"Hard Landing Ahead"
The rocky road to Argentina, the most important decision
in 40 years and the price of escaping hyperinflation...
by Bill Bonner and Joel Bowman
Dublin, Ireland - "Coming up for US deciders is their most important decision in at least 40 years. It can be reduced to a simple question: are we headed down the Argentine path, or not? The Argentines are champions of the world at soccer. What they don’t know about kicking cans down the road isn’t worth knowing. But what about the US? Where are we headed? That is not just a question for the authorities; it’s a question for you. If we’re bound for the pampas, better pack light…and bring lots of real money; you’re going to be glad you did.
That’s the ‘inflation route.’ “Print” money….and pay the costs later. And we warn you: the roads are rough…and dangerous. The deflation trip is no picnic either. But those are the two choices. When you deflate, you take the pain now. When you inflate, you take the pain, more of it, later. And by all means, don’t get on the wrong bus.
This Raggedy Plane: Here’s the situation now. Prices are falling (deflation). Commentators are joyful. ‘Inflation is beaten,’ they say. ‘A soft landing, after all.’ Charlie Bilello:
• "US Producer Prices (PPI) increased 2.75% over the last year, the 9th consecutive decline in the YoY rate-of-change and the lowest print since January 2021. PPI peaked at 11.7% in March 2022."
• Year-ahead business inflation expectations continue to fall, down to 2.8% in the latest Atlanta Fed survey. That’s the lowest we’ve seen since July 2021.
• Global Container Freight Rates (cost of 40′ Containers) are now lower than they were in February 2020 (pre-covid), down 87% from their peak.
• US Import Prices fell 4.6% over the last year, the largest YoY decline since May 2020.
• U.S. Asking Rents are lower than they were a year ago, the first YoY decline since March 2020."
But this raggedy plane has barely begun its descent. While some prices are falling, others are still rising. Shelter, for example, rose 8.2% in the latest reading – the biggest increase in housing since 1982. And transportation. Bilello: "The average monthly payment for a new car has skyrocketed to $777, which is nearly double the average payment in late 2019 (Kelley Blue Book data). Nearly 17% of consumers who financed a new car in the first quarter of 2023 had a monthly payment of $1,000 or more (a record high), up from just 6% in the first quarter of 2021 (Edmunds data)."
Taking the most common measure – the ‘sticky’ CPI, less food and energy – price inflation is actually going up, not down. It was mostly the falling price of oil that brought the overall measure down last month. But wait, oil may be going back up.
Inflation Volatility: What these numbers – some up, some down – are showing us is that inflation is far from beaten. It’s what happens when the feds spend more than they can afford year after year. And now the federal government is facing trillion-dollar deficits ‘as far as the eye can see.’ Yes, dear reader….inflation is always and everywhere a political phenomenon. And stopping it involves pain…political as well as economic. Push hasn’t yet come to shove, yet, but when it does the pain will come with it.
Greed & Fear reports: "A little noticed working paper by the Federal Reserve Bank of Cleveland, published in January (“PostCOVID Inflation Dynamics: Higher for Longer” by Randal J. Verbrugge and Saeed Zaman, 13 January 2023). This paper found that if the Fed really tried to reduce inflation to 2%, it would cause the unemployment rate to rise to 7.4%.
And here, David Stockman reminds us of the pain inflicted by the Fed in 1982:
• "Volcker pushed the real yield on the 10-year UST [Treasury bond]… from -3% in late 1979 to a peak of +9.3% in August 1983, sustaining that purgative real rate at +5% through early 1986. In the process, everything else fell into place:
• Unemployment… soared to 10.8% in Q4 1982, a victim of depriving the economy of unsustainable activity fueled by a decade of easy money.
• Real GDP …took a deep dive to -6.2% in Q1 1982, but with the fall of inflation came bounding back to +7.9% in Q3 1983 ;
• CPI inflation…which had stood at 14.6% on a Y/Y basis in late 1979, plummeted to 2.5% by Q2 1983.
And now, Stockman makes our point: "Accordingly, reversing bad policies inherently involves purging their macroeconomic effects. The estimable phrase “no pain, no gain” is rooted in the fundamentals of sound economics." So today, we end up where we left off yesterday, with a question: In today’s US, can policy-makers really stand the pain of a genuine fight against inflation? Or will they cave in under pressure from the rich – whose assets are collapsing in value ... and the poor – whose transfer payments are threatened by tightened federal budgets?
The answer – if Argentina is anything to go by: the pain of inflation may be much greater, over the long run….but the pain of deflation is more immediate. Push comes to shove, they’ll push and shove for inflation. More to come…"
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Joel’s Note: "As noted this week, Argentina provides a kind of “look around the corner” for America’s potential inflationary future. After a particularly nasty inflation print last Friday, which showed the Fin del Mundo registering triple digit inflation for the first time since 1991, the parallel rate for the local peso shot off like a rocket. From 400:1 on Friday… to 410:1 by Tuesday…to 430:1 as of this morning, the peso is disappearing before savers’ watery eyes.
Yesterday, at our local butcher, we overheard the woman in line before us inquiring about the price of her regular cut. After some lamenting and head-shaking, she left the store… with a half-kilo of ground beef. “Food or medicine?” read one somber headline in the Associated Press. “Peso slumps in parallel market as inflation soars” chorused the Buenos Aires Times.
Meanwhile, there’s growing talk on the street and the local news about “el hambre” (the hunger). For many, including the ~85% of retirees… who rely on paltry government pensions… the situation is getting desperate.
Locals looking to flee their rapidly depreciating fiat pay enormous premiums to convert their meager savings into gold, greenbacks, crypto, etc. Even so, their purchases are strictly limited… and closely monitored…
Of course, Argentina is a long way further down the road than most other countries, but the roadsigns are there just the same. Mercifully, the Argentine peso is also not the world’s de facto reserve currency. But it begs the question: what would Americans do if the dollar goes “full peso,” as Dan Denning described it in a recent correspondence? How many people have a Plan B… some gold under the floorboards… some silver coins… a crypto wallet… a foreign bank account… anything outside the State’s strangulating system?
According to BPR investment director, Tom Dyson, the “days of free money… are finished.” “Our core hypothesis is simple,” wrote Tom in yesterday’s weekly market note to members. “They blew up a gigantic wealth bubble by suppressing interest rates, printing money, bailing out bad investments and encouraging speculation. Now that era is over. The days of free money and low consumer price inflation are finished. We’re in a new period of rising interest rates, falling valuations and inflation volatility. It’s just getting started.”
