The Great Recession Blog

BlackRock’s Jean Boivin just said there are not apparent signs of stagnation — just inflation. What Bovine foolishness:

Prices have climbed around the world, with commodities prices surging and U.S. inflation hitting a 13-year high. It’s the first time since the 1970s that a supply shock is the main culprit. This is where the comparison ends. There’s no risk of 1970s-style stagflation, in our view. Economic activity is increasing briskly and has room to run.

BlackRock Weekly Commentary

How dense do you have to be as an economist to see so much of the following so well and, yet, not see at all what it is you’re looking at:

We have long held that inflation was one of the market’s most underappreciated risks. Now it’s here. This year’s surge is primarily driven by a major supply shock: the vaccine-driven restart of economic activity from the pandemic’s shutdowns. Producers have struggled to meet resurgent demand, clogged ports have increased shipping costs, and surging commodities have added to price pressures. These dynamics mark a sea change from the environment many of today’s investors know best: decades of low inflation on the back of deepening globalization and technological advances.

This reminds me of how only a tiny handful of economists could see the Great Recession coming when it was already here. Most economists could not see the recession when they were already standing in the middle of it. What abject failures at their own profession they were. So, let me point out the obvious, just as I had to do back then.

First, let me note that BlackRock even manages to see the most obvious correlation with the stagflation of the seventies (a condition that isn’t even necessary but that has suddenly risen all around the world to be as strong now as it was back in the seventies):

The last time a major supply shock drove up inflation was in the 1970s, when an oil embargo by producers triggered a spike in oil prices. Today’s oil price surge naturally raises the question of whether the economy is headed for 1970s-style stagflation, a period of high inflation coupled with weak growth.

The oil/energy crisis is already massive and global: (Just because it has not fully hit the US yet, does not mean it is not very bit as huge as what was seen in the seventies … or even worse.)

Power shortages are turning out streetlights and shutting down factories in China. The poor in Brazil are choosing between paying for food or electricity. German corn and wheat farmers can’t find fertilizer, made using natural gas. And fears are rising that Europe will have to ration electricity if it’s a cold winter.

The world is gripped by an energy crunch — a fierce squeeze on some of the key markets for natural gas, oil and other fuels that keep the global economy running and the lights and heat on in homes. Heading into winter, that has meant higher utility bills, more expensive products and growing concern….

It’s hitting the Italian food chain hard, with methane prices expected to increase sixfold and push up the cost of drying grains. That could eventually raise the price of bread and pasta at supermarkets, but meat and dairy aisles are more vulnerable as beef and dairy farmers are forced to pay more for grain to feed their animals and pass the cost along to customers.

“From October we are starting to suffer a lot….”

AP

The article above goes on to lay out manifold problems throughout the world in supply chains that will result in diminished food and supplies of all kinds already certain for months to come. While some dimwits claim the problem is purely due to high demand (to put a grand spin on it), other writers are smart enough and honest enough to state most of the problem comes from people being unwilling to return to work at ports and in transportation even after extended and enhanced unemployment benefits ended, and due to foreign ports being closed down, and especially due to a longtime and growing shortage of truck drivers.

With energy now in a global crisis, all the ingredients of the last stagflation are solidly in place, except for declining business in the US, according to BlackRock. However, hold on a minute! If you look at US GDP, as I did in my last article, you’ll see that even business is ALREADY rapidly plunging, too, leaving BlackRock’s statement that we don’t have stagflation because business is booming a projection without the support of a trend:

As a reminder, here is what I wrote about the actual trend last week,

To see proof that we are entering the stagflation I said this would turn into, let’s look at how Goldman Sachs has also revised its predictions for economic growth (annualized as what it would be if it held at that quarterly rate for a year):

“This is Stagflation, and Here is an Easy, Practical Idea to Prep for it“

• Prior to July, GS’s forecast for the second half of 2021 was +9.5% for Q3 and +6.0% for Q4.
• In late July, GS revised its forecast down to +8.5% for Q3 and +5.0% for Q4.
• On August 18, GS revised its forecast down to +5.5% for Q3 but raised its Q4 prediction to +6.5%.
• Last weekend, they revised Q3 down again to +4.5%, and decided their previous upward revision for Q4 was bassackwards and dropped Q4 to +5.0%.
• Finally, this weekend GS cut its GDP growth forecast to +3.25% Q3 and +4.5% Q4.

Plunging week to week by that much, it seems Goldman’s number runners just can’t keep up with the nation’s speedy decline. The Atlanta Fed predicts much worse. Now at a pre-recessionary 1.3%, the Fed’s predictions have plummeted continually as you can see:

Merely a nip above recession.

With so much evidence that GDP is declining faster than one can keep up with the fall, BlackRock is without excuse for failing to see the decline. In fact, a much broader array of bad conditions is in place than existed in the seventies. Yet, BlackRock predicts central banks will (and should) help save the day, even as they admit there really isn’t anything central banks can do about all of this:

We believe central banks with credible inflation frameworks will largely look through the restart price pressures – and avoid a premature tightening that hurts growth but does nothing to address the bottlenecks.

The fact is, nothing central banks do can address the bottlenecks, and the fact is, as I also pointed out in that last article, the Bank of England and European Central Bank have already started tightening, and the Fed has already indicated it will start to reduce the amount of slack it is creating in the system in November or December.

BlackRock’s ability to see everything around them but completely inability to understand what it all clearly means almost implies something darker than mere opacity of thought. Do they have a book of goods they need to offload to retail investors whom they need to energize in order to have a ready market to sell into? I don’t know, but I cannot explain, otherwise, how their economists can fail to see rapidly sliding GDP projections that others in their profession are reporting. Even if you grant them excuse for that particular blindspot, they cannot be excused for believing business will continue to boom just because demand is remaining solid! Continuing solid demand in the face of failed delivery of goods and services only assures that inflation will continue to boom, not GDP and not business. You cannot sell what you don’t have! You cannot sell what you cannot transport to market either.

On the basis of this obvious and rapid deterioration in GDP due to globally gargantuan supply-chain troubles and clear evidence that there is little to no hope of that reversing for months to come (for the reasons I and the videos below are about to remind people of), I predicted “What few of the gurus are telling you, which I will, is that we’ll be in a recession by sometime this winter.“

The winter of our discontent is already forming

Winter’s business chill is already here and is being reported everywhere. There is no excuse for being oblivious to something so obvious.

We all know at this point that supply-chain problems are increasing, not shrinking. That is what I claimed without hesitation over a year ago we would most certainly see. We also KNOW central banks can do NOTHING about that. Creating money won’t solve the supply-chain issues, it will only increase the prices for scarce goods. One of the big broken links in the chain is enough truckers, but President Biden already made absolutely certain that thousands of truck drivers will be fired in December for their refusal to get vaccinated, and truckers overall are not likely to be strong-armed by liberal presidents.

BlackRock notes the problem but denies its significance:

Supply capacity has been slow to come back online, resulting in bottlenecks and price pressures. Second, growth has room to run, we believe, with global activity well below its long-run potential. Supply will eventually rise to meet demand, instead of the 1970s experience of demand going down to meet supply.

Sure, supply will eventually come back online to meet demand, but when? As the last video above notes, if everyone does their best in a perfect world, the problem will not be resolved until the second quarter of next year! That is in an ideal world, best-case scenario. What likelihood of that is there in this new COVID world a a plague of surprises every quarter and in which politicians are deliberately adding to the wreckage with new vaccine mandates that will shut down hundreds of thousands of individual workers?

Even if those mandates do not make the problem worse (extremely unlikely), you’re going to see more empty shelves, more restaurants that cannot cook meals for lack of a few key ingredients; and the problem will not resolve until the second quarter of next year, at earliest, leaving businesses in the red well beyond “black Friday” if they cannot deliver the goods. Demand remaining strong will not solve the problem of more businesses failing because they don’t have enough products on their shelves or enough key ingredients for dinners to put on their tables. It will exacerbate it. It will make those things that are available cost a lot more, but it won’t do a darn thing to get more truckers vaccinated and on the road or more trucks built for them to drive, and more containers unloaded from ships at the docks and more ships moving away from ports.

In fact, when the president and the Port of Los Angeles announced a deal to start running the port around the clock, I could only say, “Well, that sounds nice, but where are you going to get all the extra workers needed to fill those extra shifts when you cannot fill the shift you already have, and where are you going to get all the extra truckers to haul those extra loads that are processed if you do miraculously fill entire extra shifts, and HOW MUCH extra are you going to have to pay in order to entice so many people into those newly created positions, amplifying the cost of goods sold? Especially when you are about to vaccination vacate nearly 10% of the workers you already have???

Is there no sense left in this world at all?

These vain promises are just like our pledge in the US to change to all electric cars by 2025. Where is the all-electric electricity going to come from with California going into brownouts already due to wildfires, hydro reservoirs running critically low already in the West due to drought, and Texas going into brownouts due to a single pipeline shutting down in a cold winter. Add to that the energy crisis building all around the world already, and how are you going to power those cars? Much electricity still takes oil. It sounds to me like our central planning means we are going to have a lot of cars that cannot move off the car lots due to electrical brownouts becoming blackouts once those cars start hitting the roads in greater numbers.

So, you have to think brighter than the low-wattage bulbs that put the “black” in BlackRock. The supply-chain breakdown all over the world not only raises prices due to shortages, it also assures that “booming business” will rapidly implode, not due to lack of demand, but due to inability to get things produced and inability to get the things that are produced to market. It doesn’t make any difference how strong demand remains if you cannot produce to fill that demand or cannot ship what you do produce to customers in order to make money off that production.

All you have, in that case, is costs and backups, so production will quickly be turned back down because product cannot be moved out of factories, nor resources moved in to make products. Sales will decline rapidly for lack of supply, which is already so apparent on shelves in numerous stores that it is stunning that someone at BlackRock cannot see it coming when it is ALREADY HERE! I suppose that is because they have people who do the shopping for them. Obviously, their name speaks to their opaque nature.

The result is clearly that the economy stalls because things are not MOVING. And “not moving” is the very definition of “stagnant” — “having no current or flow.” When blockages to flow all happen on the supply side, as is now already the case, that is also the very formula for high inflation, especially if central banks do as BlackRock says would be wise to do, which is to keep up their financial largesse! Too much money chasing too few goods! Great! Let’s print even more of it, knowing full well it cannot solve the core problems. What it really all adds up to is a GUARANTEE OF stagnation because nothing is moving, so nothing can be sold. And you have guaranteed inflation. That’s STAGflation by definition.

If you think it isn’t already building all around you in ways that far exceed the seventies, you need to get out more often or look beyond your narrow enclave because some shelves are already going bare in stores everywhere, and the holidays haven’t even begun. How many businesses will rapidly close down if they cannot get the goods to sell? How many producers will cut back production within a quarter if their production from this quarter doesn’t MOVE?

How can the people of a major investment company miss the writing on the wall when it is writ so large? It has to be denial, at best, or outright deception at worst. I’ll let you decide what BrainRot’s excuse is. I claim no knowledge of that; I only point out that it looks terrible on their part either way.

To the extent that you don’t see inflation information in the bond market, ignore the bloody bond market!

The bond market knows nothing right now. It has been rendered brain dead by central-bank lobotomy even though people in the market know exactly what to expect with inflation. That is because the Fed’s interference has chopped the bond market’s head off. So, the thinking part in the market gives no direction to what the flailing body does. Here its how that works and reason to believe a lot of horror will strike sometime after Halloween, especially as we observe with BlackRock how the big boys don’t have a clue about the obvious:

The Fed wholly owns the treasury bond market. Period. It currently buys up more than half of all US bond issuances, and it has been doing that for a year-and-a-half across the full maturity spectrum. As I have pointed out repeatedly, that makes the Fed THE price-setter of the bond marketplace. It means treasuries have NO ABILITY to convey accurate inflation pricing information because they sell at the yield the Fed determines for each maturity level by soaking up whatever it takes from each maturity level to maintain the yield curve within a range the Fed wants to allow.

That’s called “yield-curve control,” and it’s something I warned my patrons we’d see coming from the Fed many, many months ago. The Fed began, not long after that warning to engaged in yield-curve control without any overt word about it, which it has done for well over a year. If the Fed doesn’t like the yield on bonds at one point on the maturity curve, it will buy more bonds at that point and less at others. Simple. It doesn’t have to announce it is controlling the yield curve in order to do it.

WHEN THE FED TAPERS ITS US TREASURY PURCHASES, it will also be tapering its control over treasury pricing. Treasury pricing has a strong impact on all bond pricing. So, as the Fed relinquishes its control over US treasury pricing by backing out of that market, ALL bonds will start to more accurately price in inflation. For now, the Fed is holding back the tide, and it is big enough to do that; so, there is no true price discovery in the bond market. However, real inflation, regardless of what bond yields/prices say, is forcing the Fed to pull away. As it does so, the game is going to get real again over the next half year, and that is going to be UGLY!

Prediction: To the extent the Fed actually follows through with pulling out of the treasury bond market, the whole bond market is going to get ugly. However, to whatever extent the Fed chickens out because of how ugly things are getting, it assures inflation will keep getting worse. We’ll likely start to see that struggle by the end of this year and certainly by the first quarter of 2022, BlackWatt’s dimwits not withstanding.

While some of those in deep denial of reality said last spring that inflation could not possibly be happening in any significant way because bond prices were not falling (yields rising), those same restricted thinkers said last spring that inflation couldn’t possibly be happening for another reason, too, much less run hot, because copper prices stopped rising in the late spring and started to fall (put in a top).

Think again:

I responded at the time that there is no straight line to anything in either economics or markets, and copper was merely taking a rest after a dizzying climb. Nearly all commodities, copper included, have been on a tear ever since. Once the Fed stops controlling bond prices, they will plummet as yields rise to reflect the inflation that is really happening in commodities, which go into everything, affecting consumer prices down the road. For now, bonds are in bondage, held there by the Fed.

My next patron post will go into greater detail on the specific shortages that are already developing and what to look out for.