This Economy is Ugly in its Bones - Part 2
Market permabulls die because they act like pigs, obsessed with pushing their way into the trough for any scrap of food that remains. For example, people continue to invest in stocks as they face-plant into the hog's wallow again and again because they can only think of making money the way they have been used to making it. They believe that longterm trends that served them well are eternal.
They don't want it to be otherwise because that may mean making a lot less money than they have grown used to making, so they don't change and, because they don't change their feeding habits, they lose a lot more money. Right now investors need to seriously re-frame the picture they hold in their minds of our economy. We have all recently and repeatedly been fed the delusion that the economy is strong and resilient. Not true. This pig is parked. It's hunkered deep in mud of its own making now, and it's not about to rise for a considerable time.
Those who keep futilely trying to bid the stock market up believe the economy will ease the Fed's conundrum by skirting recession. That's absurd. How can you tighten into a recessionary quarter at the fastest rate of monetary withdrawal in history with the worst supply breakdowns across the globe any of us have experienced, unless we lived through the dust bowl years, and not push the nation deep into recession?
Add to that all the economic crushing that inflation is already doing to the economy as it has finally reached the point of forcing people to make conservation choices with their budget, and it is completely delusional thinking. This pig is ugly, and the talking heads who are smearing lipstick on it, aren't doing either their viewers or the pig any favors. So, let's get real.
Inflation is insidious
Look at those who bid stocks way up as soon as the government's Consumer Price Index was reported to have made a minuscule dip. "Ah! The pressure's off. We can fly again!" was the knee-jerk response that sent the pigs leaping into the air. Only if pigs can fly. Then some disillusioned investors must have finally stopped thinking about a searing 8.3% CPI rate with such ease, because the market returned to falling out of the clear blue sky the next day.
I won't pretend to know what sense got knocked into their porcine heads, but I will point out what IS sensible. Sensible is to note that a one-time 0.2% divot in CPI after a nearly straight-up rise for a year is barely taking a breather. Would these same people conclude a bull market was putting in a top if it soared for a year and finally dropped 2% one month? Of course not, and that is a rest that is ten times worse. Double standards in how we assess things based on what we want to believe keep delusions alive.
Nothing rises in a straight line. Not even piggish bull markets. So, pauses along the way and even dips are to be expected, especially as we come up on year-on-year comparisons for CPI that match up against previous years of climbing inflation, making it harder numerically to beat the upward grind of months that compared year-on-year to almost no inflation.
Even if inflation leveled off at 8% for months to come, that still makes everything, including real GDP, worse for that months to come. It keeps eating at your pocket book, eating at business earnings, and keeps getting subtracted from all growth numbers because all stats reported in dollars right now are merely showing the growth of inflation, not actual improvement. Eight percent inflation is a sweltering pea-soup cloud of sulfur dioxide that settles in over all of our heads and slowly weakens us with heat prostration.
Think CPI is high? Wait until it prices in inflation!
While straight lines in economics almost never happen, inflation has run in a steep, straight line for an entire year. Take a look at just the two measures used to calculate the housing-cost component of CPI:
You don't get any straighter than that! Nor ever have we seen steeper. So, after scrambling straight uphill, one can imagine the rental and home-buyers markets (blue line) might be taking a breather, and certainly everyone who rents will wish it means they are topping out. Likewise, if the black line representing the housing bubble is getting ready to roll over and pop because mortgage rates are now screaming higher like little girls on a roller-coaster ride, then the CPI housing numbers all will soon be going back downhill, right?
Au contraire! Even if rents and house prices have topped out, CPI housing measures certainly won't. I used to think CPI's contrived housing measure had about a 6-12-month lag time. (I've discussed a few times how contrived CPI's housing metrics are, so I'll leave that one alone this time.) Turns out that lag was conservative on my part. Some people that I am reading now say the lag time between actual price increases and CPI reporting them is really 12-24 months. Let's take twelve as the compromise figure. That means what you see in the housing component of CPI in the graph above is last year's March numbers at best! And we all know how much housing ran higher after that! ALL housing inflation that has come since still has to price into CPI.
CoreLogic's single-family-home rent index showed this past February's actual rent rates as being up 12-14% higher than last February's. So, there is still that much more to get priced into the CPI numbers that are just now fully reflecting last year's increases. Now, that doesn't mean CPI will go up by 12%. While that's the average amount advertised rental rates went up, one has to factor in how many rents don't rise because landlords often, even after a one-year lease expires, don't raise their rates as much on longstanding good tenants as they do on new applying tenants because they want to hold on to the good ones. So, the average listing rate runs a little higher than the average of all rents actually being paid.
Still, I see a tsunami of additional housing inflation far off shore that still has to wash over CPI, and the housing component (rents and cost of buying a home) constitutes 25% of CPI. So, anyone thinking the tiny dip we saw in the last CPI print means much, should consider that used autos plunged a lot during the last month measured, but housing has a lot more to wash inland for many months to come. Consider this lull that part of the tsunami where the water rushes out before it rushes in even faster and higher.
Producer prices show no reprieve
If you want to see whether CPI is topping, don't look at CPI; look at the number leading into CPI. Before prices rises hit consumers, they hit producers. Having given you some idea of the consumer prices that have already hit, but that are not even factored into CPI yet, let's look at producer prices that are still going to hit consumer prices.
As you can see in the following graph, some producer prices may have put in a top because some categories recently started going back down, while others are still rising, albeit not as quickly:
That shows some promise, but there are two factors here that change the picture considerably from what you get at first blush.
The first is that there is a lag time between changes in the prices producers charge and the prices retailers or others charge to consumers. Producer prices usually involve a middleman -- a wholesaler, a retailer, a dealer -- someone between the producer and the consumer. That means a lag in how producer price increases pass along.
Take warehousing and transportation for example: If you are a retailer paying for transportation to get products to your warehouse and paying the person you rent your warehouse from, then there will be a lag between your transportation and warehousing costs going up and the prices you charge your customers going up, depending, for example, on how many items coming out of the warehouse were transported months ago, versus how many at the newer, higher price, etc. Any items being moved from your warehouse and sold now that were transported to the warehouse months ago won't need to include the rise in transportation prices to the warehouse and needn't include a full year of rent increase on the warehouse if your lease rate only rose two months ago.
That leaves you less pressured for awhile to raise prices on your customers where you risk losing customers to your competition if he or she holds off for the same reasons. Eventually, however, you have to start passing those increases along. The warehouse acts as price buffer.
In the same way, the decline in producer or service prices will take time to pass through to consumer prices. The lag time for pricing in those steep rises and recent declines shown in the graph will vary with every sale and service on the consumer side. Some items where producer prices are now falling will still be pricing through their earlier increases on the consumer end. Let if suffice to say, producer prices appear to be putting in a top, but the full amount of rise they've already seen has not been priced through to consumers yet.
That said, don't be fooled! Just when you think a drop in producer prices or even further up the pipeline in producer's costs for the resources they use has arrived -- even a massive plunge on the production-end prices -- they do like the black line in this graph:
Where's the top? How do you know the latest ongoing rise in that graph won't continue until it tops the last two false summits? And that brings me to the second thing I said you have to factor in:
What could cause the decline in producer prices and input costs to suddenly rise again, just as they looked to be abating?
Anyone hear of a war or sanctions recently?
Look back at the first graph of producer prices. Note that ALL of the price increases in that graph came as we experienced the repercussions to supply chains from all of our global Covid lockdowns, and then prices eased as Covid backed off some. More importantly, note that all of the decreases happened prior to the Putin's War or the West's sanctions. That means EVERYTHING happening on the producer side due to war cutting off supplies and due to sanctions cutting off supplies ALL remains to be priced in for producers before it gets handed along to consumers.
Oh, but that is not half of it. What about those recent supply/shipping logjams and production plunges in China I reported in my last Patron Post due to their zero-Covid policy? What if Covid does as it has more than once and washes over us with another wave, resulting in governments again choosing partial lockdowns that restrict commerce? I'm willing to predict producer price increases see another wave of their own.
So, enjoy the breather represented by that dip from from 8.5% CPI TO 8.3% that made stock-yard pigs believe they could fly for all of a day. It's bound to be a short one. I have plenty more to show that will keep revealing why inflation will show no lasting mercy from its sweltering heat for some time, bring no reprieve to the Fed's furrowed brow, and neither soften its landing or ease its tightening.
Inflation's pain will continue until recession becomes depression and suffocates the inflationary inferno ... unless the Fed capitulates to recession and decides to print money. In that case, more money in the face of shortages will drive inflation into hyperinflation. Either path is deadly. There is no easy out for the troubles the Fed has already helped create and that governments everywhere are now compounding with their lockdowns, wars, and sanctions.
Some of the additional oxygen to the fires of inflation, I'll share with all readers in my next article, and a good portion I will reserve for my Patrons to saver as my thanks for your continued support.