September 27, 2022

THE WOLF STREET REPORT
Imploded Stocks
Brick & Mortar
California Daydreamin’
Canada
Cars & Trucks
Commercial Property
Companies & Markets
Consumers
Credit Bubble
Energy
Europe’s Dilemmas
Federal Reserve
Housing Bubble 2
Inflation & Devaluation
Jobs
Trade
Transportation
So now the media suddenly focuses on this big problem I’ve been screaming about for many months: Inflation has shifted from energy and from goods tangled up in supply-chain issues to services where there are no supply chain issues.
A great example is insurance. I guarantee you that there is an unlimited supply of insurance, and yet health insurance costs spiked by 24% over the 12-month period, and auto insurance jumped by 9%.
It’s small stuff too. I just got a 20% increase on my broadband service that I subscribed to a year ago to replace Comcast, which had doubled its monthly fee a year earlier.
Other service prices jumped too. Motor-vehicle maintenance and repair jumped 9%, and rents are spiking, and all kinds of service providers are jacking up their prices, and consumers are paying them.
That’s services inflation. And most of it is unrelated to energy and supply chains.
Yet gasoline prices have plunged from their highs in June, and many supply-chain issues that drove up prices of some goods have been resolved, and lots of commodities prices have come way down.
So now we’re dealing with inflation in services. This type of inflation means that something has seriously changed in the economy, and how the participants in that economy – so that’s consumers, businesses, and governments – are reacting to price increases. And how they’re reacting is that they’re paying those price increases.
Businesses are paying them because they know they can pass them on to their customers. Consumers are paying them, because they’re getting raises, and they’re still flush with cash from all the pandemic money, from the PPP loans, the mortgage payments and rental payments they didn’t have to make, and from the gains in real estate and from the cash-out refis last year, and from the gains in stocks and cryptos, though those gains have started to dissipate.
And governments at all levels sit on huge amounts of pandemic-era cash, and this cash is getting spent, and so wholesale prices go up and businesses pay them, and consumer prices go up, and people pay them. And it happened suddenly, starting nearly two years ago.
For many years, central banks have engaged in massive amounts of money printing and interest rate repression. The Bank of Japan started this over two decades ago, and it bought up a big portion of the government’s debt, and it repressed interest rates to zero, and in recent years below zero. It got away with it for years, and there was essentially no consumer price inflation.
And then during the Financial Crisis, starting late 2008, the Federal Reserve in the US started printing large amounts of money and it repressed short-term interest rates to zero, in order to bail out the bondholders and stockholders of the banks, and to inflate asset prices in general, to inflate stock prices, and bond prices, and real estate prices. And that didn’t trigger a big wave of consumer price inflation either.
And when the European Central Bank saw that neither the Bank of Japan’s money printing, nor the Federal Reserve’s money printing triggered consumer price inflation, but just asset price inflation, it too jumped into the game and printed huge amounts of money and repressed interest rates to zero, and then below zero.
And central banks of smaller countries were doing it, and just about everyone in the developed world was doing it.
And then came the Pandemic, and so now all these central banks that had been printing money and repressing interest rates without triggering consumer price inflation, went hog-wild, thinking that these many trillions of free money wouldn’t cause inflation either, because it didn’t before. But this time the amounts were a lot huger, and they came very fast.
And governments all around spent many trillions in borrowed money that their central banks were providing via their bond purchases, and all this central-bank monetary stimulus and the governments’ fiscal stimulus washed over the globe, and much of it over the United States economy, and just about everyone here got some of this money, people, businesses, and state and local governments, and they all started spending this money.
This sudden wave of free money caused a historic spike in demand for goods, which triggered the supply chain issues, which triggered the backlogs, the waiting lists, and people were so flush with money that they paid whatever, and prices of goods then spiked. It kicked off with used vehicles where prices spiked like crazy, starting in late 2020.
It was when the dam broke. And inflation began pouring into the United States.
Now the big push in inflation is no longer from goods, and it’s no longer from commodities and energy, and gasoline prices have already plunged as have many commodities. Now the big push is from services.
Inflation has spread across the entire economy, and is deeply entrenched in sectors that have little or nothing to do with energy, commodities, and supply chains.
So what we have here is that the dam that held back inflation for over a decade of money printing and deficit spending suddenly broke, and inflation flooded the country and spread across it, spread from sector to sector, and it’s huge, and more inflation is flooding in. And the original triggers have already started to recede, such as energy and supply chains, and now it’s services and other goods.
This dam that broke cannot just be put back together, so that inflation might just evaporate or whatever.
We haven’t seen this type of inflation in over 40 years. The prior dam that broke was during the oil embargo in the 1970s. And it led to a long and huge flood of inflation, that was ultimately brought back under control, but way too late, by draconian monetary policies, like we cannot even imagine today, with 30-year fixed mortgage rates hitting 18%.
Today we whine about the 6% mortgage rates. Back then, it took mortgage rates that were three times higher than today’s 6% to get this inflation monster under control.
So no, this inflation is not going away on its own. It is self-propagating. It has momentum, it’s cycling from segment to segment, and when prices stabilize or tip in one segment, they’re spiking in another. It’s what I call the game of inflation Whac A Mole.
The Fed has finally figured this out too – over a year too late. But now it’s serious about this inflation.
And here is the thing: with every meeting since last fall, the Fed has gotten hawkisher and hawkisher. All interest rate projections – how many times it might hike rates, how big the hikes might be, and where the hikes might end – moved higher at every meeting.
So now the Fed might go to 4% with its short-term policy rates by the end of this year. It might go to 4.5% by early next year.
And we now think that the Fed might then pause to see how inflation will react. But inflation keeps getting worse at the core of the economy, namely in services, and so the Fed might not pause at 4.5%, and all bets are essentially off until we see some containment of this inflation at the core of the economy.
The Fed is now also engaging in quantitative tightening or QT, which means it is reversing quantitative easing, which will reverse the effects of quantitative easing, which was the Everything Bubble, where all asset prices shot up together. And this is now being reversed.
The QT program has ramped up to full speed in September. Last week, the Fed stopped buying mortgage-backed securities entirely. And it’s letting its mortgage backed securities run off the balance sheet. By stepping away from the mortgage market, the Fed will no longer repress mortgage rates, and they’re going to go where the market thinks they should go, given that inflation is over 8%. Mortgage rates have already more than doubled from 3% a year ago, to well over 6% now.
The harder and the faster the Fed cracks down by hiking rates and by unloading its balance sheet, the sooner inflation might go back down. But the Fed really hasn’t cracked down yet. It’s still just lowering the amount of fuel it’s pouring on the inflation fire.
The top end of the Fed’s target range for the federal funds rate is currently 2.5% [update: as of Wednesday, it’s 3.25%], and with inflation over 8%, the Fed is still pouring huge amounts of fuel on the fire.
There is a good chance it will hike its target by 75 basis points at its meeting this week [update: it did], which would bring the top end to 3.25%. With CPI inflation at over 8%, it will still be pouring huge amounts of fuel on the fire.
Even if it hikes by a full percentage point, with the top of its range then at 3.5%, it would then still be pouring huge amounts of fuel on the inflation fire.
Interest rates will have to go a lot higher to crack down on inflation. And that includes long-term interest rates, and mortgage rates.
It doesn’t help that government spending, and I mean at all levels of government, is still stimulating the economy and fueling inflation. State and local governments are flush with pandemic money, and they’re going to spend it.
And the federal government is still throwing money around, including for things like incentives for EVs where demand is already red-hot, and prices are already spiking, and there are already long waiting lists to get one, and so now the government is throwing many billions of dollars of stimulus money on top of the already red-hot EV sector. This stuff is just crazy – to stimulate demand in an already red-hot sector with spiking prices.
This is going on all over the place. In other words, this is still a massively stimulated economy, fiscal stimulus, as well as monetary stimulus. And the inflation dam has broken, and new inflation is pouring into the economy.
To get this under control will take a lot of action by the Federal Reserve. Governments are not contributing anything to fighting inflation. On the contrary. They’re lined up stimulating inflation. It’s all on the Fed’s shoulders.
So this inflation isn’t going away any time soon. It has a good chance of getting worse next year. And it’s going to take years to get this under control, years of much higher interest rates, and years of much lower asset prices.
But it also means, years of much higher yields for bond holders and savers that buy those products in the future. Some yields of Treasury securities are already at 4%, such as the one-year Treasury yield. Some one-year CDs are already at 3.5%. Some savings accounts are at around 2%. And they’ll all be going higher as we go forward. But they’re still way below the rate of inflation.
We’re looking at years of much lower home prices, and much lower prices of commercial real estate. The whole entire asset bubble – the everything bubble that had been inflated by years of money printing and interest rate repression – this everything bubble is going to get repriced, and some of it has already gotten partially repriced.
Cryptos are down 70% or so. The overall stock market is down 20%, as tracked by the Wilshire 5000 index as of Friday. The most speculative parts of the stock market are down 70% and 80% and 90% or more, such as the hundreds of stocks that went public via IPO or SPAC over the past two-and-a-half years – my infamous Imploded Stocks.
And it has just started. We’re only a few months into Fed tightening. And the Fed is still way behind the curve. Inflation is now raging at the core of the economy where it is very difficult to dislodge. The many years of easy money are gone, and they’re not coming back any time soon.
I think central banks are now learning a lesson how the combination of money printing and deficit spending are just fine for many years, until suddenly the dam breaks, and inflation floods the economy, when no one expects it anymore, triggering years of a very messy process to bring this back under control.
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How much low do you guys think sp500 will go?
My guess is between 320 and 350. When we hit that level Warren Buffet, Jamie Dines, and all the Hedge Funds will start pressuring the FED.
Worse case 250.
But as Sargent Schultz would say……”I know Nothinnnnng!”
I should say 250ish. Many times these bubble hit the 50% correction level. Most people will just ride out any correction keep buying and averaging down in their 401k. It worked for the Dot.com, HB1, COVID, and probably now. I know of a couple of friends who did this. The way to get through it I was told is to just not open and look at your 401k statement.
Anyway….the lower the better! I am pretty much all cash except for some dividend stocks (which I have hedged with puts). I will jump back in when the FED becomes dovish.
Well, this time is unique – 401Ks are losing on both sides, stocks and bonds. So yeah, better don’t look. Time to panic is next year.
As long as the world does not do a Japan and stocks/housing stay low for 30 years.
401Ks will be renamed 201Ks before this is over.
hopefully to 100
What timeframe are you using?
2500 is about 10% ABOVE the pandemic low on March 23, 2020 of about 2300. That wasn’t and isn’t remotely “cheap”.
I have the pandemic low as my target for the bottom of the INITIAL phase of this bear market. It’s slightly more than 50% from the January high.
Longer term over the next several decades, I expect the entire mania to be completely retraced, though since I now think there will be more price inflation, it may be price index adjusted.
The mania “lift off” occurred either on April 20, 1994 at DJIA 3570 or sometime in November 1994 at 3675. Yes, this is DJIA, not S&P 500.
Like all major manias, I expect 100% (or more) to be retraced. Last time it happened (to my knowledge) was during the GFC when the Japan Nikkei Dow fell slightly below “lift off” of the 1980’s mania (in 1982) representing an 80%+ decline taking a quarter century.
If this seems so hard to believe, also look at the DJIA/gold ratio. It bottomed at around 1:1 in 1981 or near it. It peaked around 43:1 in late 1999. Today with gold at about $1650, it’s about 19:1. At the GFC low, it hit just under 10.
I expect it to go below 1:1 mostly with stock prices declining but if it goes noticeably below 1:1, also from rising gold prices.
Not looking????
People should look when a train is coming, and they should not sleep on the track.
The buy and hold strategy might be damaging this time around. We could be headed for a 10 year low-growth period. Once stocks drop, they can stay down for a long time. Like tech stocks did after the 2000 bubble.
Who wants to ride out a 10 year recovery, hoping to break even? I’d rather get out now, then be opportunistic when things settle. These huge bubbles come around only once or twice a generation. Your performance in these bubbles will make or break you.
@Augustus – I think the pre-pandemic should see a bounce. DOW is there right now. QQQ and SPY will most likely follow the DOW.
Burry has the Covid low as his target I think.
@Bobby – I have two friends that I warned them in January that higher interest rates would hit the stock market. Upside was minimal….downside was big.
I went all cash. Neither believed me. One finally did in the March time frame after a 10% to 15% loss. If he stayed in he would be down 25%. The other is riding it down even though he is 60. He is listening to his Edward Jones financial advisor to not sell but be more conservative. He is down over 20%.
Just like most of the news today this is fake inflation. What you’re seeing is nothing more than $5T in helicopter money working its way through the system. The fact is there’s 90 million baby boomers in the US and old people are deflationary. This time next year those 90 million strong old people will be reeking havoc on inflation.
“Generations” are a flow, like a river. It never ends. It always flows. The millennials are the largest generation ever, and they’re now flowing into their peak earnings and spending years. Here we go, inflation. Also generations aren’t about “next” year but about decades. I wish people weren’t so dumb about generations.
We didn’t get to read Siddhartha in the original language. A lot is probably lost in the translation.
@JoeGotz,
Something to think about — there will be (vastly exaggerating) twice as many people to provide services for, but half as many people to the work. More work to do, but less people available to do the work? Sounds like wage inflation to me, and wage inflation implies price inflation.
@Wolf, the demographic timebomb is real. It’s not, “same as it ever was”, as your comment seemed to imply. Immigration is the only thing that can stave off the impact of that timebomb, and *might* do so in the US. Other countries in the developed world won’t be so lucky. There is a ton of hard data on this subject at the Econimica blog.
2000
180 to 200 possible In this kind of bubble? All bets are off on supports. Buckle up
yep, when a bubble gets inflated this large there’s no telling how far or fast the falling knife will fall. There’s been very little real price discovery or accurate valuation for almost a decade thanks to ridiculous ZIRP and QE, and now those chickens are coming home to roost in a hurry. This is why the first rule of asset bubbles is not to inflate them to begin with
Well, even if current sp500 dividend yield doubles (1.65% x 2 = 3.3%), it will still be below the yield on any duration Treasury bond. Also, corporations will start cutting dividends. Do the math.
Just Tesla alone can drop sp500 by 75-80 points. And there is a lot of tesla-like garbage in there.
I’m seeing many more Teslas on the streets of Tucson. Does this mean that the company has finally figured out how to manufacture? Or have more people bought into the Tesla hype?
We’ve actually been seeing far less Teslas esp down in Texas so maybe it’s location by location thing, though in TX a lot of people bought them earlier and got disappointed with all the frustrations with replacement parts, charging that hasn’t lived up to hype and failures with FSD. And some Tesla drivers have gotten a reputation for being the worst and most irritating drivers on the road (and park illegally all the time blocking other cars from pulling out), so there’s even a social stigma developing. Result has been huge increase in people trading their Teslas back in. It may be a novelty and curiosity still in some places, but seems like in the more previously established areas we’ve been getting more drivers giving them up. Though EV’s in general are still way up, just more things like Ioniqs, Bolts, ID.4s, Polestars, or even the Taycan, iX or EQS-class. Just a much bigger range of different EV’s on the road.
Arizona Slim,
How many toyotas, or bmws, or fords do you see? These trade at 0.3 times sales. Tesla trades at 15 times sales.
Miller-(re: Teslas, and, depending on where you live, formerly BMWs (don’t yell at me Beemer-owners, my departed ’89 E30 was a GREAT auto…)) could be analogous to the ostentatious fancy-wristwatch syndrome-at base, an Armitron or Rolex are only there to tell time to individual humans, much as four wheel transport is only there to take you down the road….
may we all find a better day.
Don’t be such a killjoy brother Vet. How else are they going to signal other people in their wealth class that they are worth talking to?
Nobody has a working crystal ball.
Ha. And we knew this already:
In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7-year inquiry on Feb. 5, 1938. The study was entitled
“Member Bank Reserve Requirements — Analysis of Committee Proposal”
its 2nd proposal: “Requirements against debits to deposits”
After a 45-year hiatus, this research paper was “declassified” on March 23, 1983. By the time this paper was “declassified”, Nobel Laureate Dr. Milton Friedman had declared RRs to be a “tax” [sic].
Turtle,
We did. As mere kids.
Concentrate and ask again.
2274-2751 before March 2024.
2273-2752.
Is that how you play it?
My target, if I act on it at the time, will be the level of January 2020. I think every part of the value increase since that time and now is completely false value. I would prefer to wait for a retest of the March 2020 low, but not sure that is going to happen in anything other than an economic depression.
When everyone expects the markets to go lower, they rally. I just sold my SRTY and SQQQ and back into cash; more than doubled my account so far this year (and it is just September).
Nothing Goes to Heck in a Straight Line.
805 (January 2009)
SPX cans see 2016 levels thats when the real BS started
I watched the low on CNBC live. 666 and some change.
I think a much bigger question is how much longer will Public Stocks exist before it all goes PE?
I’m certain most of the top 10 Corps in FOOD production by WORLD SALES are most all PE, since as of maybe 8-10 years ago only #’s 3,5,7 were public, per Bloomberg, IIRC.
With the exception of IPOs, SPACS, and all of the other newer fun and “innovative” Public methods of wealth extraction that Wolf dissects here.
Yes, I do think Class Warfare is totally out of hand, and as everyone knows, poverty trickles UP.
I read the stories here about all the “painful” adjustments people have made to their lifestyles….how many would have done it if they didn’t have to?
Meanwhile our shared ball in space goes to hell, as growth for growth’s sake is the ideology of a cancer cell.
Random price projections by people are not helpful to anyone. The market doesn’t move in straight lines, it moves in waves that are fairly predictable and have ratios that tend to fit together like a puzzle.
Yes, it’s becoming more possible we have ultimately topped in the bullish market that began in the 1930s, it would be an unorthodox top in this final move up that started after the Covid crash.
While it may sound completely outlandish to anyone with “common sense,” there is still a good possibility the stock market has not topped and the bond market is likely also in for a strong bounce as well.
This isn’t based on fundamentals or logic. That’s simply not how the markets work.
Keep an open mind that we could be in for a move over the next year or so that takes us to a new all time high in the stock market. It won’t last, but would complete the sentiment pattern in a much more complete way.
It doesn’t have to “make sense.”
Wouldn’t a recession/ / higher unemployment take care of the inflation in services?
That’s the plan.
This can all be easily fixed by adjusting the Fed’s “target rate” of inflation from 2% to 4%. Or 6% as needed. They’ll come out in unison and explain why miderate inflation is a good thing.
“Or 6% as needed.”
Sure, then we will have mortgage rates of 9%. And 10-year yields of 7%. Like we used to. Stocks prices way down, and staying down. If the official line is that long-term inflation is going to be 6%, then all yields adjust upwards and all prices adjust downward.
Wouldn’t that be fun to have 9% mortgage rates for many years?
9%, or higher … “Wouldn’t that be fun to have 9% mortgage rates for many years?”
….It would not matter to future buyers because the asset prices would drop while payments would adjust accordingly, otherwise houses would not sell and be mortgaged.
On the other hand, it would be extremely painful to the current owners and holders of the real estate assets for they would suffer massive losses via revaluation.
@Wolf: was it also the case at that time that debt was 130% of GDP? Or that pensioners and savers were forced to the Wall Street casino by the corrupt laws (401k) and lack of yield? Sorry those days cannot come back. Too much deleveraging will simply break up the country. Which may be a good way to get rid of Washington DC the paper dollar.
“Too much deleveraging will simply break up the country”
Nah. Investors will lose their shirts, and that will mostly be it. Most people in this country don’t have enough — if any — financial assets to even care.
Isn’t fed mandate full employment,trains going off the track again
Full employment (and steady buoyed-up asset prices) were the foci during the recent Fed rate suppression and money-print. Now Powell says long run inflation will hurt more than some decline in employment. That’s the trade-off he is now expressly framing.
So, Exceptional Americans, or a large percentage, going to find out you can print fake fiat currency to prosperity!
Wolf should be “can’t print fake fiat currency to prosperity”
Keep up the good work educating and informing folks.
> you can print fake fiat currency to prosperity!
That turns out to be the model of a lot of crypto. Everybody issues their own tokens, which are as good as anybody’s personal check; every fool issues his own personal money and tries to hawk it, on a crowded street of fools. Yeah, that’ll work! If you dislike fiat, you’ll love some moron’s privately, personally issued fiat, right?
Did the Fed geniuses ever explain why they kept 0% rate for a decade or more?
No, but they printed $30 trillion meanwhile.
Soon, the island will be down to one cannibal.
How else can you do PPP “loans” helicopter money.
It sounds like from some of the econ papers coming out that they thought there was legitimate reason back when the GFC happened, and there was real concern the credit markets would totally freeze up in 2009. Even then ZIRP alone was questionable and about anyone who’d taken freshman year econ knew ZIRP shouldn’t be maintained for longer than a few months at tops, but after Greenspan and Bernanke had gotten going it just became inertia. Even worse than the ZIRP blunder was QE which was never a good idea and has no excuse. Especially when extended to MBS’s that even a lot of speculators could see was going to quickly turn into disaster and fuel the worst inflation in 40 years, and lead to social unrest in the US. It’s already bad enough now, but when you start to have tens of millions of Americans unable to make rent or afford basic food items at the grocery store for their family (and we’re not far away from that point the way inflation is going and wages can’t catch up), and in an already divided country with 400 million firearms with covid still going, it’s gonna get real ugly real fast unless the Fed gets even more aggressive in fighting this inflation, just like Paul Volcker figured out. A totally preventable policy blunder.
Something resembling the negative consequences in your post are going to happen at some point anyway, no matter what any government agency does or doesn’t do. It’s called extended economic and social decay.
There is no escaping the consequences of extended social and economic decay, only an end to “can kicking”.
To stop rising prices on consumer goods by making a lot of people unemployed is no good idea from the social stability perspective.
With no empoyment there is no income to buy food and shelter even if the prices stabilzes.
I just stopped by the grocery store and it feels like the 1970s all over again. Every time I go, prices are higher. Basics are a heck of a lot higher, call it just 8% inflation all you want.
This will not be your daddy’s recession or depression. Too many people now won’t stand for this. It’s not about morals anymore.
Who doesn’t like a magic money tree? And we’ll just dance and frolic until we aren’t hungry anymore.
Since inflation is measured by comparing results year over year, isn’t it likely that it will come down on its own after a year because it will start comparing to the higher prices. I think of this like companies having a stellar quarter one year complain a year later that they have an unfavorable quarter to compare to. Something that used to cost around $100 last year is now costing $108 due to the 8% CPI so we will see ~8% inflation all year but come next year do we really think it would jump another 8% to $116? This seems more like a one time step up that companies were able to raise prices but I see no evidence that they will be able to continue with such increases every year. At some point consumers just can’t pay more.
If inflation-ravaged inputs cost more than consumers are willing to pay, the product/service will be discontinued and the company may or may not survive by making/doing something else. Stagflation results. And yes, the standard of living will drop, people will be poorer, and despite this we may all be multimillionaires.
Think of yourself as a small business that buys supplies for manufacturing. They go up 10% so you have to raise your prices over 10% to cover the increased price and financing and all the other overhead costs. Lags are built in so your price inflation shows up later. In a supply chain all these little lags accumulate so it is not a step function. And through labor and taxes there are feedback loops in the chain.
At some point if consumers feel they can’t pay more – they demand raises, government handouts, student loan deferrals and debt forgiveness. Kicking inflation even higher. If student loans get forgiven, expect increases in tuition.
Only if people expect student loan forgiveness to repeat and repeat, but I agree there are better credit policy options.
One better policy option having to do with credit would have been to fight the credit card issuers and not pass the bankruptcy law changes of 2005 or, from today’s point of view, to reverse parts of that law.
Possibly the worst change of that law is that the fees someone has to pay to get through bankruptcy went up appreciably. That change made bankruptcy a less likely option for the poor or near poor, who one might think need the refuge the most.
I’ve always thought liberal bankruptcy rules were one of the great virtues of U.S. capitalism.
Offering the chance to fail and start over seems to me a good thing for the bankrupt person and the economy too.
I have heard from small business owners who now think SBA EIDL loans will be forgiven like PPP loans. The die is cast. It will take a beating of horrible proportions to change the gimmie mindset created by this administration.
Unfortunately the realists understand gimmie is pay for play.
Bankruptcy is just loan forgiveness gimmie.
joe2,
Just to make sure everyone understands: These EIDL loans and PPP loans were signed into law by Trump, not Biden. Biden only extended them.
joe2,
Declaring bankruptcy is not a gimme. Gimme’s come from the government in the form of bailouts like the PPP program.
Bankruptcies, on the other hand, are funded by investors who suffer the consequences of their own poor decision-making. There’s a huge difference between the two.
A bankruptcy proceeding reviews the borrower’s ability to pay and structures the workout accordingly. If the borrower can’t repay, the lender made a bad decision.
The abuses of the bankruptcy system going into 2005 were incredible. In that era, every street level fool had a stack of credit cards, and abused accordingly. The conversations were absurd — some guy at a barbecue telling me he was starting a wine-tasting business, getting the new double cab truck, the barbecue cost $3500, new granite countertops, blah blah. Teenagers were tossing Starbucks $4 lattes on the plastic like it was free. Every fool was spending more than he had. Credit card companies did not force people to behave like self-destructive idiots. It was an orgy of stupidity, a moronic convergence. Savings rates were sub-zero. People were begging for a comeuppance.
The differences in the two parties’ offerings are about as helpful to us as a dovish vs hawkish Fed. Either choice will still drive us into the ground, with only very minor differences in speed and momentum.
Wolf, I stand corrected.
Bobber, Yes you are textbook correct.
But when the government is an investor or subsidizer or arbiter, it is not a pure capitalistic bankruptcy – Solyndra and GM. And Tesla with carbon credits and subsidies.
One problem with your thesis — commodity prices are dropping fast, so if you are still charging 10% more, that’s just you doing some price gouging.
If your theory was correct we would see housing orices go up 8% and stay there. Yet they went up year after year after year.
Well, back to: inflation is always and everywhere a monetary phenomenon.
Where do you see 8% ,look at eggs,ground beef. There up over 100%
What I said a few months ago was that the overall CPI rate will come down in the second half of 2022 (and it has started to), but that spiking services inflation will push it back up in 2023.
Goods inflation has peaked. Services have been more sticky because of low unemployment. People are demanding higher wages.
But it looks like services are peaking. Thus we should see inflation drop but by how much is the question.
Trying to get to 2% may take awhile but a good old recession can drop inflation fast.
Time for some firings. Start with these “quiet quitters.”
If we stay to the old definition of inflation, it did as stated start years ago. Money printing is inflation, inflation of the amount of money. At first it did show up in assets price that did rise. Then it did show up in the consumer price indexes. No big surprise, inflation have previous always ended with diluting the buying power of currencies and prise rise on goods.
Higher interest rates do not really help, the interest rate work on the amount of credit and inflate the amount of money. To get price rise under control deflation is needed. That is the amount of money must be reduced, that is deflated.
QT is one possibility. Defaults is another possibility, especially if the book keeping rules is revised in away that make all money a bank have originated wannish if they go bankrupt.
If a bank goes bankrupt the loans – assets – on it’s books are transferred not vanished. Money vanishes when loans are paid back. Defaulted loans are written off where essentially the bank or the government through tax loss “pays” it off.
The real problem is the Fed increases liquidity to keep them from going bankrupt.
I know, that is why I said the book keeping rules then need to be revised.
When bank went under ,small town Nebraska . During depression my grandmother had 800$ in bank. Was replaced with 80 acre farm.which she owned until passing.No way that would happen now all in MBS,who owns it UNCLE. Mortgage bull shit= MBS hahaha
Historically, the S&P 500’s forward P/E ratio has bottomed between 13 and 14 during bear markets. It was still at 16.3 as of this past weekend, which implies additional downside is on the way. Wall St. Inevitably will take a beating, most are still standing along the ship railing refusing to put the life jacket on. It was a HELL of a run…..
Has gotten down too 7 p/e
What history are you talking about?
Any averages you are using are inflated by the stock market mania,
The last time valuations resembled anything close to “normal” was around 1995.
If you Play with Fire, Expect to Get Burned
The Great Central Bank Pivot
By David Stockman
Global central banks have been chasing the chimera of “lowflation” for years now. So doing, they flooded the financial markets with massive amounts of excess liquidity and credit,
As a reminder, the combined balance sheets of the world’s central banks stood at $4.7 trillion in 2003 and now total nearly $43 trillion. That gusher of liquidity, in turn, set the monetary table for soaring inflation–first in financial asset prices, and now in goods and services owing to commodity market disruptions …
Gotta believe all the student loan deferments since COVID and recent loan forgiveness continue to add more $$ to the inflation fire.
That money was already paid out. All the forgiveness did was to lower or stop payments. For example an acquaintance is probably going to have 8k forgiven. He was paying 97 dollars a month. That payment will soon be directed towards goods and services, or savings/other debts.
I am sorry but if 1200 a year for 40-50 million is going to fire up that much inflation, then we already have larger problems.
“I think central banks are now learning a lesson how the combination of money printing and deficit spending are just fine for many years, until suddenly the dam breaks”
Or ….. when you sell the economic soul of your nation to the devil (Greenspan, Bernanke, and Yellen) , everything works great for a while. Until the devil , in his infinite patience , finally shows shows up for payment.
Otherwise known as “can kicking”.
Look at the UK markets today. Currency is sinking like a stone though the stock market has held up, so far.
Country went “all in” on financial services, gutted their manufacturing base, inflated one of the biggest housing bubbles, and loosened immigration. As if the country needs more people.
They have reached the end of the road, or near it.
The decline of the UK seems near a ski-jump and will be world-historical. It reminds me of the passing of the Queen: seemingly a permanent fixture in history, then somewhat decrepit, and then ….
Shale binge has spoiled US reserves, top investor warns Financial Times.
Preface. Conventional crude oil production may have already peaked in 2008 at 69.5 million barrels per day (mb/d) according to Europe’s International Energy Agency (IEA 2018 p45). The U.S. Energy Information Agency shows global peak crude oil production at a later date in 2018 at 82.9 mb/d (EIA 2020) because they included tight oil, oil sands, and deep-sea oil. Though it will take several years of lower oil production to be sure the peak occurred. Regardless, world production has been on a plateau since 2005.
What’s saved the world from oil decline was unconventional tight “fracked” oil, which accounted for 63% of total U.S. crude oil production in 2019 and 83% of global oil growth from 2009 to 2019. So it’s a big deal if we’ve reached the peak of fracked oil, because that is also the peak of both conventional and unconventional oil and the decline of all oil in the future.
The thing that has actually been happening for years in the developed economies is a decline in demand for gasoline for transportation purposes. This includes declining gasoline demand in the US. And EVs are going to speed up the decline in demand for gasoline. Demand for various hydrocarbons from the petrochemical industry is still growing.
So what we have is a situation of peak demand.
Or do we have a situation of peak purchasing power when it come to energy?
Any more expensive energy, demand and economic activity may decay.
Yes Peak Demand for oil. For various reasons all moving towards lower oil consumption in developed countries. Peak oil is real because the world does have a finite oil resource but there are a multitude of reasons for that resource to become stranded or difficult to extract because of social or economic reasons.
“Hawkisher”
Am not sure if this is a real word but it’s a very important one. Forward guidance just keeps getting more hawkish with no end in sight.
Just one year ago, no one would’ve believed the FFR today would be 3%+ nor mortgage rates would be over 6.5%.
It would be like someone suggesting now that FFR will be 6% and mortgage rates 10% this time next year.
Given what’s happened already, who knows what 2023 will bring.
And who would have guessed housing prices to be so sticky in the face of 6% mortgage rates? The high mortgage rates didn’t get the job done (yet), but the layoffs haven really started.
I do see recent the tech market slowdown having a huge impact on prices at some point. It’s the tech jobs that fueled 200 to 300%% housing price gains on the West Coast and other areas this past decade. Now the tech job train has stopped, and it may even go in reverse (layoffs).
Tech job market is definitely going into reverse.
Much of it is due to venture capital funding money losing cash burn machines. Haven’t seen any data lately but new funding rounds can’t be going well and investors might soon even ask for their money back.
a lot of the tech job market has existed because of the free money. It’s literally a Fed subsidized industry at this point.
1) We don’t know what will happen next. We don’t even know what
have happened before. Sometimes charts can talk better than 30,000
words. For fun and entertainment NDX weekly :
2) Take Nov 2012 to Feb 2016 to Mar 2020 lows // parallel from Nov
2014.
3) We breached this channel from above, but never below.
4) After peaking in Nov 2021 we are back in.
5) We might rise to a new all time high, glide to a lower high, or plunge in a symmetrical way to 7K to Jan/Feb 2018 trading range.
6) No software in the world can tell SPX & NDX what to do. The markets will do what they want to do.
7) The Fed isn’t behind the curve. The Fed sucked liquidity from the market and built a $2.4T RRP maginot line for an o/n “event”.
8) The Fed isn’t a blogger, it cannot control exogenous causes.
A Mobil station near me has the highest gasoline prices in the neighborhood. Their current price for 87 octane is $5.699 per gallon. About a month ago, their price was $4.999 per gallon.
Soon they’ll start shrinkflating gallon to a liter.
Speeding tickets got more expensive too here in NL. And there is no supply chain issue in that either.
I have been saying for a while that the real impact of inflation will be when governments see their costs increase and raise taxes and fees to cover direct costs, salaries, and pensions.
The Feds definitely expect this with their 87,000 new IRS agents. But the biggest impact will be at the local level as property values collapse and the tax rates increase to cover the local inflated costs.
Armed irs agents = confiscated property
Here’s another great idea give a accountant a gun ,HILARIOUS
Flea. No. You call a thug with a gun an “accountant”. Think civil forfeiture for thought crimes.
Also think what increased interest rates do to municipality bond rates. It’s not just the Feds that have enormous debts. So far they have been bailed out by the Feds. But being held to balanced budgets …….
Why are you speeding??
Not being in a hurry, to me, is a form of being rich, all in itself.
One of the things not quite the same as the 70s, so far, is the unions and their contribution to inflation. In the 70’s it was strike after strike, with each union looking at the raises gotten by others and wanting to outdo them with an even bigger bump. Those agreements were locking in wage inflation over the life of the contract – 5 years or more.
We can see the same dynamic with the rail unions now. But so far it’s just the rail unions. The UAW, teamsters, and other powerful unions have yet to extract their pound and a quarter of flesh. And while the rail union headline number is a 24% increase, that’s 14% immediately, i.e. to cover past inflation, and only 10% over the next 5 years, a relatively modest inflation expectation.
That is what JPOW is talking about when he talks about inflation expectations. They directly affect union asks and contracts and can feed very quickly back into locked-in inflation over time.
So far, it’s not as bad as the 70s. Not yet.
They rail workers,haven’t hab a contract in 3years so a lot of it is backward looking ,tell the truth
Well, three years was the length of the contact. Most union/management contracts are three years in length.
Actually, the inflation situation might be worse today because we lack employee unions. Individuals without unions have faced years of lagging pay, and they are jumping ship for that 20% to 30% pay rise or more. I live on the West Coast and have heard stories of tech managers getting 50% to 100% pay increases as they jump ship to another employer.
Unions would ensure there is a reasonable and gradual pay raise each year (i.e., stability), which would help avoid wage inflation shocks and wage-price spiraling like we see today, resulting from years of repressed wages.
And for those eager to say “yes, Comrade”, please explain how a negotiated free-market contract between employer and employees is socialism or government intervention. Union contacts allow employers to plan for the future, and achieve workforce stability in terms of both pay and turnover, and that’s why employers sign them.
You are wrong.
It isn’t a negotiated free market contract. By law, employers have to negotiate with unions. What kind of “free market” is that?
The problem with both corporations and unions is that the political math behind both is the equivalent of 1+1=3.
No group of individuals should have “rights” which the individual members do not have on their own.
I would say ‘patiently, continuously warning’ rather than ‘screaming about’.
It has been quite eye opening. Thanks for the truth telling.
29% increase on my health insurance premium next month. That’s $3,600 per year. The deductible is already $10,000 and they don’t even cover a flu shot! Please, somebody out there tell me I’m not alone.
You are not alone. Someone has to pay for the government subsidies for the people that get 75% discounts on their Obamacare.
My wife finally switched from Obamacare to Medicare recently and the cost (with supplemental policy) dropped by around 2/3. Until it goes bankrupt of course.
Move to Norway,great system
No comparison between Norway and the US. It’s ridiculous.
Norway is a culturally homogenous country with a population equivalent to metro ATL where I live. It also has a natural resource windfall enabling it to save the economic surplus to live off the rest of the world’s production.
The US is a balkanized country of 330+MM up to its eyeballs in debt with a GDP which is too big to follow the Norway model.
The US produces way more natural resources than Norway does. The US produces six times the oil that Norway does.
Imagine is the US managed it’s profits from the sale of oil like Norway has.
Denmark, Sweden and Finland do not have the natural resources of Norway but do quite well too. Actualy the Netherlands do not manage that bad either.
Cultural homogenous, yes to a degree the scandinavian countries. Maybe more important is organizing of politics. A lot of political parties that have to form some kind of agreements between them to govern.
Slow, a lot of debate, no one really get their say, but in the end the result is reasonable to most parties. Even to the political oposition.
Quite often practical solutions are choosen and ideology lost. And the bad ideas is usually quickly discarded.
Yes Peak Demand for oil. For various reasons all moving towards lower oil consumption in developed countries. Peak oil is real because the world does have a finite oil resource but there are a multitude of reasons for that resource to become stranded or difficult to extract because of social or economic reasons.
Yes, whatever happened to the single-payer healthcare discussion? ie Medicare for All?
The insurance companies must have strong lobbyists targeting both the Democrats and Republicans. The Blue Cross CEO made $15.6M last year. He can afford his company’s plans.
Mine was $2,200/mo last year when I decided to cancel the policy and pay cash for services. The funny thing is that the medical billing system is so broken and useless that all my healthcare service providers gladly offer discounts anywhere from 20-40% when paying in cash. Inflation in medical services could be largely chalked up to systemic incompetence enforced by regulatory capture.
Suffering with you there, it’s even worse for parents with kids or other dependents. For us and the others in our parenting clubs, I’d say our fees have gone up average 35 percent the past couple years when you count the premiums, copays and coinsurance, worse deductibles and healthcare costs for parents in the US were nuts to begin with. And there’s no end in sight, the USA has had a healthcare bubble long before the recent housing bubble and it’s by far the worst in the world, combo of the worst parts of socialism with the worst parts of capitalism (and not even free market capitalism, more like the rent seeking or crony capitalism kind) so it’s just funny when self described conservatives or libertarians try to defend it.
There’s absolutely nothing economically sound, cost-effective or free market about US healthcare and US health insurance, it’s a Frankenstein-sort of monster basically designed to be both terrible in quality and extremely high in cost. And that’s what we have, Americans are paying far more than anywhere else for the worst healthcare of any developed country–we have the worst life expectancy of any of the developed countries from even before COVID (we even dropped below China and Cuba last year), most medical errors and poor outcomes, worst infant mortality and we’re paying through the nose for it. One of our cousins moved to France with his 3 kids for a new job a few years back, he makes around the same amount of money for same taxes (the high tax thing is a myth, the US just splits up our taxes more so we have less fed income tax but more payroll, property and state taxes) but he and his wife never have to worry about going broke from a medical bill.
It maybe doesn’t matter as much when you’re single or retired, but when you’re starting a family or with a kid is when you see the difference. The pregnancy and birth alone are super expensive in American hospitals even if you’re insured with a normal birth, and then pediatric care on top of daycare costs, and heaven please help you if you have a complicated pregnancy, the costs of NICU and nursery can wipe out a decade or two of your savings or leave you bankrupt right there. The hospitals and health insurers often find a way to say the NICU care was “out of your network”, so all those hundreds of thousands of dollars you paid in premiums don’t even cover the cost of having a kid–it’s bad enough there are whole expat communities forming for Americans to work in the US for a while but prepare to go expat when starting a family. We talk a lot about inflation in other sectors, but healthcare and higher education in the United States have had the worst bubbles for the longest time, while also delivering actually worsening quality as the costs get higher.
“It maybe doesn’t matter as much when you’re single or retired….”
Miller, it does matter as us two retirees are paying over $8,000 per year for Medicare and Sup insurance premiums and over $4,000 per year for prescriptions and premiums. Then there’s the misc stuff like $4,000 out of pocket for my wife’s portable 02 concentrator that Medicare doesn’t cover.
That’s a lot for a retired couple living on SS and their lifetime saving. (no pensions).
Healthcare is the real crux of the biscuit. Costs of everything going up, standard of care mostly the same for the past 10 years. Insurance companies, pharma, hospital boards all paid hugely. In the meantime, many hospitals are structurally unprofitable and closing. All this technology and advancement should be bringing down costs. On top of it all, the pandemic very much broke the entire system with people who need care not receiving it. Preventative care is only for those who can afford it which increases the burden on everyone tremendously. This inflation will be tough to get under control because we haven’t deployed our resources effectively in the healthcare sector. Too much money siphoned off to boost paychecks and profits before it gets spent on actual care. Sad state of affairs.
You’re right, just spoke with some in-laws about this very topic and they also brought up many of the same points you have. And indeed there’s an expat retiree group that exchanges ideas with the expat parents group we’ve occasionally attended and the more we hear about this, the more it seems like the US healthcare system is just a multi-level disaster for almost everyone, of every age and in every situation. Expensive, bureaucratic and lousy quality. Not just the costs themselves, but all the stress.
In fact was thinking about this a bit more after reading your comment and talking to the in-laws, and found an email from another expat contact (old friend in our former neighborhood), in his case he had an even easier route than our cousin in France. He was able to prove he had something like a great great great grandfather who came over from Germany and showed the documents at a consulate, within a few weeks he had a German passport through some kind of ancestry path in. (Come to think of it have heard a few cases of that though more with distant acquaintances who got citizenship in Poland, Italy, Latvia or Ireland, apparently tens of millions of Americans with some kind of ancestry over there are eligible if they can dig up their documents) This was a few years ago and he was able to move to Belgium and then Sweden with his wife and kids for a sweet-paying job in Web design (the passport makes it so much easier to navigate like that from one country to another), but then as a bonus, he was even able to sponsor his father and mother, both still working but planning out their retirement. And from the message, they were quite happy about it for the very reasons you mention!
Rising healthcare and food costs have turned the standard “eat less, exercise more” prescription into a legitimate investment. Anything you can do to stay out of a medical facility is a big win for your bottom line!
Now in my mid-60s, I have seen a doctor for anything about once every ten years. Lots and lots of walking, and not consuming harmful junk, is the primary reason. My health care is thus quite affordable. For many decades I have paid twice, so to speak: once by being disciplined, and again, subsidizing these radically unhealthy people, at least 50 percent due to THEIR irresponsibility.
Yes, pill splitting is becoming an art form with retirees.
Cost/value assessment by everyone is the only way to start lowering prices. Get the fish sandwich instead of the haddock dinner that costs 2x as much with little increase in fish, or better yet go fishing and hunting. Rabbit tastes like chicken if you like meat.
Cut your own lawn. I can’t believe the amount of people that hire lawn companies to mow their yards, and they come periodically whether it needs it or not. Fix things around your premises yourself.
Instead of paying to exercise, do some manual labor, and stretch out correctly while doing it, not doing
As Wolf has stated, the only way that the inflation starts to deflate is by the buyers’ striking. Make an effort not to take the easy work way out if possible. Enjoy work as long as you can, it is an important key to health and happiness. Take your time, and do it right, and above all just keep going.
Buyer’s strike and do without? The heck with that. Move to Cuba it that’s you cup of tea.
Demand a raise.
Although, I agree that physical work is better than excruciatingly boring exercise.
Don’t need Cuba, although I would like to visit there and Costa Rica. I don’t have to change too much. I never paid anyone to mow my lawn- 1.71 acres, and never had a sit down mower. Been on strike my whole life, if that is what you’d like to call it. Just try to keep working even though I’m 70 and retired.
Gotta go and remove a screw from my old BMW and take it to the hardware store to get 5 more close approximations to the 6mm screw removed.
I have never owned a new car in my life, and never took out a loan to get a car. I am frugal, but have been to most every state including Hawaii and Europe 4x. Keep Going!
Did you ever read Millionaire Next Door? I guess you’d have been around 45 when it came out. Sounds like you fit the profile. This kind of wisdom should be taught in school. At least people would have a chance, then. We’re out of control.
Turtle,
My parents taught me and my sister that wisdom. My nieces have it too; from my sister & her husband. That kind of wisdom comes into one’s being from family and at an early age, I reckon.
Don’t be afraid to spend money on things, of good quality, that you use, and enjoy using, but be smart about it.
Millionaire Next Door was a great read and changed our lives here. That plan worked wonders for us, and our kids have inherited the attitude as well.
I’d rather mow my lawn,trim, and weed outside in the fresh air for 2 hours than work out in an air-conditioned gym. However, I understand that it is hard to schedule this with a busy work schedule. The darn neighbors complain and mowing quality goes down when it must be done before dawn.
In the Winter, shoveling snow is even a better workout.
This is why I live where there is no snow and why I have no lawn. I don’t have to convince myself I like doing it or that it is a ‘good workout’.
Just got back from Cuba…lol.
A few expats there enjoying it and living well as long as the government keeps a lid on the population.
If you enjoy rolling power outages, a daily struggle to find food, be my guest.
In my neighborhood there’s just a few geezers like me that do our own yard work. Even families with teenage sons still pay to have their yard work done.
Rabbit tastes like chicken?
Much better. Lean delicious meat. The problem is that there isn’t a lot of meat on a regular rabbit.
Thanks. Yes to DIY services and go on strike. Stop buying when expensive. Many don’t even look at the price they pay just tap the CC machine and head out the door!
Thanks again Wolf for making the effort to put into print your podcast. It really helps us ‘non-aural’ types.
🙂
The DXY is up over 112 today on its way to 120. The two decade high in the USD is the story that no one is talking about. Yet when it causes a world wide economic catastrophe people will say it was a black swan event lol. We are on the eve of destruction.
re: “We’re only a few months into Fed tightening.”
I think that’s right. The distributed lag effect of long-term money flows, the volume and velocity of money, the proxy for inflation, is exactly 24-months (and has been for over a century).
During the GFC, bank credit peaked on 10/22/2008 @ $9245., then bottomed on 3/24/2010 @ $8602., and didn’t exceed the prior peak until 2/1/2012 @ $9249.
Bank credit may have just peaked on 8/24/2022 @ $17333.
John Authers in Bloomberg pointed out today that real interest rates are still very low.
Rates are lower than they were any time since 1975.
Please explain. Rates were lower earlier this year and last. My mortgage rate was lower in 2008 than they are right now.
“Real” means inflation adjusted. Subtract inflation from the rates to which you refer, and do it using the rate of inflation during the time periods to which you refer
Almost all health insurance in the U.S. is not insurance, but health care spending. Almost all us plans are ASO (administrative Services Only), meaning the employers or US government pays what the employee/citizen eats (healthcare utilization), and the health insurance company charges an administration fee based on the utilization, but both get wrap up into the health insurance bill. So utilization is the big factor here (people going back to elective surgeries and doctor offices) not price. Price is some where in that 24% number, but probably 4-5% based on industry trends and DRG codes.
I worked for both a health insurer and mortgage insurer in my career. Strangely, neither one cared that much about operational (ie, claims vs premiums) profitability. They both ran the business operationally at a 2% annual loss. I guess it makes sense if you’re trying to keep prospective competitors at bay. Who wants to enter a field that has a 2% annual loss?
What they both were really concerned about was the performance of their portfolio. And with today’s rate environment plus inflation you have to be concerned about the future viability of such companies.
What about food inflation?
The food we are eating now is starting to be the first crops, post 2/24/22 (Ukraine conflict) fertilizer price influenced.
67% of Europe’s nitrogen fertilizer production capacity is shut down, and US natural gas prices due to LNG shipments to Europe are very high compared to the past 2 decades.
I was told by a couple farmers that they’re literally thinking of skipping a year because fertilizers in their area (Texas) are literally not available.
Effete elite defeat.
I knew we would hear from the effete corps of impudent snobs at some point.
A big problem, which is only getting started is that many want to borrow and spend more money to “fight” inflation, which will only make problems worse. Everyone points the finger at someone else especially Central Banks, billionaires and Governments. However, the public wanted then and still wants the freebie, easy, money printing solution. The only difference now is they don’t like the consequences, like price inflation, interest costs and falling real wages.
We’re on our way to Weimar. Wheel barrows won’t be coming down in price any time soon. As I’ve stated in the past, you can’t unprint all that money. Interest rates going up will help stifle demand but to even get close to putting a damper on inflation we’ll need to see double digit rates. Everyone knows inflation isn’t running at 8%, well, almost everyone… the prez seems to think things are under control. There’s a surprise.
Yes you can. That’s what QT does.
Wheelbarrows at Lowes yesterday were $119 for the single wheel ones and $179 for the dual wheel ones…
Same single wheel thing just a couple years ago was $69.
Gonna bee very interesting to see if this kind of opportunities will continue, eh?
Cousin who was doing his junior year in HS in Germany in 1936 told me later many similar stories he had heard there about the elite taking a wheelbarrow of jewels to the bank to pawn for the money to buy seeds for her PEONs,,, then taking the produce six months later to pawn to get the jewels back…
Probably just another ”meme” gone bad IMHO,,, but,,, but,,, maybe so and maybe no ”this time.”
Gonna bee a ton of fun for those of WE the PEONs who have always been thrifty and have saved and have NO DEBT… etc., etc…….
My wheel barrow is from Lowes and I keep the front axle greased up and the tire inflated properly for immediate use if necessary! (prior Boy Scout here)
“Everyone knows inflation isn’t running at 8%, well, almost everyone… the prez seems to think things are under control. There’s a surprise.”
Bob, the Prez and his Chief Economic Advisor Cornpop have their pulse on the finger of the……uh…….you know, the thing.
I suspect Cornpop is on social security by now, so he’s gonna get screwed, too, unless he’s somehow getting part of the big guy’s 10%
Services inflation doesn’t seem all that mysterious to me. At the base of all services is the same inflated cost inputs as manufacturing and goods. Maybe not as directly tied to a product, but they are there nonetheless.
Your insightful columns could be considered a “service”. You mentioned your broadband costs had risen 20%. Your costs as a service provider, are inflated.
What my simple mind keeps telling me is that constrained energy production, and the resultant inflation thereof is probably percolating upward through the economy. First and most evident are the many thousands of day to day petro chemical products contained in manufactured goods that also impact food prices. Service providers are passing along the same inflated input and sustenance costs, albeit somewhat delayed.
Maybe I’m just too simple minded. Back to my corner.
The Fed went full throttle when they didn’t need to, was then slow to react to initial signs of inflation, and will invariably overcorrect. The Fed is supposed to give us stability; it does anything but.
This is a geopolitical/geoeconomic inflationary war game. The periphery currencies are collapsing against the USD. The Fed is gaining dollar hegemony over its periphery as Russia attempts to dedollarize trade with Eurasia. The easy days of importing deflation is over. Deglobalization will be extremely inflationary in the cost of re-shoring production and degrowth in neocolonial financialization. The Fed is front-loading inflation to prepare us for this monumental shift towards a new foreign policy where domestic security of energy, food and tech are in the front row.
As the periphery currencies collapses, the countries with these currencies will no longer be able to pay interest on US dollar and may default.
If there is mass defaults on souverign debt, the US counterparts will feel that.
A new Bretton Woods 3.0 ?
A realignment in favor of Commodities ?
This attempt to slowly deflate the bubble(s) by rate hikes & QT will soon be hitting the 25% of companies that are zombies (can’t service existing debt from cash flow).
The zombies will be faced with the twin threats of reduced demand and higher refi rates. It is easy to predict a surge in bankruptcies and some sort of domino effect. I think chaos theory applies here and complexity makes predictions all but impossible. That said, I can’t imagine any outcome that does not include a liquidity crisis.
When this tide goes out, we will see who was buried in the shallows
What if we called it ‘Winflation’ instead, sounds better.
I have to go dig around and see if I can find my “W I N” button!
(Those too young to remember, that was the campaign President Ford had in the 1970’s. Whip Inflation Now!)
And we should call economists ‘Winfluencers’.
Ah, somebody did remember, even as I was typing!
Most people probably don’t remember the ‘WIN’ buttons and government ad campaign of President Ford, in the mid-70s.
‘Whip Inflation Now!’, as if the population could do anything about it except take the blame for inflation and modify their spending and saving behavior, even as the Federal ‘Budget’ deficits ran to 10-fold of the 1960s.
People started wearing their WIN buttons upside down: No Immediate Miracles.
I remember “Whip Inflation Now” from my pre-teen days of youth. Was still a moment of wonder (in a negative way) for me, and tells me that my current thought processes have been with me since near the beginning.
Soon after that, I also recall President Carter’s helpful rejoinders to wear a sweater and keep the thermostats down. Good advice for today’s western Europeans and next year’s Americans. 55MPH for the WIN!
Debt levels are now so obscene , there are only 3 possibilities:
1) service the debt using ZIRP and NIRP (plan A that failed)
2)) inflate the debt away (present plan B)
3) dishonor the debt and start again (banana republic plan C)
We re-papered the global financial system in ’08, and got away with it.
All of human “progress” or “history,” like simple walking, is some form of more or less controlled stumbling forward.
I wonder if the Fed really believes they’ve got things under some kind of control, like holding onto a boat’s wheel during a storm, or if they’re more shrewd than that.
These aren’t stupid people. They know future is impossible to predict. That’s an uncomfortable truth of the universe. All they can do is plan for probable scenarios, and react to changes as they happen.
In point of fact, they CAN’T “control” inflation. They can only push a few policy buttons and watch as a kajillion unknowable interactions happen. Will inflation to go down? Maybe. Will they have “caused” inflation to go down. No.
That’s complexity.
They are regulators. That is a continuous process of adjusting and steering. They are far too sophisticated to think it is a binary of “controlled” or not. They know it is contingent.
I always thought the Fed should have STABLE PRICES mandate and maybe a MODERATE long term interest rate policy (not too high, or low). You know, to prevent wild swings in asset prices and markets.
In a system that boasts of “checks and balances”, who checks the Fed?
(its not the Senate banking committee based on their climate and gender inclusive questioning)
QQQ closed June 17/21 gap for Rosh Ha Shana…
I think the only way they get control of the inflation is by inducing a deep, deep recession, and I expect the Fed will have to raise its policy rate to at least a minimum of 6%. In my opinion, they are still way behind the curve- all those 0.75% increases needed to be 1- 1.5%. I think they are under the illusion they can engineer a soft landing, still.
Wolf, I couldn’t directly reply (no button available) to a response you made to my comment in a previous article of yours.
I was asking about Argentina and Turkey’s inflation nightmare, and you provided a great response with these two links and an Argentine Peso chart:
https://wolfstreet.com/2020/08/04/why-wall-street-loves-serial-defaulter-argentina/
https://wolfstreet.com/2018/08/13/price-of-cheap-debt-dollar-euro-local-currencies-come-unglued/
I wasn’t aware you had already covered these topics way back in 2018-2020, as I had only become familiar with your fantastic financial coverage around mid-2021.
Thanks for your earlier response! I did catch it, obviously.
UK – puke, eh.
great work Wolf!
As this asset repricing goes on, I’m still waiting for some big name hedge fund blow-ups. Somebody has got to be in trouble … but so far all I hear is crickets … still plenty of liquidity.
If I read another zero hedge article that says QE is just around the corner after a market crash I’m going to puke. The Fed is trapped. If they try to save the market with qe inflation will sky rocket and we’re back to where we started.
I found Wolf on ZH. At least they provided some value.
Yep, that’s what the tightening deniers and the pivot squawkers still don’t seem to get, they keep trying to cite the Fed’s recent history of loose monetary policy (going back about 40 years to be fair about it), but they forget a critical variable has changed. We also have the worst inflation in 40 years, and it poses a greater threat to the US economy, the US dollar and US social stability and society than any other economic threat. Rampant inflation has brought down more great powers and major empires than any way ever has, like one of my econ professors always liked to stress, and whatever it’s shortcomings before, the Federal Reserve is well aware of that. Crime and social unrest are already starting to rise in some parts of the US with the worst increases in rent and food costs, food lines are stretching out for blocks and it’s only getting worse. Like you said the Fed is boxed in, and JPow knows he has to channel Paul Volcker now. There really isn’t any alternative.
I believe the CPI inflation won’t come down until RE prices DROP a good 20%. It’s the RE price inflation that is driving CPI inflation. Unlike stock gains, people think their RE gains are safe and secure. They take out loans against the equity. They spend more simply because they feel wealthy.
About 70% of families own their home, and they feel a lot wealthier than they did three years ago. CPI inflation is a nuisance to them, but not an impediment.
If Powell keeps at it, and home prices drop 20%, CPI inflation should subside. People that don’t own a home might finally get a break, if they don’t starve first.
20% drop, cool. Reasonable.
Long time reader, first time poster… Here’s a question I’ve always wondered. With a reset in economy, do prices ever go back to their pre-inflation levels or do new price floors get established in inflationary cycles? So if product A was $100 before, then goes to $150, can it to get close to $100 again, or would it remain higher than before but lower than now?
Prices of commodities can do that and did do that in the past, such as gasoline, or crude oil, or wheat.
Some consumers goods always tend to get cheaper, such as consumer electronics. And that’s normal. The CPI for consumer electronics is down like 8% now.
Rents in the past have plunged. And this can happen again. In San Francisco, rents are below where they’d been in mid-2019.
Airfares jump up and down.
But insurance, healthcare, education, and many other services only get more expense — they may get more expensive faster or slower though.
Overall CPI is made up of a gazillion goods and services, some go up and some go down at the same time.
Hideous Times.
Not all bonds will be equal though. Bankrupt companies can’t pay coupons. How many deadwalking corporations are the out there right now? In, say, the USA, UK, Europe, Japan, Russia (for self inflicted reasons wholely avoidable), and China. Ahh, China.
For China read everything from LGFV’s to real estate developers to anyone the Party can blame for their own myopia.
But back to Blighty. For a more horrific comparison of charts for those living in the UK I challenge you to better the comparison between the USD gold price chart and the sterling gold price chart on any website you like. Perhaps Bullionvault.
Staysafe.
TT
Fed is only acting because workers are demanding higher wages. They will follow the Larry Summers plan to do rate hikes til unemployment rate is above 10%. This will dynamite whats left of the economy, but rich people can afford to pay more so the Fed really dont care.
Capitalism was great while it lasted,(Obama bailing out Wall St put an end to what remained of capitalism), i don’t know what we have now, but it ain’t capitalism.
“The prior dam that broke was during the oil embargo in the 1970s.”
Was it? Didn’t have anything to do with delinking gold and the dollar? Didn’t have anything to do with all the money spent on the war in vietnam over 2 decades?
We can go back further. Printing and globally exporting dollars into the early 60s?
We got a nice bump postwar. It was a vast welfare state hootenanny. Basically everybody took the candy on offer. Now is the inevitable consequence or reversal, bound to happen. I don’t think most of the righteous grumblers have the humility to consider it in that frame.
We’ve been exporting inflation to the rest of the world for 40 years. Something broke in 2019 and then we got 2020. Perhaps, just perhaps, those who see themselves as the rival block for the rest of the world said no more exporting inflation? Maybe your market tea leaves from the last 40 years won’t work in predicting movement anymore. Just a thought
But for a few isolated pockets, the rest of the world is more corrupt and incompetent than we are, even now. And more chaotic and warlike and savage. They can’t build a world-spanning system of anything.
Others may not be able to build a world spanning system like USA did, but the US may well be able to import the chaos, develop the corruption and aspire to the incompetence found elsewhere.
Years ago I said to a workmate in the USA that USA started to look more and more like say India. Not because of development in India, but because of decay in the USA.
Well, just like the Roman Empire, we had a good run!
The talking heads calling on the Fed to stop the ‘pain’ have suddenly taken a newfound charitable interest in the poor and middle class. They certainly weren’t doing that during the great asset inflation as the 1%’s were racking up phenomenal gains while everyone else was treading water or left behind entirely.
“And the original triggers have already started to recede, such as energy and supply chains, and now it’s services and other goods.”
Small quibble on this statement Wolf… The energy “trigger” has temporarily receded, but it is coming back in spades once the SPR stops getting drained. Oil prices are going right back up and beyond that is a guarantee. There are no more wells coming on line, no new refining capacity, OPEC is pissed, Russia isn’t going to play ball, and Europe wants oil.
“We’re looking at years of much lower home prices, and much lower prices of commercial real estate. The whole entire asset bubble … this everything bubble is going to get repriced”
Either we will see continued expansion of prices to support continued hot inflation or we will see prices collapse as the everything bubble pops which will stop inflation in its tracks. So what’s it going to be? It can’t be both.
Repricing hints at continued downward pressure on housing, commodities, stocks/bonds, cryptos, etc. along with the negative effects those price drops will have on business. Good and profitable companies that rely on these markets will be hurting. Zombie companies will collapse. Good companies that rely on Zombie companies will be hurting too. That equals much higher unemployment. And let’s not forget about all the retirees who’s 401Ks are transformed into 201Ks. The sum is a much slower economy and demand destruction leading to much lower inflation, potentially very quickly since such a huge bubble could explode spectacularly.
So are we up against continued price increases or repricing of the everything bubble? You only get to pick one.
“Don’t Fight the Fed”, or “Don’t Trust the Fed?” We’ll see how resolute the Fed really is between now and April 2023.
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Holy-moly mortgage rates close in on 7%.

The ridiculous price spikes now face Bank of Canada’s monster rate hikes, QT, and spiking mortgage rates.

“Housing market will have to go through a correction … to where people can afford housing again”: Powell

But these sales happened during the “Fed pivot” fantasy that pushed mortgage rates down to 5%. Now mortgage rates are near 6.5%.

Bank of Japan lets yen go to heck, trade deficit blows out, costs surge for manufacturers, prices surge for consumers.

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