I Have To Laugh

Inflation numbers, like most economic data, are noisy in the short term and highly dependent on the weighting of the various components. That’s why we have both CPI and PCE, “headline” and “core” and even “supercore”. There are many other measures like “trimmed-mean”, “median”, “sticky” and so forth. The St. Louis Fed’s list of inflation charts – just the headings – runs to 30 pages. But financial commentators cannot resist the temptation to cherry-pick the data that supports their personal thesis and throw out the data that doesn’t (must be “transitory”) and declare imminent victory over inflation. Yes, the economy is quickly rotting from the inside. But there is no historical basis for believing that a recession will bring inflation down, at least without a financial crisis much bigger than the 2008 GFC. This is not to say that such a crisis won’t happen, but that is a separate matter from re-arranging the tea leaves to extract the desired prediction from the current data.

Credit John Hussman to use actual data and observe that the best predictor of inflation is… (drum roll) year over year inflation. But you don’t need to know that. All you need to know is that the Federal deficit for the first six months of FY2023 was $1.1 trillion. Federal revenue for the whole year is budgeted at $4.71 trillion. This means the Federal government is spending roughly 50% more than it takes in. That, ladies and gentlemen, is where inflation comes from. To make matters worse, its partner in crime, the Federal Reserve, is no longer converting that deficit into interest-free cash (QE) but is letting its Treasury portfolio roll off at maturity(QT). Now the Feds have to issue new interest-bearing debt, plus replace the existing debt as it matures. As of Q1, the interest bill alone was $929 billion, up 54% from the same quarter of 2022. Roughly half of all $32 trillion in federal debt matures in five years or less and must be re-issued at then-current rates.

I may laugh at the data manipulators, but this is a picture of a slow-motion train wreck where you and I are the passengers. The train driver sees no problem and is unwilling to even discuss applying the brakes, although brakeman Powell has started to turn the wheel. I am reminded of an incident that happened when I was in high school. I had a summer job working on a maintenance crew for a property developer. One morning I came in and the boss called me over “Grab your lunch and one of those folding chairs and come with me. You’ve got a watch, right?” “Yes,” I said and did as told. We drove out into the countryside and stopped by the side of the road. There was a buried concrete vault with steel doors on top, which we opened to reveal a large pipe and valve with an equally large wheel. You could hear a rushing noise. “This,” said the boss, “is a 36-inch water main. As you can hear, it is in use but we need to shut it down to do some work on it. Your job is to turn that wheel one quarter-turn every 15 minutes. If you turn it too fast that pipe is going to jump right out of the ground. Understood?” I acknowledged and he demonstrated and left, saying he would pick me up for quitting time. (IIRC I was being paid $0.80 an hour. but saved enough to buy my first car, a $1895 Mini Cooper with parental matching funds.)

Back to the subject. Powell is turning his wheel a quarter point at a time. Is he turning it too fast? We’ll only know if the financial system has a heart attack. Is he turning it too slow? According to Bloomberg, Venezuela is raising its interest rate to 97% on Monday. That’s what happens if he is too slow. When is quitting time?

Sources: https://fred.stlouisfed.org/tags/series?t=inflation&et=&pageID=1, https://www.washingtonexaminer.com/policy/economy/deficit-soars-to-1-1-trillion-for-first-half-of-fiscal-year-2023, https://fred.stlouisfed.org/series/GFDEBTN/, https://fred.stlouisfed.org/series/A091RC1Q027SBEA

That’ll Buff Out

Well I got that one wrong, fortunately my trading system had no dog in the hunt. Yes, Powell did hint at slowing rate increases. But the markets were shocked, shocked I say, by his acknowledgement of the 15 years of futile attempts to curb inflation before Volcker took matters in hand. That an economist should consider history rather than models and calculus is pretty much unprecedented, at least in modern times. His academic credentials may be called into question. The calculus thing was introduced because economists – it was called, correctly, “political economy” at the time – felt they were underpaid, relative to the physical sciences, and therefore needed to emulate them. It helped their prestige but not their forecasts.

Sarcasm aside, it’s a good thing. But the bad thing is there is way too much money in circulation. Consider the following mantra from Milton Friedman in 1963, years before the 1970s inflation.

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

Then please consider the following:

That’s going to take a lot of buffing. And yes, Mr Powell, it is the product of years of central bank economic idiocy and arrogance. First chart St. Louis Fed, second John Hussman.

Inflation Projection

John  Hussman posted an inflation estimate on his Twitter account.

Just One Chart

When you buy shares in a company, you are really buying a share of the stream of profits yet to come. This chart from John Hussman shows what is going to happen as labor reclaims its share of company income.

The extra profits in the early 2000s were financed by the housing bubble, while the recent spike is mostly the result of massive government deficit spending on subsidies and handouts of various kinds. These are coming to an end despite the best efforts of the Dems to blow up inflation.

Choice

I just have to include this quote from John Hussman’s latest screed:

“the Federal Reserve has fashioned itself into a reckless circus clown handing out lollipops to diabetic toddlers. Having taught them that they will be continually appeased, regardless of the long-term consequences, even a “taper” is now met with wails of surprise, crisis, and tantrum.”

Small Craft Warning

Looks like the time is right for financial hurricanes.

Playing With Fire

Warren Buffett’s market valuation metric is a simple one – The market capitalization of  all U.S. equities (financial + nonfinancial) as reported in the Fed’s Z.1 flow of funds data. divided by GDP.

In 1999, Buffett said “If the ratio approaches 200% you are playing with fire.” Which it did in 1999 and 2000. The ratio is now about 275%.

A similar but not identical indicator is the Wilshire 5000 market cap, which reached about 140% in 2000.

Oh

Just read a tweet on Hussman’s feed: “And implied volatility feeling like the tide before a tidal wave.” Powerful image. Recording it here to see if it plays out.

Bitcoin

John Hussman on Bitcoin:

Should be obvious why a wildly energy-inefficient, closely-held token from a replicable app with no fiat or reserve tether to the payments system and can only process ~2500 transactions every 10 min (vs ~2 million for the USD) should have 1/6 the cap of the U.S. monetary base.

Just for reference, the VISA credit card system is capable of processing 65K transaction messages/sec. That’s 30 million transactions in 10 minutes. Yes, that’s on a global basis, not USD only, but Bitcoin claims to be global.

John Hussman

Much as I respect John’s careful analysis, he is not in the same class as Sir Winston, a genius and leader as well as a master of the bon mot. But John’s tweet from a few hours ago was too good not to preserve:

Well, when you’re livin’ in a van down by the river, at least you can say you had the balls to stay bullish at the most extreme valuations in history, with negative 10-12 year return estimates, lopsided bullishness, and the spu pushing through its upper bands at every resolution.