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Dotcom Bust 2 has begun. Only bigger (you can also download the WOLF STREET REPORT wherever you get your podcasts).
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Predictions a few weeks ago of peak gasoline prices have been obviated by the inflationary mindset.
The average price of all grades of gasoline at the pump spiked to a record $4.33 per gallon on Monday, May 9, the third week in a row of increases, and was up 46% from a year ago, edging past the prior record of Monday, March 14 ($4.32), according to the US Energy Department’s EIA late Monday, based on its surveys of gas stations conducted during the day.
Gasoline price increases slap consumers directly in the face every time they get gas, and the classic ways of hiding price increases – such as making gallons smaller (shrinkflation) – would be illegal.
Adjusted for CPI inflation, it’s still not a record. In July 2008, gasoline at $4.11 would amount to $5.37 a gallon in today’s dollars. Long way to go, baby.
Back then, demand destruction rippling out of the Financial Crisis and the Great Recession toppled the price spike. We’re not there yet either – but the Fed has started to work on it.
Gasoline futures have been breath-takingly volatile since February, with huge spikes and drops, that led to a new record on Friday, but on Monday, they fell from that record (chart via Investing.com):
The average retail price of No. 2 highway diesel spiked to a record $5.62 a gallon at the pump on Monday, the EIA reported late Monday. Year-over-year, the price of diesel has spiked by 76%!
Adjusted for CPI inflation, that spike in diesel prices is still not a record. In July 2008, diesel peaked at $4.76 a gallon, which would be $6.22 in today’s dollars. Long way to go, baby.
…click on the above link to read the rest of the article…
There’s some demand destruction. But oil bounced again, gasoline might be next. My guess is a long-drawn-out zigzag higher.
Following the dizzying spike in gasoline prices, the question arises when demand destruction will set in, where people start driving less, start taking it easier to conserve gas when they do drive, or start prioritizing the most economical vehicle in their garage. If enough people do it, demand begins to decline, and gas stations have to compete for dwindling business. Demand destruction is what would cause the price to come down again. Are we there yet?
The Energy Department’s EIA measures consumption of gasoline in terms of barrels supplied to the market by refiners, blenders, etc., and not by retail sales at gas stations. The volume of gasoline supplied has fallen for the third week in a row. This is unusual this time of the year, when gasoline consumption normally rises through the summer.
The EIA reported on Thursday that gasoline consumption fell to 8.61 million barrels per day in the week ended April 8 on the basis of a four-week moving average (red line), the lowest since March 4, down 2.3% from the same period in 2021 (black line) and down 8.1% from the same period in 2019 (gray line).
Consumers began to react in January.
Note how the past 11 months (red line) tracked the pre-Covid period three years earlier very closely (gray line) until they began to diverge sharply, not just in March, but already in mid-January, and have been solidly below the 2019 level ever since.
Gasoline prices started shooting higher from collapsed levels in April 2020. By May 2021, the average price of gasoline, all grades combined, breached $3.00 a gallon, a multi-year high, and kept going…
…click on the above link to read the rest of the article…
Sunday night, crude oil WTI futures, as soon as trading started, spiked to $130.50 a barrel, the highest since July 2008. Maybe it was just one contract someone traded to get it over with and nail that number. But this came after discussions in Washington whether or not the US should ban the imports of Russian crude oil. After the crazy open, the price of WTI futures fell, eventually to $123 a barrel, still the highest since July 2008. And then they started rising again. Currently, WTI trades for around $126, also the highest since July 2008.
The reason the price spiked isn’t because the US is suddenly running out of crude oil or anything, but because traders and algos smelled an opportunity and jumped on it, and drove up the price of those futures, and it’s pure speculation, but that’s what futures trading always is.
The US doesn’t import much Russian crude and could do just fine without Russian crude – and that’s why the import ban is even proposed. And if some buyers in the US actually buy Russian crude, it’s simply another trade, like a gazillion others, but Russian crude is a big part of the gigantic complex global oil trade.
For example, California is cut off from other US producing regions because there’s no pipeline across the Rockies. It produces some of its own crude oil and imports some crude oil from Alaska, and imports crude from the rest of the world. The local refineries, such as those in the Bay Area, buy this imported crude and refine it and export large quantities of gasoline, diesel, and jet fuel to Latin America, which is a huge profitable business.
…click on the above link to read the rest of the article…
“We are simply limited to what our suppliers tell us we can have. It really isn’t supposed to work this way!”
For what seems like a long time now, Wolf Street has been discussing the apparently never-ending shortages that US manufacturers, construction companies, retailers, and other businesses have been struggling with. So here are the boots-on-the-ground observations by an Ohio-based manufacturer, with operations in other states, about the global supply-chain chaos. Todd Miller is the president of Isaiah Industries, which manufactures metal roofing shingles for residences and commercial buildings and sells them under several brands, such as Classic Metal Roofing Systems, in North America, Japan, and the Caribbean. He shared his observations with Wolf Street:
By Todd Miller, president of Isaiah Industries:
Over the years, we have seen some situations where metal supply was tight and caused some disruption for us and our customers. However, we’ve never seen anything like we’re experiencing now as it goes beyond just metal supply to also include the specialty coatings we use.
Supply shortages started in 2020 with Covid-related closures at the leading metal mills where we buy steel, aluminum, and copper. Once the consumer demand for virtually everything under the sun started to accelerate wildly in the latter part of 2020, mills were caught with shortages, and significant delays and backlogs developed – a situation that has yet to be rectified.
Generally, consumers are understanding of the price increases. But now delays and shortages threaten our ability to meet consumer needs. We currently are running about a 60-day backlog on orders, the bulk of which we are waiting for raw materials to arrive. Historically, our backlog was a couple of weeks at the most.
…click on the above link to read the rest of the article…
The market finally gets it: The Fed is going to tighten to get a handle on its massive inflation problem.
Since February last year, the hottest most hyped stocks, many of them recent IPOs and SPACS, have been taken out the back and brutalized, either one by one or jointly. The stocks that have by now crashed 60%, 70%, 80%, or even 90% from their highs include luminaries such as Zoom, Redfin, Zillow, Compass, Virgin Galactic, Palantir, Moderna, BioNTech, Peloton, Carvana, Vroom, Chewy, the EV SPAC & IPO gaggle Lordstown Motors, Nikola, Lucid, and Rivian, plus dozens of others. Some of these superheroes are tracked by the ARK Innovation Fund, which has crashed by 55% from its high last February.
This mayhem has been raging beneath the surface of the market since February last year, and in March, I mused, The Most Hyped Corners of the Stock Market Come Unglued. They have since then come unglued a whole lot more. But the surface itself remained relatively calm and the S&P 500 Index set a new high on January 3 this year because the biggest stocks kept gaining or at least didn’t lose their footing.
But now even the giants too are going over the cliff. Combined by market cap, the seven giants, Apple [AAPL], Amazon [AMZN], Meta [FB], Alphabet [GOOG], Microsoft [MSFT], Nvidia [NVDA], and Tesla [TSLA] peaked on January 3, and in the 13 trading days since then have plunged 13.4%. $1.6 trillion in paper wealth vanished (stock data via YCharts):
This is obviously still no big deal, a 13.4% decline, after this huge gigantic run-up. During the March 2020 crash, these giants plunged 28%. But it’s the first time since then that this unappetizing event has occurred.
…click on the above link to read the rest of the article…
An extra-special cocktail of three powerful ingredients with no cherry on top awaits us in 2022.
Super-inflated asset prices such as housing, stocks, and bonds; massive inflation; and central banks that have started to react.
Many central banks have started pushing up interest rates; others have ended asset purchases. And Quantitative Tightening (QT) – central banks shedding assets – is on the table.
Rising interest rates in the US won’t catch up with raging inflation in 2022 – CPI inflation is now 6.8%, the highest in 40 years.
But unlike 40 years ago, inflation is now on the way up. In the early 1980s, it was starting to head down. We need to compare the current situation to the 1970s, when inflation was spiraling higher. So we’re entering a new environment where the economy will be doing things we haven’t seen in many decades. It will be a new ballgame for just about everyone.
As is always the case, the year-over-year inflation figures will fluctuate. CPI could go over 7% or 8% and then fall back to 5% only to jump again, providing moments of false hopes – as they did during the waves of inflation in the 1970s – only to race even higher.
Inflation has now spread deep into the economy, with services inflation picking up, and there are no supply-chain bottle necks involved. This includes the inflation measures for housing costs. Those housing inflation measures have begun to surge.
We know that the figures for housing inflation, which account for about one-third of total CPI, will surge further in 2022, based on housing data that we saw in 2021, and that is now slowly getting picked up by the inflation indices. They started heading higher in mid-2021 from very low levels, and they’re going to be red-hot in 2022.
…click on the above link to read the rest of the article…
Euro’s 20th birthday after dreams of “Dollar Parity” put on ice during Euro Debt Crisis. Central banks still leery of Chinese renminbi.
The global share of US-dollar-denominated exchange reserves declined to 59.15% in the third quarter, from 59.23% in the second quarter, hobbling along a 26-year low for the past four quarters, according to the IMF’s COFER data released today. Dollar-denominated foreign exchange reserves are Treasury securities, US corporate bonds, US mortgage-backed securities, and other USD-denominated assets that are held by foreign central banks.
In 2001 – the moment just before the euro officially arrived as bank notes and coins – the dollar’s share was 71.5%. Since then, it has dropped by 12.3 percentage points.
In 1977, when inflation was raging in the US, the dollar’s share was 85%. And when it looked like the Fed wasn’t doing anything about inflation that was threatening to spiral out of control, foreign central banks began dumping USD-denominated assets, and the dollar’s share collapsed.
The plunge of the dollar’s share bottomed out in 1991, after the inflation crackdown in the early 1980s caused inflation to abate. As confidence grew that the Fed would keep inflation more or less under control, the dollar’s share then surged by 25 percentage points until 2000 when the euro arrived.
Since then, over those 20 years, other central banks have been gradually diversifying away from US dollar holdings (year-end data, except for 2021 = Q3):
Not included in global foreign exchange reserves are the assets held by a central bank in its own currency, such as the Fed’s holdings of dollar-denominated assets, the ECB’s holdings of euro-denominated assets, or the Bank of Japan’s holdings of yen-denominated assets.
Impact of exchange rates on exchange reserves.
…click on the above link to read the rest of the article…
Billionaires got more billions, bottom half of Americans got peanuts and inflation.
My “Wealth Effect Monitor” uses the data that the Fed releases quarterly about the wealth of households. The Fed, after having released the overall data for the third quarter earlier in December, has now released the detailed data by wealth category for the “1%,” the “2% to 9%,” the “next 40%” (the top 10% to 50%) and the “bottom 50%.”
Wealth here is defined as assets minus debts. The wealth of the 1% ($43.9 trillion, according to the Fed) is owned by 1% of the population. The wealth of the “bottom 50%” (only $3.4 trillion) gets split across half the population. My Wealth Effect Monitor takes this a step further and tracks the wealth of the average household in each category.
The average wealth in the 1% category ticked up by only $121,000 in Q3 from Q2, after skyrocketing over the prior five quarters, to $34,478,000 per household (red line). In the bottom 50% category, the average wealth ticked up by $6,800 $53,600 (green line). And get this: About half of that “wealth” at the bottom 50% is the value of consumer durable goods such as cars, appliances, etc. Even the top 2% to 9% (yellow), have been totally left behind by the explosion of wealth at the 1%:
Note the immense increase in the wealth for the 1% households, following the Fed’s money-printing scheme and interest rate repression in March 2020.
A household is defined by the Census Bureau as the people living at one address, whether they’re a three-generation family or five roommates or a single person. In the third quarter, there were 127.4 million households in the US, per Census estimates.
…click on the above link to read the rest of the article…
Home prices spike in a few cities, “pause” in some, drop in others. Vancouver prices are below August levels.
In an amazing development for the Canadian housing market where prices have relentlessly exploded higher – fueled by money printing and interest rate repression that started in March 2020 – prices in November didn’t explode higher in all cities, but only in a few, and “paused” in some, and declined in others. In the most hyped red-hottest housing market of them all, in Vancouver, prices were below the peak in August.
So maybe this is just a seasonal breather in those markets. But last year and for most of this year, there were no seasonal breathers in Vancouver or any of the other major markets, the whole thing just went exponential, fueled by the Bank of Canada that was printing money and repressing interest rates like there’s no tomorrow.
But this is tomorrow.
The Bank of Canada announced its first taper decision in October 2020, over a year ahead of the Fed. It let repos and short-term Canadian Treasury bills mature and run off the balance sheet without replacement. It ended other smaller purchase programs. In October 2021, it ended QE altogether, and is no longer adding to its holdings of Government of Canada bonds. And it has put rate hikes on the table.
Throughout this 14-month period since the taper announcement, the BoC has pointed at the excesses in the Canadian housing market that resulted from the BoC’s reckless asset purchases and interest rate repression.
And inflation in Canada has reached the worst levels since 1992, as measured by CPI in November (+4.7% year-over-year).
…click on the above link to read the rest of the article…
But on the surface, stocks still look hunky-dory.
It’s amazing how individual stocks, at the tippy-top of the biggest stock market bubble in modern times, are getting taken out the back one by one to be crushed, but without denting the overall indices all that much.
The stock market bubble was driven by $4.5 trillion in QE in the US alone, along with many more trillions by other central banks, and it was driven by interest rate repression, even has inflation has been surging to multi-decade highs, not just in the US but globally, and not just in goods, but now also in services, particularly housing, such as rents.
After a decade of QE being relatively benign on the inflation front, giving central bankers a false sense of confidence, it has finally broken the dam, and inflation is now surging everywhere, and it’s spreading across the economy.
Central banks are now no longer denying it, and some have raised rates, and others have ended QE.
Even the Fed, which engineered this money-printing orgy and is very slow in ending it, is now ending it, and it will be raising rates, and everything is moving faster than expected, and suddenly the orgy is over.
Each stock that crashes has its own story for the crash. What they have in common is that they were all ridiculously overvalued, and investors knew it, and they kept hanging on till the last moment to ride them up all the way, but they were sitting all bunched up near the exits, and when the signal came, they all rushed out together, causing those shares to collapse. But even at those much lower valuations, those stocks are still ridiculously overvalued.
…click on the above link to read the rest of the article…
That’s the big question. Looking for signs of widespread push-back but not finding much. Consumers pay whatever.
One of the bizarre factors that has driven the current surge in inflation – the worst in 30 years per CPI-U, the worst in 40 years per CPI-W – has been the sudden and radical change in the inflationary mindset among consumers and businesses.
We saw that in late 2020 and all year in 2021, when prices of new and used vehicles spiked in practically ridiculous ways. People are paying more for a one-year-old used vehicle than what a new vehicle would cost, if they could get it, and they’re paying many thousands of dollars over sticker for new vehicles.
Out the window is the ancient American custom of hunting for a deal. And yet, new and used vehicles are the ultimate discretionary purchase for the vast majority of buyers that can easily drive what they already have for a few more years. But they’re jostling for position to pay these ridiculous astounding prices. And there has been enough demand to keep inventories bare and prices soaring.
During the Great Recession, potential new-vehicle buyers went on a buyer’s strike, and sales collapsed, and two of the Big Three US automakers filed for bankruptcy, along with many component makers, and sales didn’t recover for years. Consumers have this power because vehicle purchases are discretionary. But this time, consumers aren’t exercising their power to put a stop to those price spikes. Instead, they’re paying whatever.
We’ve also seen this with the price of gasoline, which at the end of November had spiked by 59% year-over-year and by 31% compared to November 2019, to an average of $3.38 per gallon, according to the EIA.
…click on the above link to read the rest of the article…
But the Fed has now backed off its ridiculous claims and is taking inflation more seriously.
The lowest lowball inflation measure that the US government produces, “core PCE,” which excludes the now soaring food and energy prices and understates inflation by the most, is used by the Fed for its inflation target: a symmetrical 2% “core PCE.” And this core PCE in October, released today by the Bureau of Economic Analysis, spiked by 4.1%, more than twice the Fed’s inflation target, and the worst-hottest inflation reading since January 1991:
It’s not temporary, Fed Chair Jerome Powell groaned and muttered this morning upon seeing this inflation monster blow out, following his $4.5 trillion in money-printing in 21 months. Here he is, freshly re-nominated for another four years, viewing the problem of his own making that he will now have to deal with, by cartoonist Marco Ricolli for WOLF STREET:
The overall PCE inflation index that includes food and energy, the second-lowest lowball inflation measure the US government produces, spiked by 5.0% in October, the worst-hottest since November 1990:
There is hardly anyone left on Wall Street with professional experience in this kind of inflation.
And the Fed still has the foot on the gas, but just slightly less so, planning to print $105 billion from mid-November through mid-December to repress long-term rates, and it’s still repressing short-term rates to near-zero – blowing at nearly full speed through every red light at every intersection.
On a month-to-month basis, the overall PCE increased by 0.43% in October from September, the worst-hottest increase since May. This amounts to an annualized pace of 5.2% (12 x 0.43%).
If you think that a car will slow down on its own somehow when you floor the accelerator, you’re tragically mistaken, as the history of automotive accidents shows.
…click on the above link to read the rest of the article…
Home prices fell in Vancouver, Ottawa, and Montreal; were flat in Toronto, other cities for the first time since 2019.
So this is something that hasn’t happened in the Canadian housing market since 2019: The Teranet-National Bank House Price Index for October, released today, failed to rise from the prior month.
The index for Vancouver, a red-hot housing market, fell for the second month in a row, something the market hasn’t seen since September 2019. The indices for Ottawa and Montreal also fell. The index for Toronto was flat for the month, as were the indices for some of the other cities.
What has changed that caused this “pause,” as it is now being called, in one of the biggest housing bubbles in the world?
The Bank of Canada got hawkish.
For a year now, the BoC has repeatedly cited the craziness in the Canadian housing market – a historic spike in home prices – the result of the BoC’s crazy asset purchases and interest rate repression.
The BoC started tapering its purchases of securities a year ago by ending its MBS purchases and tapering its purchases of Government of Canada bonds. It then shed nearly all its repos and short-term Canada Treasury bills, ended other smaller programs, and tapered its GoC bond purchases multiple times. Then in October, a suddenly hawkish Bank of Canada ended QE entirely and surprised markets by moving the next rate hikes forward. Meanwhile, inflation in Canada hit an 18-year high.
Total assets on the BoC’s balance sheet, as of last week, fell to C$496 billion, down 14% from the peak in March.
…click on the above link to read the rest of the article…
Fed still printing money and repressing “real” interest rates to negative 6%, new vehicle prices spike by most since 1975, housing CPI jumps, food & energy soar.
The broadest Consumer Price Index (CPI-U) spiked 0.9% in October from September, and by 6.2% from a year ago, the highest since November 1990 (6.3%) and since 1982, according to data released by the Bureau of Labor Statistics today.
The Consumer Price Index for All Urban Wage Earners and Clerical Workers (CPI-W) spiked by 6.9% in October year-over-year, the highest since June 1982, nearly 40 years ago:
This CPI-W is the index upon which the Social Security COLAs are based, which are determined by the average during the third quarter. The Q3 average of 5.9% set the COLA for 2022 at 5.9%, the highest COLA since 1982, and there was some jubilation among beneficiaries a month ago. But now inflation is blowing right past that COLA.
As Atlanta Fed President Raphael Bostic pointed out, “transitory has become a dirty word.” This massive inflation occurred while the Fed still had its foot fully on the accelerator – $120 billion a month in money printing and near-0% short-term interest rates, meaning “real” short-term rates are at negative 6.0%.
The Fed has been saying over and over again ad nauseam for seven months that inflation will slow down somehow on its own, even as the Fed had the foot fully on the accelerator, and every step along the way, the Fed has grossly underestimated the surge of inflation, and continues to do so. The Powell Fed has unleashed a monster.
Here is Fed Chair Jerome Powell’s reaction to this inflation monster blowout, as captured by cartoonist Marco Ricolli for WOLF STREET:
…click on the above link to read the rest of the article…
