Inflation & the US Dollar
Originally published in TDV May 2021 Issue and edited for clarity
Inflation is Coming Here
The April CPI rose 4.2% year-on-year as against the forecast of 3.6%, while core CPI (excluding energy and food) printed 3%, as against the forecast of 2.3%. As we mentioned in the options trade update, the increase in the CPI rate was the fastest since September 2008, while the monthly gain in core inflation was the largest since 1981. This print should come as no surprise. Ed has been beating the drum on higher inflation ever since the plandemic began. In the March Dispatch, Ed explicitly predicted that the year-on-year rate of change was about to soar due to unfavorable comparison with the low base set last April.
Investors responded to the news by slamming gold and stocks and bidding up the dollar. Why? 'Cos deflation.
Let’s have a quick peek at how that’s going.
Maybe that’s all just one thing, let’s have a closer look.
While it is hard to ignore signs of rising price inflation, which are everywhere, including in your friendly neighborhood supermarket aisles, investors are still talking about deflation.
Hoisington Investment Management, a prominent bond bull shop put it this way:
"Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year-end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation."
The inflationary psychosis? There is nothing untoward, presumably, about a central bank zero interest rate policy that has lasted 13 years because the central bank can’t withdraw it. I guess there is nothing out of the normal here, never mind the fact that money growth rates are well above the historic average everywhere, or how that has led to record debts in peacetime. The only psychosis we see is the one you get from having your head in the sand for too long. Forget about all that though because according to the above view,
"when money [supply] increases and velocity falls, the money is trapped in the financial markets and has only a minimally lasting impact on the real economy."
Nothing to see here, folks! This inflation is only transitory and will have only a minimally lasting impact. The trend is still towards deflation. If lumber prices double or triple, that'll only be transitory. Don't worry, all the money being printed is trapped in the financial markets. Even stimulus checks go right back to the stock market via Robinhood.
Of course, our readers already know what’s wrong with that premise because Ed has debunked the velocity concept many times, including in the newsletter last May. The above sentence is essentially just a rationalization of things from someone that is unacquainted with the development of economic theory since Irving Fisher. Hazlitt and Rothbard and others have shown that velocity is not an independent variable that causes anything. It is the outcome of a formula that disregards the concept of demand for holding money.
Frank Shostak made that point just a couple of months ago in his article, titled: “No, Drops in Money Velocity Don’t Offset Money Printing”, where he notes,
“According to popular thinking, the sharp decline in money velocity since June 2008 is likely to neutralize recent strong money supply increases’ effect on price inflation ahead. But because of massive monetary pumping by central authorities, the yearly growth rate of the Consumer Price Index, i.e., price inflation, is in fact likely to strengthen in 2022. This increase in CPI inflation is likely to take place notwithstanding the sharp decline in the velocity of money.”
What's truly amazing is that it only takes a few dumb soundbites fed at opportune times to the media and traders are quick to dismiss all the evidence on inflation and just go with the deflation narrative.
Acknowledging that the Fed has gone too far and needs to rein in its money printing doesn't sit well with the current administration. Not with the March budget deficit at $660 billion, the third-highest monthly deficit on record, with the budget deficit for the last 7 months already surpassing $1.9 trillion. And the spending spree is only getting started, with the administration already working on the next stimulus bill.
Naturally, the Fed and Treasury would like to stave off inflation fears as long as they can. To quote George Soros,
"economic history is a never-ending series of episodes based on falsehoods and lies, not truths."
In this case, we can see through the popular narrative and get at the truth. The truth that inflation is rising.
We are not alone in seeing this.
According to BofA Global Research, the number of mentions of “inflation” during earnings calls of companies included in the S&P 500 index has more than tripled year-over-year per company, the biggest jump since 2004. Historically, the tally “has led CPI by a quarter with 52% correlation and points to a robust rebound in inflation ahead. The strategists said raw materials, transportation, and labor were cited as “major drivers” of inflation during the calls. Many companies plan to raise prices because of the higher costs or have done so already, with inflationary pressures noted in sectors including consumer, industrials, and materials,
according to the note.
Cost pressures are rising across the board, affecting every industry.
Container freight rates are soaring.
According to Bloomberg,
"stubbornly high shipping expenses for businesses are getting sealed into contracts for the next 12 months, forcing companies to pass the extra costs on to consumers".
This is occurring in a backdrop of container shortages, which is exacerbating the problem.
Nike already reported a 11% decline in revenue in its North American segment last quarter, due to supply chain bottlenecks caused by global container shortages and U.S. port congestion.
Dry bulk (iron ore, coal, grains, soybeans, etc.) shipping rates are nearing 11-year highs, driven by surging demand for imports into China.
Domestic transportation costs are also rising. The Cass Indices, which track freight costs in the US, show freight rates and total transportation expenditures at decade highs. According to Knight-Swift Transportation (NYSE:KNX), the largest truckload carrier in North America, wages for recently certified drivers have jumped by 40% or more in recent months. The
company said its driving-school graduates are on track to earn more than $60,000 a year in their first year after training. And the trucking companies are still worried about the shortage of truck drivers and spare parts.
Gasoline prices are nearing 7-year highs heading into the summer driving season.
Even billionaire establishmentarian Warren Buffet has gone off script and called out the Fed on inflation. At Berkshire Hathaway’s AGM this month, Buffet said his companies are seeing substantial inflation.
“We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up.”
April jobs report disappoints dollar bulls
The April jobs report came in below expectations, with nonfarm payrolls only rising 266,000 versus expectations of one million. Total employment is down 8.2 million since the pre-plandemic level. The dollar fell slightly on the news as investors expected the Fed to continue its loose monetary policy.
The Fed is still influenced by the Phillips Curve, a Keynesian concept that posits a false tradeoff between inflation and unemployment. According to the theory, there is no threat of inflation as long as unemployment is high. But if we step off the Keynesian paradigm, there's a term for that we are seeing - emerging signs of a stagflationary environment. Like the '70s after Nixon closed the gold window.
Implications for the US Dollar
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
— John Maynard Keynes in The Economic Consequences of the Peace
The Fed is caught between a rock and a hard place. In their view, raising rates will kill the already anemic recovery and increase unemployment. Not raising rates while inflation rages will indicate the Fed has lost control, which would be a disaster for the stock and bond markets protected by the Greenspan- Bernanke-Yellen-Powell put.
For now, I expect Fed officials to stick to the inflation is transitory narrative. It's the path of least resistance. As expected, Fed governor Waller already came out on the speaking circuit saying that the Fed needs to see ‘several more months of data’ before determining when to adjust policy.
The plandemic saved them from having to raise rates last year. And gave them a ready scapegoat to blame the stock market crash on. Perhaps there's another deus ex machina solution working its way through the bankster controlled Deep State to help them out of this mess. Unlikely, but I wouldn't put it past them.
'Absent another shock event like last year, the coming inflation should absolutely destroy the dollar as well as US stocks and bonds. As Ed has repeated in these pages over and over again, the USD is the most overvalued, overowned currency on the planet, a legacy it inherited from its status as the world's reserve currency. That status is now fading, with demand for the dollar as a reserve falling to a 25-year low.
This is bullish for gold and silver and should herald the end of the correction we have seen since the $2063/oz top in gold last August.
Don't forget to put the dollar cost average into our TDV stock portfolio. We have a page for each company in the portfolio where we post updates, including our latest guidance. We have also published our complete set of updates for April for your convenience.