Cost of Inflation to Middle-class
Showing posts with label INFLATION. Show all posts
Showing posts with label INFLATION. Show all posts
Thursday, November 30, 2023
Tuesday, May 17, 2022
Bernanke "Stagflation may be on the way"
Ben Bernanke sees "stagflation" ahead
But he also suggests it is possible the nation could be in for a period of “stagflation,” a word Mr. Bernanke says was invented in the 1970s.
“Even under the benign scenario, we should have a slowing economy,” he said. “And inflation’s still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high,” he predicted. “So you could call that stagflation.”
He is particularly aware that runaway inflation can quickly become a political issue — possibly putting the Federal Reserve in the cross-hairs of the public — in a way that even unemployment doesn’t evoke. “The difference between inflation and unemployment is that inflation affects just everybody,” he said. “Unemployment affects some people a lot, but most people don’t respond too much to unemployment because they’re not personally unemployed. Inflation has a social-wide kind of impact.”
Thursday, April 21, 2022
Friday, April 1, 2022
Biden Goes Facist - It's the Gas
Biden Goes Facist - It's the Gas
How is Joe Biden dealing with the high gas prices?
As we reported earlier, he ordered that there would a release from the Strategic Petroleum Reserve — one million barrels a day for 180 days — to help lower the prices. This is an incredibly bad move — robbing our savings account at a time of great inflation and world instability — that does nothing to increase our long-term production. We’re only supposed to be using it in an emergency, which is not this when there are other options.
Wednesday, March 30, 2022
Blistering New Report Takes Down Media's Gas Price Narrative
Blistering New Report Takes Down Media's Gas Price Narrative,
Reveals 81 Ways Biden Has Sent Prices Sky High
Monday, December 20, 2021
Big Crash Coming, According To Treasury Yields
Big Crash Coming, According To Treasury Yields
Summary
- The long-term Treasury yields (or 10-year yield) remain stubbornly low, signaling a recession or deflation is coming soon.
- Don't misinterpret Treasury yield signals. We are currently seeing dynamics that the market has not witnessed for over 70 years.
- How did the stock markets do historically in periods of high inflation and low interest rates, similar to the one we are seeing today?
- The Fed already fooled you about inflation this year. Don't be fooled by Powell's hawkish talk.
- The Fed to remain dovish, inflation running high. How you can profit in the current environment?
- Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Learn More »
bunhill/E+ via Getty Images
We have consistently been taught that we should always listen to what the Treasury yields are telling us. When inflation is running as high as it is today, you should expect one of two things from the Treasury yields:
- Long-term treasury yields (or the 10-year yield) go up along with the inflation rate, which would suggest that the bond markets are pricing in a healthy economy, or
- Long-term treasury yields (or the 10-year yield) remain the same or even go down, which would suggest that that the bond markets are pricing-in an economic recession along with a collapse of inflation.
With the 10-year yield remaining stubbornly low at 1.5%, many investors believe that they are pointing to a recession (or deflation) next year, whereby we could see a big market crash.
However today, we are seeing a very interesting phenomenon, unseen in modern times. Inflation (as measured by U.S. Personal Consumption Expenditures) is running well above the 10-year Treasury yields, resulting in significant negative "real yields"! Take a look at this chart since the year 1990 (or for the past 31 years).
Well, inflation is so high and persistent that even Jay Powell stopped using the word "transient", yet the 10-year Treasury yield is around 1.5%. This is confusing many investors who are asking themselves:
- Are we heading into a deflationary environment?
- Are we heading into a recession?
This is a very interesting phenomenon, that we have only seen 3 times in the past 120 years in the United States:
- During the Civil War
- During and after World War I
- During and after World War II
The fourth time is happening right now!
Treasury yields always tell the right story, but it is people that misinterpret them.
A Dig Through History
It is very easy for us to fall into the trap of assuming things that have been true for 20+ years have been true "forever". This is called "recency bias", where our perspective of the world is more strongly influenced by things that happened recently than by things that happened long in the past.
When we think of high inflation, most of us jump right to the 1970s when higher inflation led to higher treasury yields, and treasuries almost always had a higher yield than inflation.
It's a period that many of us lived through or at least our parents lived through it. So it is a period that is fairly accessible. But has it always been the case?
No, it has not - if we dig into history:
- Since the mid-1950s, we have seen a few cases when inflation has been higher than the 10-year Treasury rate, but the difference was resolved fairly quickly.
- If we go further back in history, we have seen cases of inflation spiking up significantly, and the 10-year Treasury remaining low for a long period of time. The "real yields" were deeply negative as they are today. The two most obvious cases relate to World War I and World War II.
- Source Data: rateinflation.com and multpl.com
So what is the common denominator in WWI, WWII, and Today?
- In all cases, for obvious reasons, debt spiked to unusual levels.
- The Treasury markets are pricing-in continued loose monetary policy. The Government will let inflation take its course to "deflate" the national debt", rather than curb inflation as they have been telling us.
So it is no wonder that Treasury yields refuse to go higher than they are today! In fact, what treasuries are telling us is exactly what I have been saying over the past several months:
- The Fed cannot and will not hike rates anytime soon. And if they do, it will be an immaterial rate hike that will have an insignificant impact on inflation.
- The government will continue to ensure there is a high amount of liquidity in the financial system. The Bubble of Liquidity will remain large.
How Did the Markets Fare During Similar Periods: WWI and WWII
For us investors, it is important to not only be aware of what is happening in today's macro-economic situation but to also understand what the likely outcome will be for equities. In this case, we have to go back to the periods of WWI and WWII and see how equities fared during times of very high inflation and very low Treasury yields:
Case #1: WW I (Bull Market of 1918-1919)
Inflation started picking up significantly in 1917 when the U.S. formally got involved in WWI. Inflation surged up to 18% while the 10-year Treasury rate remained at 4.5%. Inflation remained high through 1919.
Despite an initial selloff in late 1917, we saw a great Bull Market that ran through 1918 and 1919 and the Dow Jones Industrial Average hit all-time highs. The Bull Market ran up 80% over the course of two years.
The party came to an abrupt end in 1920 when inflation suddenly became deflation. A few of the most relevant factors impacting the recession in 1920 were:
- The return of troops from WW1: 1920 was characterized by high unemployment rates as troops coming home from war struggled to find work.
- Resurgence in the Spanish Flu: The Spanish Flu was particularly brutal the 1919-1920 season, with the death rate approximately doubling.
- The Gold Standard: In 1920, the dollar was still linked to gold. Deflation expectations were high, as people anticipated a wave of redemptions to reduce the monetary supply.
- Rising Interest Rates: The Fed hiked rates in an effort to fight inflation from December 1919 through June 1920, from 4.75% to 7%.
Case #2: WW2 (Bull Market 1942-1956)
From 1942-1956, we can see several periods where inflation significantly exceeded the 10-year Treasury rate. Over this 14-year period, inflation averaged over 4%, while the 10-year Treasury rate averaged 2.5%. Meanwhile, the DJIA averaged +11% per year. I believe this is the most comparable period to our situation today.
The DJIA gained 120% from 1942-1946, even as inflation outpaced the 10-year Treasury rate for three of those years.
The "bear" market from 1947-1948 is perhaps better termed a "consolidation" as it was a 25% pullback before the market continued to new heights. The market climbed up another 230% from 1949-1956 even as inflation rose to 7.9% in 1951 and the 10-year Treasury stayed around 2.5%. By 1953, inflation had slowed down.
The combination of high inflation and low Treasury Rates proved very beneficial for equity holders. The period was characterized by low unemployment (below 5% from 1942 on) and economic growth as the U.S. economy ran hot in the wake of WWII.
The Great Inflation Lie: The Fed Won't Stop Inflation
As recently as June, the Federal Reserve was projecting a PCE inflation rate of 3.4% for 2021. Three months later it hiked that projection up to 4.2% for 2021. One month after their meeting, PCE inflation was 5%.
Earlier this year, I highlighted what I termed as "The Great Inflation Lie". Either the Federal Reserve is incompetent with projections that aren't even in the ballpark of reality, or it is intentionally being misleading. When random average Joes are being surveyed and are more accurate than the Federal Reserve with their projections, something is wrong.
I do not believe the Federal Reserve is that incompetent, that they failed to see what everyone else in the country could see.
So why do both Government and the Fed want inflation to run very high?
The U.S. Government has run up a ton of debt. As a percentage of GDP, the Federal debt is now over 120%. The cost of COVID alone was several times higher than the cost of WWII in today's dollar terms.
- Source: St. Louis Fed
- Politically this is a very unpopular issue to deal with because budget cuts and higher taxes aren't really popular with anyone. While some support for token moves might occasionally gain enough support to pass, comprehensive solutions aren't even seriously discussed.
- To make matters worse, the U.S. Government has massive financial obligations coming up as Medicare and Social Security will both become much more dependent upon general tax funds as they fail to fund themselves.
- So without meaningful budget cuts and/or meaningful tax increases likely off the table in a polarized country, how does the government pay off all that debt? It doesn't.
The last time the U.S. had debt/GDP of over 100% was in 1946. The U.S. Government had a massive debt of $269 billion. Just by reading that number, you know what happened. What is $269 billion to the U.S. Government today? That is only half of what the government spends on interest payments alone! $269 billion just isn't what it used to be, and that was intentional.
The U.S. never "paid" for WWII - it refinanced the debt, and through inflation, the significance of the debt dissipated quickly, even as the total debt grew.
- Source: Financial Times
A significant amount of inflation is the only solution that the U.S. Government has to manage its debts and obligations.
With debt levels far beyond the pale of productivity levels (i.e., embarrassing debt to GDP ratios), the U.S. and other developed economies are mathematically and factually unable to ever grow their way out of the debt hole they have been digging us into for years.
It is too late to fix all the past mismanagement. It is also impossible to force new generations to pay for debt accumulated by the older ones by taxing them to death and forcing them to be productive in the labor force well above the age of 75. Not only will it result in political unrest, but there are simply not enough young people to tax due to an aging population, and a wave of baby boomers retiring soon.
The only way to deal with this black hole is through inflation.
Conclusion
Don't be fooled by Fed Chair Powell's hawkish talk. After all, he has a hearing to keep his job coming up in January. Treasury yields are NOT pointing to a recession and/or deflation. They are telling us that liquidity will remain high and that the treasury market is not buying the hawkish story the Fed is selling.
We are seeing dynamics that the stock market has not witnessed for over 70 years. The inflation rate will remain above the 10-year Treasury rate for a sustained period of time, creating an environment of high inflation and relatively low-interest rates. Historically, this dynamic has been very beneficial for equity markets!
Right now, it is a fantastic time to be an investor and the worst time to be sitting on cash. Investors want to be exposed to equities that benefit from high inflation, while also benefiting from low treasury yields.
My strategy includes investing in:
- Value dividend stocks: These are stocks that are valued based on earnings they have today and are paying out generous dividends. When cash is losing its earning power daily, you want cash now, not in a few years! Liberty All-Star Equity Fund (USA), yielding over 10%, is a fantastic CEF to gain broad exposure to the stock market that is overweight on "value" strategies.
- Companies with Real Estate Assets: Companies with high levels of real assets, like REITs, will see ideal conditions. They will be able to borrow cheap thanks to low interest rates, while inflation will drive up rents and property values. Some of our picks include "Dividend Aristocrat" crowns yielding +5%, that are well-positioned to take advantage of these dynamics!
- Economically sensitive stocks: The combination of low interest rates and rapid growth means that economically sensitive stocks will run hot. Default rates will remain relatively low as the burden of debt becomes less significant for borrowers, and the excess liquidity in the financial system ensures refinancing will be easy. "CLO" funds like Oxford Lane Capital (OXLC) yielding over 12% will thrive in this environment while producing a generous yield for investors.
- Energy & Commodities: Energy frequently leads the inflation wave as we pointed out long ago we are entering a commodity supercycle. These companies will benefit from a combination of higher prices, while at the same time being able to access inexpensive debt thanks to low interest rates. And yes, you can get fantastic yield of +8% while investing in commodities. You don't have to worry about price fluctuations, exactly because you are getting paid extremely well to wait!
I am looking forward for the year 2022 to be a very strong year for equities. I am personally keeping as little cash as possible in my investment account, taking out what I need, and redeploying the rest of my dividends into income investments. The last thing anybody wants is a 6.8% inflation eroding the purchasing power of their hard-earned savings. Being invested in the right stocks which offer both high yield and growth helps you not only to protect your principal, but also increase your net worth in today's difficult environment.
It is critical that investors are aware of the major macroeconomic forces at play that are impacting the markets so that you can make informed decisions. I write "Market Outlooks", similar to the above which I share every Sunday with members of my investment community, to keep focus on the big picture as it evolves. This helps us make adjustments to our portfolio as needed, in a planned and methodical manner.
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It’s Cold in Turkey. - Compare to Biden's USA
WHEN THE GOVERNMENT DOESN’T CARE ABOUT INFLATION UNTIL IT’S TOO LATE:
Saturday, December 18, 2021
Sunday, November 28, 2021
The Inflation Situation: How We Got Here
RECAP
The Inflation Situation: How We Got Here
The funny thing about the current inflation scare is...it all happened so abruptly.
As the first Covid wave ripped through the US last spring, more than 20 million Americans lost their jobs and the country entered its worst recession in history. With GDP tumbling 31.4% in Q2 2020, the last thing worrying economists was surging prices. After all, for a brief moment, oil prices had just plummeted below $0.
But it turns out the worst recession in US history was also the shortest—by far. Thanks to government stimulus to the tune of nearly $6 trillion, many Americans were able to weather the storm and, flush with cash but restricted to their homes, went full Extreme Makeover.
Consider this: Consumer spending on goods was nearly 26% higher in August 2021 than in January 2019.
Demand is just one element of the price equation
And while demand for goods skyrocketed, supply was not ready to meet it. For a number of reasons—frequent Covid lockdowns in Asia, widespread labor shortages, poor planning—producers were unable to make and ship enough goods to satisfy the ravenous appetites of consumers.
So given this severe demand–supply imbalance, prices started to climb, slowly at first in late 2020 but then really picking up steam as the ball dropped on 2021. The consumer price index, which monitors the prices of a basket of consumer goods, grew 1.7% annually in February but by May had jumped 5%.
The higher inflation readings in spring 2021 were attributed to a few items that had an outsized impact on rising prices. You might remember all the fuss about used cars, which accounted for more than one-third of the monthly price increases in June. This weird dynamic lent ammo to the officials, Fed Chair Jerome Powell included, who argued that inflation was “transitory” and likely to subside once a few pandemic wrinkles had been ironed out.
But Team Transitory is on the back foot right now. This fall, inflation has spread from used cars and energy to items across the economy, from rents to food to apparel. At the same time, wages are surging, which is great for workers but also contributes to inflation, as companies must raise prices on their products to offset higher labor costs.
In October, consumer prices rose at their fastest pace in 31 years, and economists are still debating when inflation will peak.
So that’s how we got here.
Francis Scialabba; repurposed from Axios
Thursday, November 18, 2021
Another Democrat economist jumps ship on Biden's inflationary spending
Another Democrat economist jumps ship on Biden's inflationary spending
Just as the Congressional Budget Office looks all set to present some very bad numbers about Joe Biden's porkulus social spending plan that Joe claims is "paid for," another Obama-era Democrat economist has bailed on the Biden plan, warning it's not "paid for" and will throw fat on the fire of inflation:
Steven Rattner, who served as counselor to the Treasury secretary during President Obama's administration, begins his New York Times piece with exasperation at all the Biden gaslighting:
Enough already about “transitory” inflation. Last Wednesday’s terrible Consumer Price Index news shifts our inflation prospects strongly into the “embedded” category: Prices are up 6.2 percent from a year ago, the largest increase in 30 years.
While not likely to morph into the double-digit inflation I covered for The New York Times four decades ago, prices may well rise fast enough to trigger higher interest rates. Higher financing costs make it more expensive for consumers and businesses to borrow, which, in turn, throttles growth.
And yes, he actually understands why:
How could an administration loaded with savvy political and economic hands have gotten this critical issue so wrong?
They can’t say they weren’t warned — notably by Larry Summers, a former Treasury secretary and my former boss in the Obama administration, and less notably by many others, including me. We worried that shoveling an unprecedented amount of spending into an economy already on the road to recovery would mean too much money chasing too few goods.
He even explains the political dynamics of the coming fiasco, perfectly accurately:
The administration wanted to claim a big policy win ahead of the 2022 midterm elections. But inflation worries are top of voters’ minds.
So the administration should come clean with voters about the impact of its spending plans on inflation. Build Back Better can be deemed “paid for” only if one embraces budget gimmicks, like assuming that some of the most important initiatives will be allowed to expire in just a few years. The result: a package that front-loads spending while tax revenues arrive only over a decade. The Committee for a Responsible Federal Budget estimates that the plan would likely add $800 billion or more to the deficit over the next five years, exacerbating inflationary pressures.
Mr. Biden also insists that the much-lauded infrastructure bill he just signed is fully paid for — but it isn’t. Indeed, the infrastructure figures show $550 billion in new spending and just $173 billion of additional offsets.
Being a Democrat, he naturally thinks the solution is tax hikes instead of just scrapping the entire Goliath plan. But the fact remains: Government spending fuels inflation and there's already too much of it already, that's Economics 101 and Rattner refuses to argue with it.
He also notes that he's hardly the first to warn about this economic iceberg the money-burning ship U.S.S. Joe Biden is heading straight into. Former Obama Treasury Secretary Larry Summers cast his aspersions on the disaster earlier in the Washington Post. Both note the godawful impact on inflation on Joe's runaway government spending, and Rattner notes Joe's previous porkulus packages that are still coursing through the system aren't finished yet, yet we can already see what they have brought us: the current round of inflation, with $7 gas in California. Biden's $1-plus trillion social spending plan with its subsidized government daycare, its $10 billion in cash handouts to illegal aliens, and its green new deal cronyist spending will only add to the runaway inflation currently on offer.
He had to say that, same as Summers did, because it's going to happen no matter what he says, and being an economist of sorts, he recognizes that he's still got a reputation to defend. He, and Summers, and apparently many Obama economists who never made the kinds of messes Joe Biden is making, see value in distancing themselves from the coming inflation disaster. They don't want Biden's mud all over them as the problem inevitably shakes out. Some economists, such as Paul Krugman, don't really care that they are always getting it wrong as they chase clowns like Joe Biden and his ignorant notions of economics. But real economists do.
Leading economists unaligned to the Democrat agenda or even the Obamatons, such as Johns Hopkins University Professor Steve Hanke and Invesco of London top economist John Greenwood have already laid down what's happening, explaining in plain English for the Wall Street Journal's op-ed page that the "monetary bathtub is overflowing." They lay it out in baby English anyone can understand at the beginning, and then show with a wallop what's for certain to happen:
Let’s take a look at the U.S. bathtub. During the early months of the Covid-19 pandemic, the faucet was wide open. Between December 2019 and August 2021, the U.S. money supply, measured by M2, grew by $5.5 trillion, a stunning 35.7% increase in only a year and a half, driven primarily by the Fed’s purchases of Treasurys and mortgage-backed securities. In light of anticipated Federal Reserve tapering, we estimate that by the end of 2024 the money supply will grow another $5.1 trillion.
Out of the total $10.6 trillion in new money, real GDP growth will drain roughly $1.4 trillion. Another $1 trillion will flow down the money demand drain. Since the amount of money flowing into the bathtub far exceeds the two outflows, the excess money in the tub—around $8.2 trillion—will hit the inflation overflow drain.
The huge monetary expansion—$5.5 trillion already in the bathtub—is starting to reach the overflow. Persistent, not transitory, inflation will be with us for the next two to three years.
Descriptions like that can't be ignored and they don't even amount to forecasts, they describe actual monetary and fiscal behavior as it has been studied over decades.
Those are the kinds of economists that Obama-linked economists such as Summers and Rattner likely don't want to become laughingstocks around by touting Joe's inflationary spendathon fantasies. Those kinds of economists amount to their academic peers, and they don't want to look like idiots in their presence, because they are persistently right.
That may well be why any economist who wants to maintain respect is now speaking out against Joe's spending plans. They have to if they don't want to look like morons when what happens, happens. That list includes Democrats.
Image: Daphne Borowski, via Wikipedia // CC BY 2.0
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