mr. Powell came out in the summer of 2020 with a specific, as well as headline-making, agenda to “allow” higher inflation above the 2% rate.

This “new inflation direction” ignored the larger irony that the Fed had been unsuccessfully “targeting” 2% inflation for years before changing verbs from “targeting” to “allowing.”

Such magical word choices reveal a critical skunk in the Fed’s semantic wood pile.

If, for example, the Fed was honestly “targeting” inflation to no success for years, how could Powell suddenly have the public ability to then “allow” more of what he failed to achieve before, as if inflation was as simple to dial up and down as a thermostat in one’s home?

Dishonest Inflation Reporting

The blunt answer is that the Fed, in sync with the fiction writers at the Bureau of Labor Statistics (BLS), reports consumer inflation as honestly as Al Capone reported taxable income.

In short: The Fed has been lying about (i.e. downplaying) inflation for years.

As we’ve shown in many prior reports, the Consumer Price Index (CPI) scale used by the BLS to measure U.S. consumer price inflation is an open charade, allowing the BLS, and hence the Fed, to basically “report” inflation however they see fit—at least for now.

If, for example, the weighting methodologies hitherto used by the Fed to measure CPI inflation in the 1980’s were used today, then US, CPI-measured inflation would be closer to 10% not the reported 2%.

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

 

The Foundation for Potential Price Hyperinflation is Being Laid

The Federal Reserve sure seems to have a tough time finding and reporting signs of rising inflation — especially when it’s hidden in other sectors like a lack of demand for energy.

A recent example of the Fed’s “inflation blindness” comes from a speech Chairman Jerome Powell gave to the Economic Club of New York. According to a MarketWatch piece that reported on that speech:

Powell said he doesn’t expect “a large nor sustained” increase in inflation right now. Price rises from the “burst of spending” as the economy reopens are not likely to be sustained.

It’s odd that Powell would say he doesn’t expect a sustained increase in inflation, because food price inflation has consistently run 3.5 to 4.5 percent since April last year. That sure seems like a sustained increase in food prices.

What Powell seems to have “forgotten” is that some of the overall inflation includes negative energy price inflation (as low as negative 9 percent at one point). But now that the demand for fuel is returning, the official gasoline index rose 7.4 percent in January.

It will be much more challenging for Powell to keep downplaying the risk of hyperinflation once energy price inflation rises back to “pre-pandemic” levels.

In fact, Robert Wenzel thinks the main inflation event is “just about to hit.” If it does, and inflation does rise past Powell’s two percent target, it isn’t likely to stop there. Jim Rickards thinks that’s when hyperinflation can gain momentum:

If inflation does hit 3%, it is more likely to go to 6% or higher, rather than back down to 2%. The process will feed on itself and be difficult to stop. Sadly, there are no Volckers or Reagans on the horizon today. There are only weak political leaders and misguided central bankers.

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

 

BoE Keeps Policy Unchanged, Tells Banks To Start Preparing For Negative Rates “If Necessary” But Sees Spike In Inflation

BoE Keeps Policy Unchanged, Tells Banks To Start Preparing For Negative Rates “If Necessary” But Sees Spike In Inflation

The Bank of England kept its stimulus program unchanged on Thursday. The BoE maintained its Bank Rate at 0.1% and left the size of its total asset purchase programme at 895 billion pounds in a unanimous decision, as expected.

Growth and Inflation

On QE, the BOE said that “if needed, there was scope for the Bank of England to re-evaluate the existing technical parameters of the gilt purchase programme” but that is unlikely since the BOE’s growth forecast was far stronger than previously:

  • UK GDP is expected to have risen a little in 2020 Q4 to a level around 8% lower than in 2019 Q4.
  • This is materially stronger than expected in the November Report.
  • While the scale and breadth of the Covid restrictions in place at present mean that they are expected to affect activity more than those in 2020 Q4, their impact is not expected to be as severe as in 2020 Q2, during the United Kingdom’s first lockdown.
  • GDP is expected to fall by around 4% in 2021 Q1, in contrast to expectations of a rise in the November Report.
  • Global GDP growth slowed in 2020 Q4, as a rise in Covid cases and consequent restrictions to contain the spread of the virus weighed on economic activity. Since the MPC’s previous meeting, financial markets have remained resilient.

The BOE also said that CPI inflation was expected to rise quite sharply towards the 2% target in the spring, as the reduction in VAT for certain services comes to an end and given developments in energy prices. In the MPC’s central projection, conditioned on the market path for interest rates, CPI inflation is projected to be close to 2% over the second and third years of the forecast period.

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

Inflation Is Spreading Broadly into the Economy. Amid Surging Costs, Companies Raise Prices, and Customers Pay them, Despite Weak Economy, 10 Million Missing Jobs

Inflation Is Spreading Broadly into the Economy. Amid Surging Costs, Companies Raise Prices, and Customers Pay them, Despite Weak Economy, 10 Million Missing Jobs

“Not only have the last two months seen supply shortages develop at a pace not previously seen in the survey’s history, but prices have also risen due to the imbalance of supply and demand.”

The signs of inflation building up in the economy are now everywhere. IHS Markit, in its release of the Flash PMI with data from companies in the services and manufacturing sectors, added to that pile of evidence.

For companies, inflation happens on two sides: what they are having to pay their suppliers, and what they can get away with charging their own customers, which may be consumers, governments, or other companies.

And increasingly, companies are able to pass higher input prices on to their customers – meaning, their customers are not totally balking at paying higher prices and they’re not switching to other sources to dodge those price increases. That’s a mindset that nurtures inflation.

This PMI data is based on what executives said about their own companies (names are not disclosed) and the conditions they face in the current month. No quantitative measures or dollar amounts are involved.

And this is what they said about their two aspects of inflation, according to Markit:

On surging input prices:

  • “Inflationary pressures intensified as supplier delays and shortages pushed input prices higher.”
  • “The rate of input cost inflation [in January] was the fastest on record (since data collection began in October 2009), as soaring transportation and PPE costs were also noted.”
  • Amid stronger expansions in output and new orders, manufacturers experienced “significant supply chain delays, raw material shortages, and evidence of stockpiling at goods producers” that “pushed input prices up.”

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

The U.S. Government Will Inflate To The Bitter End

The U.S. Government Will Inflate To The Bitter End

The big news organizations say Joe Biden’s the next president of the USA.  That claims of election fraud and fixing are baseless.  Do you believe them?  Do you trust them?

Regardless, Biden’s acting as if.  He’s talking to foreign leaders.  He’s meeting with vaccine makers.  He’s making big plans.  He’s planning big things.  But, apparently, he’s not progressive enough.

This week, for example, an organization called Justice Democrats accused Biden of appointing corporate-friendly insiders.  They say these “corporate-friendly insiders […] will not help usher in the most progressive Democratic administration in generations.”

Certainly, Biden’s getting plenty of advice.  The political puppet has left many strings to be pulled.  Elizabeth Warren and Chuck Schumer want Biden to erase the first $50,000 of a person’s student loan debt.  According to Schumer“Joe Biden can do that with the pen as opposed to legislation.”

Will Biden listen to them?  Will he listen to progressive superstar Alexandria Ocasio-Cortez?  On Monday, Ms. Ocasio-Cortez, tweeted:

“Student loan forgiveness is good, actually.

“We should also push for tuition-free public colleges to avoid this huge debt bubble from financially decimating ppl every generation.  It’s one of the easiest progressive policies to ‘pay for,’ w/ multiple avenues from a Wall St transaction tax to an ultra-wealth tax to cover it.”

Wow!  Biden hasn’t even moved into the White House and things have gone stoopid silly.  Where to begin?

Cut It Off

Without question, the student debt crisis is a disgrace.  There are roughly 45 million student loan borrowers who owe on the order of $1.6 trillion.  Most of this debt is from federal student loans.

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

Soaring Food & Energy Costs Spark Rebound In Producer Prices

Soaring Food & Energy Costs Spark Rebound In Producer Prices

Producer Prices rebounded MoM in May with headline Final Demand PPI rising 0.4% (against +0.1% exp) but it left PPI YoY still down 0.8%…

Source: Bloomberg

Some serious dispersion in the various sector’s price swings…

This rebound was driven by a record surge in food prices…

Source: Bloomberg

Two-thirds of the May increase in the index for final demand goods is attributable to a 40.4-percent jump in meat prices.

Source: Bloomberg

The indexes for gasoline, processed young chickens, light motor trucks, liquefied petroleum gas, and carbon steel scrap also moved higher.

Source: Bloomberg

Conversely, prices for chicken eggs fell 41.2 percent. The indexes for diesel fuel and for plastic resins and materials also decreased.

What will Jay Powell do now that average joe’s cost of living is soaring?

Anatomy of a fiat currency collapse

Anatomy of a fiat currency collapse

This article asserts that infinite money-printing is set to destroy fiat currencies far quicker than might be generally thought. This final act of monetary destruction follows a 98% loss of purchasing power for dollars since the London gold pool failed. And now the Fed and other major central banks are committing to an accelerated, infinite monetary debasement to underwrite their entire private sectors and their governments’ spending, to prop up bond markets and therefore all financial asset prices.

It repeats the mistakes of John Law in France three hundred years ago almost to the letter, but this time on a global scale. History, economic theory and even common sense tell us governments and their central banks will rapidly destroy their currencies. So that we can see how to protect ourselves from this monetary madness, we dig into history for guidance to see who benefited from the Austrian and German hyperinflations of 1922-23, and how fortunes were made and lost.

Introduction

The way inflation is commonly presented by modern economists, as a rise in the general level of prices, is incorrect. The classical, pre-Keynesian definition is that inflation is an increase in the quantity of money which can be expected to be reflected in higher prices. For consistency and to understand the theory of money and credit we must adhere strictly to the proper definition. The effect on prices is one of a number of consequences, and is not inflation.

The effect of an increase in the quantity of money and credit in circulation on prices is dependent on the aggregate human response. In a nation of savers, an increase in the money quantity is likely to add to savers’ bank balances instead of it all being spent, in which case the route to circulation favours lending for the purpose of industrial investment.

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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 Inevitably Going To Rise” – Is Alan Greenspan Right?

“Inflation Is Inevitably Going To Rise” – Is Alan Greenspan Right?

Via DataTrekResearch.com,

“Right now, there’s no real inflation at play. But if we go further than we are currently, inflation is inevitably going to rise.” That’s from Alan Greenspan on CNBC this week. The “further” relates to US Federal deficit spending, the idea being that +$1 trillion annual budget shortfalls will eventually trigger price inflation.

It isn’t just Greenspan that is worried about rising US consumer price inflation; as we read through the most bearish market commentaries for 2020 this concern often has pride of place. Easy monetary and fiscal policy combined with a reaccelerating US/global economy late in a cycle is THE playbook for rising prices, so fair enough. The counterarguments are more structural (aging demographics, Internet price discovery, etc.), and while those work over the long term we can’t lean on them too hard in any given year. So do the inflation hawks have a case to make about 2020?

You know our methods for evaluating questions like this – a combination of market-based expectations and historical/real time data – so let’s get right to it:

#1: Expected 10-year inflation expectations imbedded in Treasury Inflation Protected bonds (TIPS spreads):

  • Even during the period of Federal Reserve bond buying, TIPS spreads were reasonable proxies for market expectations about long-run future inflation. The lowest they ever got was 1.2% in early 2016 and they have often been +2.0% over the last decade, the Fed’s notional target (see chart below).
  • TIPS spreads were +2.0% for almost all of 2018, for example, only dropping in November along with US/global growth expectations.
  • Expected 10-year forward inflation as measured by the TIPS market hasn’t touched 2.0% in 2019 and currently sits at 1.73%.

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

The Source of Killer Inflation: Services

The Source of Killer Inflation: Services

The soaring cost of services is driven by a number of factors.

What will the future bring: fire (inflation) or ice (deflation)? The short answer: both, but in very different doses. Goods that are tradeable and exposed to technologically driven commodification will decline in price (deflation) while untradeableservices that are difficult to commoditize will increase in price (inflation), generating a self-reinforcing feedback loop of wage-price inflation.

Gordon Long and I discuss these trends in our latest program The Supply-Demand Services Problem (YouTube).

The big difference between goods that drop in price (TVs, etc.) and services that are exploding higher (healthcare, childcare, elderly care, higher education, local taxes and fees, etc.) is the relative size each occupies in the household budget: a new TV is a couple hundred bucks and a once-every-few-years purchase, while all the services cost thousands of dollars annually– or even tens of thousands of dollars.

A new TV or electronic gew-gaw is signal noise in the household budget while services consume the most of what’s left after paying for housing and transport.

A 10% decline in the cost of a new TV is $25, while a 10% increase in annual tuition and college fees is $2,500. Add in thousands more for childcare, elderly care, local taxes and fees and healthcare, and the deflationary impact of tradeable goods is trivial compared to the increases in untradeable services.

Not all goods are declining in sticker price. vehicles are rising sharply in price, a fact that’s erased by hedonic adjustments in official inflation (the new car is supposedly so much better than the previous model that the “price” actually declines-heh).

Then there’s the inexorable shrinkage of quantity and quality. The package that once held 16 ounces now contains 13.4 ounces, and the appliance that once lasted for years now lasts a few months as the quality of components is reduced. 

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

Will Your Retirement Efforts Achieve Escape Velocity?

Will Your Retirement Efforts Achieve Escape Velocity?

Sadly, most of us will outlive our savings

The concept of ‘retirement’, of enjoying decades of work-free leisure in your golden years, is a relatively new construct. It’s only been around for a few generations.

In fact, the current version of the relaxed, golfing/RV-touring/country club retirement lifestyle only came into being in the post-WW2 boom era — as Social Security, corporate & government pensions, cheap and plentiful energy, and extended lifespans made it possible for the masses.

But increasingly, it looks like the dream of retiring is fast falling out of reach for many of today’s Baby Boomers. Most will outlive their savings (if they have any at all).

And the retirement prospects look even worse for Generations X, the Millennials, and Gen Z.

A Bad Squeeze

While the US enjoyed a wave of unprecedented prosperity throughout the 20th century, the data clearly shows that halcyon era is ending.

Real wages (i.e., nominal $ earned divided by the inflation rate) for the average American worker have hardly budged since the mid-1960s:

Yet the cost of living has changed dramatically over the same time period. Note how the rate of increase in the Consumer Price Index (CPI) started accelerating in the late ’60s and never looked back:

Squeezed between stagnant wages and a rising living costs, perhaps it should be little surprise that so many Americans are having difficulty finding anything left over to save for retirement.

We’ve written about this extensively in our past reports, such as Let’s Stop Fooling Ourselves: Americans Can’t Afford The Future and The Great Retirement Con. But as a way of driving the point home, here are some quick sobering stats from the National Institute On Retirement Security:

  • The median retirement account balance among all working US adults is $0. This is true even for the cohort closest to retirement age, those 55-64 years old.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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