"Rising Inflation and Bill’s Doom Index"
by Bill Bonner
OUGHAL, IRELAND – "Oh my… look up. There it is. Our old, tattered Black & Blue… Our trusty “Crash Alert” flag, proudly signaling the alarm. Yesterday, we saw consumer prices moving up. And we saw how the supply of “money” is far outstripping the supply of goods and services you buy with it. So far this century, the Federal Reserve’s balance sheet (a rough way of keeping track of the supply of dollars) rose 15 times. U.S. GDP (an equally approximate measure of output) only doubled. That is the classic definition of inflation.
Today, we’re going to look at what kind of inflation it is… and how long it will be with us. Is it “transitory,” caused by a booming recovery and trillions in stimmy money. Or has it come with big suitcases and its favorite pillow… as if it intends to stay? We’ll come back to those questions. But first… the big news…
Crash Alert! Our Doom Index is registering an 8 – which is Crash Alert territory. We created the Doom Index a number of years ago to improve on our (often faulty) intuition. It tracks 12 key indicators to try to detect when there are dangerous excesses in the economy and markets are out of whack. Yes, you can see the full report on the latest Doom Index Reading here. But here’s the short version from our ace research team:
The chart below shows our Doom Index levels by quarter. The red bars indicate a reading of 8 or higher. That’s when we raise our “crash alert” flag and tell investors it’s time to prepare for a market crash. The last time we raised our “crash alert” flag was at the end of Q2 2019, when the Doom Index hit 8. We stayed in the “Danger Zone” for the next four quarters.
Economic conditions improved slightly in the second half of 2020, as evidenced by our Doom Index reading dropping to 7 for Q3 2020 and Q4 2020… Our recent Doom Index reading – based on the Q1 2021 data – is 8… which means we’re raising our tattered “crash alert” flag.
[…]it appears that the stock market is getting way ahead of the economy… Nearly all stock market valuations are at all-time highs, investors are using more leverage, junk bonds are looking riskier, and of course… the feds keep printing.
More Inflation Sightings: Meanwhile, we looked at some of the inflation sightings yesterday. Here’s The Wall Street Journal with more: "Americans accustomed to years of low inflation are beginning to pay sharply higher prices for goods and services as the economy strains to rev back up and the pandemic wanes. Price tags on consumer goods from processed meat to dishwashing products have risen by double-digit percentages from a year ago, according to NielsenIQ. Whirlpool Corp. freezers and dishwashers and Scotts Miracle-Gro Co. lawn and garden products are also getting costlier, the companies say. Some consumers are feeling stretched."
No Big Deal: But don’t worry. Jerome Powell at the Federal Reserve and Janet Yellen at the U.S. Treasury both assure us that inflation is no big deal. The Fed is still “printing” $120 billion per month… trying to overcome the “low inflation” threat. According to Powell, the nation’s economic health is threatened not by inflation, but by the lack of it… that is, by persistent Consumer Price Index (CPI) readings below 2%. He thinks stable prices somehow inhibit growth.
As for Yellen, she believes the feds can hit whatever pitch comes their way. Here’s what she confidently told a Wall Street Journal CEO Council event last week: "I don’t think there’s going to be an inflationary problem. But if there is, the Fed will be counted on to address them." That settles it for us. Nothing to be concerned about. There is no inflation. And if there were any, just as a hypothetical, the Fed would smash it out of the ballpark. And Ms. Yellen should know. She used to run the Fed.
Intellectual Exercise: But… just in case – not that we’re doubting Ms. Yellen… or second-guessing the Fed – but just as an intellectual exercise, for our amusement… what if they’re all not really up to playing in the Major Leagues? What if they are better suited to the Special Olympics?
Before last Friday’s jobs report came out, Ms. Yellen suggested that interest rates might have to go up to contain rising price inflation, caused by a robust recovery. That is, she said she was concerned about “overheating,” whatever that is. Then, after stocks began to fall, she backtracked, letting the speculators know that she didn’t really mean it. In the space of less than 24 hours, she determined that the economy’s temperature was just right after all. She must have breathed a sigh of relief on Friday. The employment numbers made it clear that the economy is not heating up; it’s cooling off.
Phew! This takes the pressure off Yellen and Powell to “address” the inflation issue. But only by misunderstanding the nature of the inflation – which both Ms. Yellen and Mr. Powell are eager to do. More like “Marvelous” Marv Throneberry than “Boog” Powell, both want to win the game… but neither has any idea how to play it. They believe that inflation is purely cyclical, caused by rising demand in an expanding economy. (They also believe they can cause the economy to expand by pretending, that is, by inflating the money supply to look like real demand is increasing.)
Double Act: But this is no natural cyclical inflation. It is systemic. It is not driven (or, at least, not entirely) by the business cycle. Instead, it is man-made… caused by the two illustrious strike-outs themselves – Yellen weighing down heavily on the White House’s fiscal bench… and Powell heading up the Fed’s monetary team. The fiscal team spends. The monetary team prints. And they’ll both keep at it until the final inning… when the game is lost."
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