Just An Inch

“Prices are up hardly at all, just an inch” says Joe Biden when reported inflation was up from 8.2% to 8.3%. Joe, what are you going to do when the SPR is empty? And China invades Taiwan? In wintertime?

One Thing Right

Fed Chair Powell got one thing right: He observed that the current situation was outside historical norms. Well, duh. This is the largest, most extreme financial bubble in history, so throw away any analysis that depends on history.

During the last two or three decades, China took over as the workshop of the world and flooded the rest of the world with cheap goods, largely suppressing inflation while destroying the goods-producing cores of western economies.  Governments and central banks did “whatever it takes” to support employment by lowering interest rates and monetizing government debt. But, as in California’s forests, fuel built up as fires were suppressed, in this case piles of cash instead of dry underbrush. We do know that government deficit spending is the primary cause of inflation. As China’s growth sagged and supply chains reached their limits of capacity, government deficit spending accelerated… and here we are.

Where do we go from here? No-one knows, we are in uncharted territory. Governments continue to spend like drunken sailors, but at least the Fed has stopped monetizing the debt with its balance sheet around 36% of GDP (against a historical norm of around 6%). Japan continues to lead the monetizers, with the BoJ balance sheet now around 135% of GDP, forcing the Japanese government to intervene in forex markets to prop up the yen this morning, for the first time in 24 years. This observer would welcome to a return to more peaceful times, where the world did not revolve around central bankers roiling markets and economies while attempting the impossible. Pass the peanuts.

Success In Corporate America

I’ve always believed that there are three keys to success in corporate America – being in order first lucky, second tall, and smart a distant third.

Here is confirmation that #2 is correct.

A Las Vegas surgeon reports tech workers are paying $70,000 to $150,000 to get surgery to increase their height by 3-inches

…. According to a 2009 study of Australian men, short guys make less money than their taller peers (about $500 a year per inch); are less likely to climb the corporate ladder (according to one survey, the average height of a male Fortune 500 CEO is six feet)

The Cash Economy

Large-scale money printing was launched by Alan Greenspan, who believed that additional liquidity would be needed to cushion the shock of the millennium rollover. The shock never happened, but the easy money continued as the dot-com bubble popped, eventually leading to the housing bubble and its culmination with the failure of Lehman and the 2008 financial crisis. The Fed’s response was to turn on the afterburners. The December 2007 monetary base was 0.84 trillion dollars. By December 2019, it had risen four-fold to 3.4 trillion. And the the Fed lit the JATO bottles as well and we got real liftoff, as by December 2021 the monetary base had risen to 6.4 trillion dollars.

This matters because it means the economy is awash in cash. Monetary velocity has fallen from a pre-2009 low of 1.65, set in Q4 of 1964, to 1.15 as of Q2 of 2022. That means that much of the cash is idle, not being spent. All that cash is buying power in the hands of people and institutions. This means that interest rates and availability of credit are less important, and the Fed’s mission to reduce inflation by reducing demand faces an uphill battle. The Fed has begun reducing the monetary base by selling its pile of Treasuries and MBS. This is far more important than raising rates, but it will be a long time before its effects start to be felt because the current position is so extreme.

The poster child of the 2008 crisis was the NINJA (No Income, No Job or Assets) home buyer. The NINJA borrower has been replaced by the US government. Federal debt has nearly quadrupled since 2008.

fredgraph

fredgraph

This is why we have inflation. It is not going away until the deficit spending is reined in. Every dollar of new federal debt becomes a dollar in savings – and potential spending – for the private sector.

Where The Fugawi?

The flightless Fugawi bird lives in the tall grass of the African savannahs. Unfortunately, this bird is not as tall as the grass that surrounds it, hence its mournful call. The mavens of Wall Street seem to share the bird’s frustration as they focus on fractional changes in economic data, in the hope that they will foreshadow a return to the peaceful, sunlit uplands of free and flowing money.

Alas, it is not to be. We are fated to do battle with the multi-headed Scylla of inflation and, if we win, it is only to be sucked into Charybdis’ whirlpool of depression. Massive increases in government debt have, inevitably, increased private sector savings and pulled consumption forward in time. If these increases continue, Scylla will dine well as hyperinflation ruins the dollar. If they do not, consumption will, of necessity, fall as the credit impulse reverses. Charybdis’ whirlpool is a fine metaphor for the negative feedback cycle that will result from bankruptcies and defaults. If I do say so myself.

Jeff Gundlach Interview

Jeffrey Gundlach is the billionaire founder and CEO of DoubleLine, a Los Angeles based investment boutique mainly specializing in bonds, ranks among America’s highest-profile investors. His bold calls and correct prediction of the 2007 housing crash have earned him a solid reputation. A recent interview is most interesting in that he clearly, if intuitively, understands the instability inherent in the Fed’s attempts to control the economy by hindsight.

The next shock is that we’re having to put in a big overreaction to the inflation problem which we created from our initial reaction of excess stimulus. My guess is that we will end up creating momentum that’s more deflationary than a lot of people believe is even possible.

Of course he is very probably correct. A deflationary economic collapse is very likely to follow the inflationary phase. So long as the Fed is willing to make massive interventions in the economy without understanding the dynamics of control, we are utterly screwed. There comes to mind a well-known class of control systems known as bang-bang control.

Dummies?

When seeming professionals propose ideas that are internally contradictory I really start to question professionalism in the financial services industry.

The idea proposed was that since inflation was caused by limited supply, which the Fed cannot control, the Fed would simply raise its inflation target and resume easy money to resume growth, driving stocks to infinity and beyond.

Excuse me, but doesn’t limited supply itself limit growth?

Since when has the Fed ever been able to control supply? The money printers go b-r-r-r but there are no gas wells or potash mines at the Fed building. The Fed’s manipulations are intended to control demand.

And by the way, how is the economy to grow when businesses wanting to expand cannot hire the employees that they need?

The bubble is still with us.

China

China sports the second largest economy in the world and its hyper-stimulated growth over the last decade has boosted growth in the rest of the world, including the US. Right now, however, the Chinese economy is foundering. Its struggle to stamp out Covid continues, with two major cities, Shenzen and Chengdu entirely or mostly in lockdown. Chinese investors have chosen to speculate in residential housing rather than the stock market, leading to a giant property market bubble with hundreds of thousands of empty or unfinished apartments overhanging the market. August sales of new units were down 33% y-o-y. Both drought and flooding have plagued the country this summer, leading to the same difficulties with agriculture and transport seen in Europe.

The Chinese government has responded with yet more stimulus, widely seen as inadequate given the magnitude of the economic problems. These problems will have a negative effect on the rest of the world.

Yet Another “You Can’t Make This Stuff Up”

Promptly after California issued its electric car mandate, the grid operator is asking people to avoid charging electric vehicles over the coming Labor Day Weekend, in order to avoid blackouts.

“The power grid operator expects to call on Californians for voluntary energy conservation via Flex alerts over the long weekend.

During a Flex Alert, consumers are urged to reduce energy use from 4-9 p.m. when the system is most stressed because demand for electricity remains high and there is less solar energy available. The top three conservation actions are to set thermostats to 78 degrees or higher, avoid using large appliances and charging electric vehicles, and turn off unnecessary lights. Lowering electricity use during that time will ease strain on the system, and prevent more drastic measures, including rotating power outages.”

My Volt gets most of its charging at night, when it is not in use. The electricity to charge electric cars has to come from somewhere. Looking at the weight of these vehicles, my guess is that the total energy consumption of these vehicles is higher than the IC vehicles.

If we want to get off fossil fuels, it is necessary to replace them as the base load source. And that means nuclear.

Artemis Scrubs Again

This morning’s planned launch of NASA’s ludicrously expensive SLS rocket was scrubbed – again – due to a fuel leak. It is way past time to call a halt to this boondoggle. I quote from the report from NASA’s Office of Inspector General released in November 2021:

“In addition, NASA lacks a comprehensive and accurate cost estimate that accounts for all Artemis program costs. For FYs 2021 through 2025, the Agency uses a rough estimate for the first three missions that excludes $25 billion for key activities related to planned missions beyond Artemis III. When aggregating all relevant costs across mission directorates, NASA is projected to spend $93 billion on the Artemis effort up to FY 2025. We also project the current production and operations cost of a single SLS/Orion system at $4.1 billion per launch for Artemis I through IV, although the Agency’s ongoing initiatives aimed at increasing affordability seek to reduce that cost. Multiple factors contribute to the high cost of ESD programs, including the use of sole-source, cost-plus contracts; the inability to definitize key contract terms in a timely manner; and the fact that except for the Orion capsule, its subsystems, and the supporting launch facilities, all components are expendable and “single use” unlike emerging commercial space flight systems. Without capturing, accurately reporting, and reducing the cost of future SLS/Orion missions, the Agency will face significant challenges to sustaining its Artemis program in its current configuration.”

As soon as SpaceX’s Starship is ready, SLS is obsolete. And SpaceX’s first test vehicle is on its pad, doubtless as a metaphorical finger to the government efforts. SLS is based on obsolete Space Shuttle technology, using leftover engines and the familiar orange tank. There was a time when NASA’s space program was inspirational. Now Congressional corruption has sunk it to a way to funnel money to the contractors. It is an embarrassment.

Edit: Turns out the scrub was due to an engine problem, the fuel leak had been resolved.