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Do You Remember The Oil Crisis And “Stagflation” Of The 1970s? In Many Ways, 2019 Is Starting To Look A Lot Like 1973…

Do You Remember The Oil Crisis And “Stagflation” Of The 1970s? In Many Ways, 2019 Is Starting To Look A Lot Like 1973…

The price of gasoline is rapidly rising, economic activity is slowing down, the Middle East appears to be on the brink of war, and Democrats are trying to find a way to remove a Republican president from office.  In many ways, 2019 is starting to look a lot like 1973.  For many Americans, the 1970s represent a rather depressing chapter in U.S. history that they would just like to forget, but the truth is that if we do not learn from history it is much more likely that we will repeat our mistakes.  And without a doubt, right now a lot of things are starting to move in a very ominous direction.

“Stagflation” was a term that was made popular in the 1970s, and it occurs when there is a high rate of inflation but economic growth is declining or stagnant.

The U.S. hasn’t had a serious bout with stagflation in quite a while, but it appears that we may be moving in that direction.

Let’s talk about the slowdown in the economy first.  On Monday, we learned that sales of existing homes in the U.S. were way down in March

Home sales are struggling to rebound after slumping in the second half of last year, when a jump in mortgage rates to nearly 5% discouraged many would-be buyers. Spring buying is so far running behind last year’s healthy gains: Sales were 5.4% below where they were a year earlier.

On a year over year basis, existing home sales have now fallen for 13 months in a row.

That is terrible, and there is no way to “spin” that fact to make it look good.

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

The Coming Inflation Threat

The Coming Inflation Threat

Falling asset inflation plus rising cost inflation equals stagflation.

Inflation is a funny thing: we feel it virtually every day, but we’re told it doesn’t exist—the official inflation rate is around 2.5% over the past few years, a little higher when energy prices are going up and a little lower when energy prices are going down.

Historically, 2.5% is about as low as inflation gets in a mass-consumption economy like the U.S. that depends on the constant expansion of credit.

But even 2.5% annually can add up if wages are stagnant. According to the Bureau of Labor Statistics (BLS), what cost $1 in January 2009 now costs $1.19. https://www.bls.gov/data/inflation_calculator.htm

That 19% decline in the purchasing power of dollars is tolerable as long as wages go up by 20% over the same period, but for many American households, wages haven’t kept pace with official inflation.

While the nominal hourly wages keep rising, adjusted for inflation, wages have stagnated for decades.  Here’s a chart based on BLS data that shows median weekly earnings adjusted for official inflation rose $6 a week after five years of decline:

But stagnant wages are only part of the inflation picture: official inflation under-represents real-world inflation on several counts.

First, the weightings of the components in the Consumer Price Index (CPI) are suspect.  Many commentators have explored this issue, but the main point is the severe underweighting of expenses such as healthcare, which is only 8.67% of the CPI but over 18% of the U.S. Gross Domestic Product (GDP).

Second, the “big ticket” components—rent/housing, healthcare and higher education—are under-reported for those who have to pay the unsubsidized cost.  The CPI reflects minor cost decreases in tradable commodity goods such as TVs and clothing that are small parts of the family budget, while minimizing enormous expenses such as college tuition and healthcare that can cost $20,000 annually or more.

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

“Shocking” Turkish Inflation Hits 15 Year High, Unleashing Stagflationary Shockwave; Lira Plunges

A few days ago we discussed how soaring oil prices have been a stagflationary double whammy to emerging markets, which have been hit not only by a surging dollar, resulting in a collapse in local currencies and spiking import costs, but a spike in local currency oil and gasoline prices resulting in a surge in inflation and a slowdown in the economy as local infrastructure grinds to a halt.

This morning, this dynamic was revealed clearly – and painfully for Turkish residents – when Ankara reported that consumer inflation climbed to one of the highest levels since President Recep Erdogan came to power 15 years ago, spurring more calls for higher interest rates to rein in prices or at least for Erdogan to normalize relations with the US.

Turkish inflation soared to 24.5% in September from a year earlier (up 6.3% on the month, the highest since April 2001), rising for the 6th consecutive month driven by an across-the-board spike provoked by the lira’s meltdown; it was also the highest since June 2003 and rising above all Wall Street expectations where the median estimate was 21.1%. Worse, the CPI print was higher than the central bank’s policy rate of 24% suggesting more rate hikes are now imminent… but will Erdogan agree?

Medley Global analyst Nigel Rendell said the inflation figure was “a shocker” but said he was cautiously optimistic that weak consumption might offset inflationary pressures at some point.

“Interest rates of 24 percent provide some protection, and there is a sense that the weakness of domestic demand will be the dominating disinflationary force in a few months’ time once the foreign exchange pass-through has fed its way through the system.”

As the following key highlights from the Turkstat report show, the price increases was broad based across virtually all categories (via Bloomberg):

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

Watching America’s Collapse

Watching America’s Collapse

Existence is running out for America

In the 1950s and 1960s the United States was a vibrant society. Upward mobility was strong, and the middle class expanded. During the 1970s the internal contradiction in Keynesian demand management resulted in stagflation. Reagan’s supply-side economic policy cured that. With a sound economy under him, Reagan was able to pressure the Soviet government, which was unable to solve its economic problem, to negotiate the end of the cold war.

This happy development was not welcomed by powerful forces, both in the US and Soviet Union. In the US the powerful military/security complex was unhappy about losing the Soviet Threat, under the auspices of which its budget and power had soared. Right-wing superpatriot conservatives accused Reagan of selling out America by trusting the Soviets. The American rightwing portrayed President Reagan as the grade-two movie actor dupe of “cunning communists.”

In the Soviet government Gorbachev faced a larger problem. With trust established between the two nuclear powers, Gorbachev released the Soviet hold on Eastern Europe. Hardline elements in the Soviet Communist Party saw too much change too rapidly and concluded that Gorbachev had sold out the Soviet Union to Washington. This conclusion resulted in Gorbachev’s arrest, and the consequence of his arrest was the collapse of the Soviet Union and the Communist Party.

With communism departed, the Russians forgot all of Marx’s lessons about capitalism and naively concluded that we were all now friends. The Yeltsin government opened to American advice and, by naively accepting American advice, Russia was looted and reduced to penury. Russia under Yeltsin became an American puppet state, and the Russian people paid for it with a great reduction in their living standard.

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

A Hard Rain’s a-Gonna Fall

A Hard Rain’s a-Gonna Fall

The prospects for the rest of the year are awful

Après moi, le déluge

~ King Louis XV of France

A hard rain’s a-gonna fall

~ Bob Dylan (the first)

As the Federal Reserve kicked off its second round of quantitative easing in the aftermath of the Great Financial Crisis, hedge fund manager David Tepper predicted that nearly all assets would rise tremendously in response.

“The Fed just announced: We want economic growth, and we don’t care if there’s inflation… have they ever said that before?”

He then famously uttered the line “You gotta love a put”, referring to the Fed’s declared willingness to print $trillions to backstop the economy and financial makets.

Nine years later we see that Tepper was right, likely even more so than he realized at the time.

The other world central banks followed the Fed’s lead. Mario Draghi of the ECB declared a similar “whatever it takes” policy and has printed nearly $3.5 trillion in just the past three years alone. The Bank of Japan has intervened so much that it now owns over 40% of its country’s entire bond market. And no central bank has printed more than the People’s Bank of China.

It has been an unprecedented forcefeeding of stimulus into the global system. And, contrary to what most people realize, it hasn’t diminished over the years since the Great Recession. In fact, the most recent wave from 2015-2018 has seen the highest amount of injected ‘thin-air’ money ever:

Total Assets Of Majro Central Banks

In response, equities have long since rocketed past their pre-crisis highs, bonds continued rising as interest rates stayed at historic lows, and many real estate markets are now back in bubble territory. As Tepper predicted, financial and other risk assets have shot the moon.

And everyone learned to love the ‘Fed put’ and stop worrying.

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

A Summer Of Disappointments Will Lead To An Extended Economic Crash

A Summer Of Disappointments Will Lead To An Extended Economic Crash

The summer season is often about renewed hope and revelry in comfort, and this goes for economic comfort as much as anything else. In parallel to the old tale of The Ant And The Grasshopper, we are all tempted to act like the grasshopper, forget about the trials and tribulations of the world and take a vacation from awareness.

I am seeing quite a lot of this in the past month as mounting global tensions appear to have subsided. But appearances can be deceiving…

I am reminded of the summer of 2008 when those of us in alternative economic analysis were warning of the overwhelming evidence of a debt based deflationary disaster. There seemed to be widespread complacency back then as well. September finally struck and reality began to sink in, and the rest is a history we are still dealing with to this day. Right now, economic optimism is desperately clinging to news headlines rather than data fundamentals, but this can just as easily sink markets as it can keep them artificially afloat.

Consider the numerous powder keg events coming our way over the next few months and what they will mean for economic sentiment if they go the wrong way.

Federal Reserve Meeting June 12-13

The next week will be packed with public statements from various Fed officials which may hint at how aggressive the central bank will be for the rest of the year in its tightening program. However, I think I can guess rather easily what they will do. The Fed has been sticking to its policy of interest rate hikes and balance sheet cuts as I predicted they would for the past couple years. Nothing has changed under new Fed chairman Jerome Powell.

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

Stagflationary Crisis: Understanding The Cause Of America’s Ongoing Collapse

Stagflationary Crisis: Understanding The Cause Of America’s Ongoing Collapse

It is at times frustrating, but also interesting, to witness the progression of the mainstream’s awareness of economic crisis within the U.S. over the years. As an alternative economist, I have had the “privilege” of perching outside the financial narrative and observing our economy from a less biased position, and I have discovered a few things.

First, the mainstream economic media is approximately two to three years behind average alternative economists. At least, they don’t seem to acknowledge reality within our time frame. This may be deliberate (my suspicion) because the general public is not meant to know the truth until it is too late for them to react in a practical way to solve the problem. For example, it is a rather strange experience for me to see the term “stagflation” suddenly becoming a major buzzword in the MSM. It is almost everywhere in the past week ever since the last Federal Reserve meeting in which the central bank mentioned higher inflation pressures and removed references in its monthly statement to a “growing economy.”

For those unfamiliar with what stagflation is, it is essentially the loss of economic growth in numerous sectors coupled with a marked spike in consumer and manufacturing costs. In other words, prices keep going up while employment growth, wages, production, etc. decline.

I have been warning about a stagflationary crisis as the ultimate result of central bank bailouts and QE for many years. In 2011, I published an article titled ‘The Debt Deal Con: Is It Fooling Anyone?’ in which I predicted that the Fed would resort to a third round of quantitative easing (they did). This prediction was based on the fact that the previous two QE events had not resulted in the kind of results the central bankers were obviously looking for.

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

Velocity of Money Picks Up: Inflation Coming? Stagflation? How About Deflation?

Velocity of Money Picks Up: Inflation Coming? Stagflation? How About Deflation?

The velocity of money is picking up. What does it mean?

Velocity of money is defined as (prices * transactions) / (money supply). Economists substitute GDP for (prices * transactions).

This tweet caught my eye today.

View image on TwitterView image on Twitter

Velocity of Money has increased for third quarter in a row after a long steady decline, strong evidence that inflation is heading higher. Given weak economy and tighter monetary policy, based on the data we have today, we are clearly entering a period of imho.

I suspect that opinion represents the majority view, but does it make any sense?

Let’s investigate with a series of charts.

Velocity of Money vs. CPI

Velocity of Money vs. CPI (Percent Change From Year Ago)

The above chart is particularly amusing. There are periods of correlation, inverse correlation, and periods of major random meanderings of velocity while the CPI does nothing at all.

Velocity vs GDP

Since 1998, the year-over-year trend in velocity has strongly correlated with the year-over-year trend in GDP. In the stagflationary 1970s Velocity and GDP were often inversely correlated.

Velocity “Magic”, Tax Receipts, and GDP

I have written about velocity several times previously. Please consider some snips from Velocity “Magic”, Tax Receipts, and GDP.

Velocity Magic

Austrian economist, Frank Shostak, took apart conventional wisdom years ago with his column Is Velocity Like Magic?

“The Mainstream View of Velocity

According to popular thinking, the idea of velocity is straightforward. It is held that over any interval of time, such as a year, a given amount of money can be used again and again to finance people’s purchases of goods and services. The money one person spends for goods and services at any given moment can be used later by the recipient of that money to purchase yet other goods and services.

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

Markets Better Prepare for Stagflation

Markets Better Prepare for Stagflation

By all metrics, prices are heating up. But the same can’t be said for economic activity.
Pray for Jerome Powell.     Photographer: Andrew Harrer/Bloomberg

Investors better wake up to the growing risk of stagflation. The coming weeks promise to deliver the verdict on how they should be positioned.

By all metrics, inflation is heating up. But it’s not clear the same can said for underlying economic activity.

According to producers, input costs have risen for six of the past eight months. And it’s not just big companies that are feeling pressure. One in four small businesses say they plan to raise prices, a 10-year high, according to the National Federation of Independent Business. Inflation’s persistence will finally begin to trickle through to consumers.

David Rosenberg, chief economist at the wealth management company Gluskin Sheff, recently quipped that investors “better say a prayer for Jay Powell,” the Federal Reserve chair. The deniers will dismiss the suggestion. But Rosenberg is serious, citing the core consumer price index’s March leap to 2.1 percent, a level that breaches the Fed’s 2 percent inflation target.

“There is going to be a price to be paid for last year’s string of wireless-induced 0.1 percent prints which are falling out of the year-over-year math,” Rosenberg explained, referring to the collapse in wireless services that skewed inflation lower in 2017. “I see 50/50 odds of a 3 percent core inflation by year end.”

That would certainly grab the Fed’s attention and — critically for investors — keep the central bank in a tightening mode through the end of the year and into 2019. Notably, no single Federal Open Market Committee member voiced concern about the risk of inflation that is too low, the first time this has occurred since the Fed began making public the views of participants in 2011.


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

Interest Rates and Gold

It is commonly assumed that the gold price and interest rates move in opposite directions. In other words, a tendency towards higher interest rates is accompanied by a lower gold price. Like all assumptions about prices, sometimes it is true and sometimes not.

The market today is all about synthetic gold, gold which is referred to but rarely delivered. The current relationship is therefore one of relative interest rates, because positions in synthetic gold, in the form of futures and forwards, are financed from wholesale money markets. This is why a rumour that interest rates might rise sooner than expected, if it is reflected in forward interbank rates, leads to a fall in the gold price.

To the extent that this happens, the gold price has been captured by the modern banking system, but it was not always so. The chart below shows that rising interest rates were accompanied by a higher gold price in the 1970s after 1971.

interest rates and gold

We can divide the decade into four distinct phases, numbered accordingly on the chart. In Phase 1, to December 1971, interest rates fell and gold increased in price, much as today’s market expectations would suggest, but from then on until the end of the decade a strong positive correlation between the two is clear. So why was this?

Those of us who worked in financial markets at the time may remember the development of stagflation in the late sixties and into the first half of the seventies, whereby prices appeared to be rising without a corresponding increase in underlying demand for the goods concerned. This put central banks in a difficult position. In accordance with post-war macroeconomic thinking, monetary policy was (as it is to this day) one of the principal tools for promoting economic growth, and so the lack of growth was put down to insufficient stimulus.

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

Ed Butowsky: Calculating The True Cost of Living

Ed Butowsky: Calculating The True Cost of Living

Why it’s much higher than we’re told/sold 

Over the past decade, we’ve been told that inflation has been tame — actually below the target the Federal Reserve would like to see. But if that’s true, then why does the average household find it harder and harder to get by?

The ugly reality is that the true annual cost of living is far outpacing the government’s reported inflation rate. By nearly 10x in many parts of the country.

This week, we welcome Ed Butowsky, developer of the Chapwood Index, to the program. His index is a ‘real world’ measure of how prices are increasing much faster than the wages of the 99% can afford:

In my business, I wanted to make sure that I was building portfolios that weren’t just efficient but got people the rate of return that they needed. I thought: My goodness, what I need to do is give people a list of everything they spend money on and have them track quarter by quarter exactly their increases, so I can do a better job as a financial advisor in determining what return I need to target. 

I got a hold of a list of 50 major metropolitan areas and found people in every city and I gave them a job: I asked everybody to send me what items they spend their after-tax dollars on. I got about 4,000 different items. Then I took the 500 that most frequently appeared on the list and we’ve been tracking specifically these same items in every city since that period of time. I weight this list based on what percentage of a normal income people spend on each item.

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

Norway’s Interest Rate Conundrum

Norway’s Interest Rate Conundrum

Current Situation 

The ECB recently stimulated more than expected, cutting rates by five basis points and expanding  quantitative easing. It is already expected that Norges Bank (The Norwegian Central Bank) will cut rates next week, seeing accelerating inflation as temporary. They have a 2.5% inflation target mandate “over time,” giving them lee-way. They see demand falling off while the local economy, driven by exports, recovering. Therefore, they feel that they can cut rates. My previous articles challenged the assumptions that the oil sector will recover, showing that new technology reduces long term prices below offshore break-even points, and exports can make up the difference, illustrating that key sectors, like fishing, can be replicated in Canada, Maine, Russia and Japan.

We are experiencing 1970’s style stagflation, coming from the supply side, not demand. Prices are going up because Norges Bank continues to destroy the Norwegian Krone, turning it into the Nordic Peso. This is where they are “hiding” the damage to save rest of the economy. For example, housing prices will rise in NOK but fall in USD or gold (universal commodity) terms. It’s a shell game, leading to long term decline or even worse, an unexpected period of elevated inflation, requiring a rapid rise in interest rates.  Housing remains at risk in this situation (Norway does not have 30 year fixed loans, most people float monthly).

I am in no position to stop them from making trips to Thailand, fruit from Spain and iPhones from California more expensive, but at least I can share my knowledge with others.

The dashboard, above, lines up key figures, showing how low rates drive inflation, gradually eroding public wealth. It is important to notice that inflation is much higher than interest paid at the bank, punishing responsible behavior. A person’s savings diminishes over time in terms of purchasing power.

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

Forget Deflation. Stagflation Arrives in Canada

Forget Deflation. Stagflation Arrives in Canada

Worst Plunge in Retail Sales since 2008. Inflation Whacks Consumers

Retail sales in Canada fell 2.2% in December from November on a seasonally adjusted basis, but not adjusted for inflation, to C$43.2 billion. “Declines were widespread as lower sales were reported in 10 of 11 subsectors, representing 97% of retail trade,” Statistics Canada said.

It blamed the weather. I mean, really. “Later snowfalls and unseasonably warm weather in many parts of Canada may have contributed to lower seasonal purchases.” It said this right after saying that the decline was widespread, and therefore beyond winter jackets, thermal underwear, and fuzzy earmuffs.

Motor vehicle sales dropped 3.9%, with sales at new car dealers falling 4.1%. In dollar terms, given the magnitude of motor vehicle sales, it was the largest decrease among all subsectors. But wait… “Unseasonably warm weather” in the winter is great for car sales, so they should have jumped!

On the other hand, the sub-category of “other motor vehicles dealers” includes snowmobiles, and there sales plunged 6.7%, down for the third month in a row. In this subsector of motor vehicle sales, the weather likely did played a role. But then, sales also fell 2.5% at used car dealers though warmer weather should have really helped them.

Which leaves us stumped about the weather excuse.

Then the really bad news, StatCan put it: “Store types typically associated with holiday shopping registered weaker sales in December,” with sales at general merchandise stores down 2.2%, falling for the second consecutive month in a row; clothing and accessory stores down 3.6%; electronics and appliance stores down 3.0%, the fourth month of falling sales in six; sales at sporting goods, hobby, book and music stores down 2.3%.

And it was spread across the country. Retail sales dropped in nine of the 10 provinces and in all 3 territories. Only exception: tiny Prince Edward Island, where retails sales were flat.

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

A Contagious Crisis Of Confidence In Corporate Credit

A Contagious Crisis Of Confidence In Corporate Credit

Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder – can prove particularly hazardous (to finance and the real economy).

Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and other financial excess (and shorten the Credit cycle).

A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global scale. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.

The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.

The Fed’s explicit assurances of marketplace liquidity came at a critical juncture for the evolution to market-based finance.

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

The Economist Rings Out Cognitive Dollar Dissonance

The Economist Rings Out Cognitive Dollar Dissonance

Two years ago, prior to travelling to Sydney to present at the Annual Precious Metals Symposium, I prepared an article for the Gold Standard Institute Journal titled Cognitive Dollar Dissonance: Why a Global De-Leveraging Requires the De-Rating of the Dollar and the Remonetisation of Gold (see here). This article highlighted the growing inconsistency between those arguing on the one hand that the dollar’s role in international trade and finance was clearly diminishing; yet denying that it was in any danger of losing the near-exclusive monetary reserve status it has enjoyed since the 1940s.

This apparently contradictory yet mainstream thinking about the future of the international monetary system continues to the present day. Indeed, earlier this month the Economist magazine ran a special feature on fading US economic power replete with dollar dissonance. The experts cited note the accelerating trend towards bilateral trade settlement, say between Russia and China, who plan to finance their multiple ‘Silk Road’ infrastructure projects using their own currencies and their own development bank (The Asian Infrastructure Investment Bank or AIIB: See http://www.aiib.org/). They also observe that Russia, China and the other BRICS are no longer accumulating dollar reserves (although curiously overlook that they continue to accumulate gold). They acknowledge that not only the BRICS but many other countries have repeatedly expressed their desire that the current set of global monetary arrangements should be restructured in some way, although they are not always clear as to their specific preferences.

Note the sharp contrast in these two paragraphs, both on the very same page of the Economist feature:

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

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