Weekly Investment Insight 09132021 – Inflation Pressure and Stagflation

1. Inflation is still trending higher. Inventory to sales reflects supply to demand. The everything shortage and price hikes mechanism is in full flow. This should be characterized as trending inflation. Check out the details from the Fed’s Beige Book.

“We need lower consumer demand to give supply chains time to catch up… recover efficiency… and break this vicious circle”: CEO of Maersk’s APM Terminals, one of the largest container port operators.

Today’s release of the Fed’s “Beige Book“ – an informal narrative of the economy as told by small and large companies in the 12 Federal Reserve districts – listed “shortage” 77 times, up from 19 times in January.

https://wolfstreet.com/2021/09/08/the-everything-shortage-price-hikes-plastered-all-over-feds-beige-book/

2. The CPI has broken out to multi decade highs, but it still underestimates inflation in its single largest item.

“Those, like the Fed, betting on “transitory” inflation, should be careful. If either OER or Rental prices show some correlation to reality, CPI could not only continue to run hot but could rise from elevated levels.”

https://realinvestmentadvice.com/bls-housing-inflation-measure-is-bull 

3. The Producer prices index also shows further price increases are in the pipeline.

“Producer prices that are input prices for consumer-facing industries are red-hot. But further up the production chain, prices are white-hot.”

https://wolfstreet.com/2021/09/10/up-the-price-pipeline-inflation-rages-at-20/

4. Deglobalization Will Steepen Inflation. Then what would happen if the Fed ended up increasing QE?

“In our analysis, the Fed will have no choice but to substantially increase its planned quantitative easing.”

While trading bottlenecks remain intense, budget finance requirements remain unresolved but will likely stay substantial. The chart above shows that the Fed’s QE has a significant and increasing budget financing component.

https://www.youtube.com/watch?v=evWtpSnDpSo

5. The probabilities for an extended stagflationary period have escalated.

The chart above shows that the Covid “stimulus” dwarfed previous packages.

“The scale and speed of this spending explains much, if not most, of the recent GDP growth. Putting an extra $14 trillion on top of normal government spending into a $20 trillion economy is a massive sugar high. It wasn’t a free lunch by any means; the national debt went up accordingly. But it still had a short-term stimulus effect.

The stimulus effect is now ending. The last round of $1,400 payments is either spent or banked. The extended and enhanced unemployment benefits ended this week in the states that hadn’t already canceled them. The small businesses who received payroll support are reaching the end of their rope.

Yes, Congress is considering a pair of infrastructure bills whose price tags, if they pass in the proposed form, will outweigh the prior COVID bills. But passage is increasingly dubious. (More below.) Even if they do, the spending will be spread over many years. It won’t come close to replacing the other programs that have ended, or will end soon.

For all intents and purposes, without more stimulus the economy is back on its own as the fourth quarter approaches—and basically where it was in late 2019. It may even be worse, considering changes to the workforce. Millions have died, become disabled, retired early, or are retraining for career changes. While this may be long-term positive in some cases, it’s not necessarily positive for the next quarter’s GDP.”

https://www.mauldineconomics.com/frontlinethoughts/the-return-of-stagflation

The upside of the stimulus is passing. The current budget deals to come may offset the short term cyclical downside, but the longer term cyclical downturn from the limits to deficit spending and QE distortions is far from resolved.

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