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What's the average person experiencing? The narrative v the reality v the bond market.
My mate Sam Mitchell @Sam Mitchell posted some interesting insights into inflation.
Not saying there is a silver bullet to answer this, but the whole inflation picture has a bit of shades-of-grey for each view in my opinion.
This should give us a good insight into the "reality", what the average person is experiencing and therefore what their inflation narrative/belief will be.
haha alright well lets talk about it. I was thinking of doing a post but commenting on here will do @John Ahearn and @Wissam Ali
Lets forget all the random narratives and look at what is happening. Price over narrative.
We just had an inflation print that was 5% on a YoY basis. All the things have come together to do it, fiscal policy, monetary policy, base effects, supply chain problems that still persist, and a down dollar.
So how do you know what the market thinks? Well theoretically we had an inflation print "above target", whatever the f*ck that means:
So we have a print "above expectations" and what does the market do? Nothing! It is already priced in. Old news now. Bonds are actually up on the day (currently).
Purely on a base effects level we will see things roll over a little in the latter half of this year. And then definitely in the first half of 2022. The popular narrative that inflation is going to surprise to the upside is just a narrative. It didn't surprise the market at all. Could it in the future? Sure but its still not doing it.
Honestly, I think the deflation guys have a lot of really good points and I think they were betting on more insolvencies to pull inflation down. At the moment all the NPLs are being suppressed because of fiscal policy suspending mortgage forbearence. Those forbearances are no longer in effect in September along with people paying their student loans again.
I could honestly care less if inflation is "transitory" or not. At the moment, the market is seeing a cyclical high in rates. Could these break out higher, yeah of course. What will be a test of the inflation narrative? Supply chains normalizing. Once that happens, prices continue to go up and rates move out of their cyclical trend then we can start being much more sure about more of a "secular inflation." Because of the extreme sharpness of the COVID contraction, we are having an extreme reaction as we revert to the mean.
We shall see but the economic data is always lagging. Even the "leading" indicators are of past growth. I wasnt necessarily trying to start a debate or anything. I just don't think things are that bad in terms of inflation "surprising" to the upside.
Show me manufacturing capacity usage in the mid 80% and a consumer that is consuming above pre-COVID trend and I'll believe more in CPI.
Most of this I am arguing is related to oil speculation about what happens in the future and semiconductor shortages, neither of which can be caused or mitigated by Fed policy. The remainder is the pain of trying to reopen an economy. If we see bank credit growth or if we actually get 6 trillion in additional infrastructure spending, we can revisit the topic. A Fed taper now (and I would argue even a passive Fed that lets this play out to its natural conclusion) will just accelerate the air coming out of the balloon. Given the current economic conditions, the CPI is a talking point to sell to retail investors. There are much scarier monsters waiting in the closet that are being ignored.
Sorry, trying to understand you.
Consumption and retail sales:
Credit growth is flat to low, 6T in infrastructure is currently off the table in congress.
I agree that there are bigger issues. But a tapper is possible by the FED. However, if they do it then the market will call their bluff, sell off and force them to pull back more. So I dont think they will really be able to tapper. but things are running hot right now with consumption and retail sales far above trend.
Thoughts? I feel like we are saying the same thing? lol
Caveman here... What scary monsters?
I wrote another book report. Here are my thoughts currently more or less, hopefully I didn't get my wires crossed anywhere.
Retail Sales:We spent several trillions of dollars into the market just to keep retail sales afloat, and the delay in getting stimulus out in Q4 2020 showed retail sales starting to tail off. Think about that, retail sales from Oct to Dec were falling. During the Christmas season. The last time that happened was in 2019 when we had the mini-crash in December of that year.
March was when we started really seeing vaccines have an impact on people relaxing social distancing. There is some pent-up demand there just for people to get back outside again. And there was a very large round of stimulus and an extension of the eviction moratorium.Let's see how this looks in say October, and I'll start considering if this pattern has long-term legs. We still have 9 million on stimulus unemployment and a not insignificant number of people have not had to pay rent or their mortgage in over a year. The trend is about ~490B to 500B a month. We are getting a 10% pop, which was flat to lower than the prior month the last time this reported.Unless we continue to let people not pay rent and we continue to provide extended unemployment benefits, I am skeptical this chart is going to last.
For the amount of money we spent, we should have more than this, especially if everything is so much more expensive in nominal terms and we have a healthy consumer who can afford the higher prices, which has to be the case if I believe these retail sales numbers are related to the CPI prints and not to people simply coming out of lockdown and the economy getting a burst of activity from reopening.And if we ARE seeing all of this economic activity showing the economy running hot, it should be worthwhile for companies to lure workers back. Except they aren't paying higher salaries, they are luring people back with one-time bonuses. Many times, not even that.This makes me believe that the companies themselves are skeptical that this isn't going to last and that they won't be able to pass on higher costs to their own customers, so they want to avoid paying higher labor costs only to have to trim those workers later.
We have to see how that plays out once the pandemic benefits roll off of the books. If labor has no negotiating leverage, then they are going to get structurally poorer if the narrative is true and they are making so much more money on unemployment than they were at their jobs.Just for fun, I looked up Macy's reviews on Indeed.com from this year. They are still chronically short-staffed and many seem to pay shit. On the plus side, hours are flexible. But if you are senior management, you seem to get nice bonuses. It pays to be in charge I guess.
And this was all a trend before the pandemic too, so structurally nothing has changed in traditional retail.
Personal Consumption:We had a major pop in personal consumption when the pandemic first started, and since then it has leveled off to about 70% of GDP.
Here is the thing though, GDP hasn't recovered back to where the trend should have it. GDP was growing by about 200 Billion a quarter prior to COVID, we are still behind by 700 billion and it took us 6 Trillion just to get GDP back from 19.2T. That 70% actually has personal consumption more or less flat on a lower GDP from Feb 2020. And all that is after you have two months of those retail sales numbers. If CPI is running red hot, we should be seeing it show up in the nominal values of GDP and personal consumption. Instead, most of the costs are supply-side "cost of doing business" issues. This could be a sign of stagflation, but it is still too early to tell. We are coming out of a horrific period, there is too much noise in the data right now for it to be of any real value.
From last year, GDP has grown by 2.32%. So one of these things has to be true:
Simply from the fact that we KNOW that the economy is not back to normal, I heavily discount CPI as telling us anything we didn't already know. And if we were going to create stagflation with just QE and one-time fiscal spending bills, we would have done so at some point in the past 12 years.
We need something to structurally change with the current setup to worry about inflation long term. CBDC maybe? There are too many signs that the flow of money thru the economy is not going gangbusters, and you can't really get inflation to feed on itself when velocity falls at a rate that neutralizes any monetary expansion you attempt. If anything, QE is deflationary because it traps collateral and fills up bank balance sheets with inert reserves. This makes commercial banks the masters of if/when/how inflation occurs. They are the only ones who can produce money out of thin air by extending credit. Even Congress needs the banks to underwrite the Treasury Market (what they basically agree to when they become primary dealers) in order to guarantee the financing the government needs when they put Treasuries up for auction. And without monetary expansion that comes with an expansion of debt, inflation kind of dies due to a lack of oxygen.
Note: Inflation that people talk about I call "demand-side inflation". Inflation traditionally occurs when too many dollars are chasing too few assets. This is usually thought of in people's minds as "more dollars chasing the same goods".
What we have right now is the same or fewer dollars chasing even fewer goods, because we can't get the goods to where they need to be without throwing money at the transport and shipping companies. This is structurally deflationary, and it can still cause higher prices until the supply comes back into balance. The main issue is that people effectively pay the higher cost, but cut spending elsewhere. So essentials survive, but discretionary dies on the vine.
Given how warped our economy is, I am not surprised that it is nearly impossible to tell what is happening right now. But I look at the whole picture and take an educated guess as to what might be occurring. I only learned in 2020 that this is basically what macroeconomics is lol.
@ALLEN AZAR Debt defaults at a systemic scale. The monster that keeps the Fed up at night.
Jeez John lol @John Ahearn
lets just jump on a zoom call and do a video on it. Such great info here. And I really feel like I’m on the same page with Most things but I’d like to unpack things
yes, please do this!
I'm tied up this weekend with work, maybe we can do something Wednesday night after the FOMC meeting. I'm pretty much in a holding pattern till I read the next FOMC statement to see how the Fed wants to signal from here.
Let’s do it
What a mess
Really? I thought it was ho hum personally.
Transitory don' panic 😁
All of the inflation pundits were calling for 6% or more inflation. Sky is falling type stuff. And much of this inflation has to do with supply shocks and energy prices (which feeds into transportation costs rising).Hate to admit it, but I agree with Powell.
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