Why “Persistent Inflation” Will Become an Intense Fire Tornado, Greater Than the Fed Even Imagines

In my last article, I broke apart the arguments that are popularly used against my prediction that inflation will spiral up hotter than the Fed thinks and last longer. In this article, I lay out arguments that are being raised by others and myself for why inflation will run hotter, reaching higher for longer.

The primary argument I said I would lay out in my last post was one author’s claim that inflation will only be persistent IF “the economy is entering an entirely new regime.” That, I will show here, is exactly what the economy is doing.

Shutting down all the major economies of the world for the first time in history has changed the global economic climate forever. As I prognosticated clear back in April of 2020 when reopening hadn’t even begun,

This time is different because [the economy is] not going to bounce back in v-shaped recovery. The virus resulted in an entirely voluntary global economic shutdown such as has never been experienced in world history! That sounds like one of those circus-carnie boasts (“biggest” or “best in the world”); but, if you think about it, you’ll see it’s factually accurate. Never have nearly all of the nations of the world locked down to this degree internally (shelter at home) and externally (many closing their borders or limiting travel) for any war or any plague. So, this time is entirely different!…

The global economy was barely standing in the first place. It existed jacked up on central-bank steroids for years, which were already fading toward zero effectiveness. The [stock] market developed such a tolerance to Fed meds and was so in shock over the viral assault that for two weeks, the bull lay like splat on a rock and did not raise its head or even twitch a nostril to the normally pungent odor of Fed stimulus. Yet, Fed stimulus was greater in scale and quicker in timing than anything the Fed has ever done.

“Stock Market Bulls Delusional in Face of Great Depression“

That was not the first time, the market wrongly anticipated a V-shaped recovery. It did the same thing the year before in expecting corporate earnings to make a V-shaped recovery. I wrote about that, too.

At the start of 2019, the consensus was for a V-shaped earnings recovery to take hold by year-end, but instead of double-digit growth that the consensus had once penned in, Q4 2019 is now seen as coming in at -0.3 per cent on a YoY basis….

We went from that recovery fail straight into the COVIDcrisis and a recession. While writing in June, subsequent to the article above, that I fully believed the market would go up as a result of the reopening, I warned,

Reopening has arrived! And these stupid people [stock investors] will believe that means they were right about the “V,” virtually assuring they continue to bet the market up…. The reopening means economic statistics will improve rapidly. That will give a lot of stupid people many reasons to believe they were right to think the obliterated economy would experience a V-shaped recovery. What they won’t see because they don’t want to see it is that the steep recovery is not going to take the economy back to where it was.

It may take stocks back to their last highs (and beyond!) but not the economy. Many people continue to think the stock market is a gauge of the economy, even though the stock market has never been more completely disconnected from economic reality than it is now. They will agree with Donald Trump when he says the economy has recovered because stocks have recovered. They’ll buy the narrative they want to believe without even questioning it….

[And that is exactly where sentiment took the market.]

Reopening means, OF COURSE, businesses will start to show rapid improvement, and millions of jobs will certainly come back almost overnight. That’s half the truth. The other half, which investors and Trump supporters (and Lunatic Larry) won’t see because they don’t want to, is that many businesses will not reopen, and many jobs will not come back.

“I Believe in the Stupidity of the Stock Market“

Jobs topped out when and where I said they would last summer. They haven’t improved much since. The stock market rose to new heights as I said was likely based on euphoric sentiment, but I also said the sentiment would baseless because the economy supporting the actual existence of those businesses being priced upward would be a disaster. The market’s certain rise would be based on a false narrative everyone wanted to believe.

Some of what I said would happen back then still remains to happen because unemployment benefits that were scheduled to end last summer and mortgage and rent forbearance that were scheduled to end, continued clear into this summer for the very reason that economic damage proved far more lasting than the government believed it would back then. Exactly as enduring as I said I would be. So, when those programs end (if they ever can), we’ll see a lot more damage unless the government bails everyone out who is snared in them, which will create its own problems.

The stock market believed in and priced itself for a V-shaped recovery, but it was delusional if it thought we would return to business as usual. We are far from it, still surviving on government life support as we are. As Rabobank noted at the time,

What we have is a not a V-shape but a reverse tick shape: down huge and up a little (and even less than shown). Yes, at least it’s not still down. Yes, some more jobs will come back as reopening begins. But many sectors won’t, and once government payroll support schemes end we will see just how ugly things really are…. Nonetheless … equities up big: because bad news is good news for stocks and good news is also good news, apparently.

Zero Hedge

I also noted back then, how the delusion works:

Even GDP growth will look great after the second quarter because it is measured quarter-on-quarter and annualized, so the third quarter may yield the best GDP growth we’ve ever seen.

Nothing about how all of this has gone is unexpected to me, and all that time I wrote inflation would keep building beneath the surface in producer data and would eventually blow through the surface into consumer data. Still, we do not feel the pain because of all the government anesthesia.

But look beneath the hood. Sudden growth in GDP, when it happens (and I’m telling you in advance it will in the third quarter), doesn’t mean a thing. It is nothing but a rapid retracement from an near instant restart of a near total shutdown. It’s really just math. If you turn off a massive number of things, then suddenly turn them back on, you get a huge jolt. The real issue is what broke in the jolt.

Inflation is telling us what broke. The shortages are due to all that broke and didn’t come back in production and transportation, leaving the world unable to fill consumer demand. The demand is strong because governments all over the world are keeping consumers flush with cash, but the ability to make real deliveries from a real economy to fill those wants and needs is broken all over the place.

So, the Fed’s idea that the breakdowns are transitory in a short-term respect is as delusional as it was when I wrote about all that would break a year ago while most people were betting on a V-shaped recovery. As I explained, it would only look V-shaped from a statistical perspective; but from the reality perspective of a performing economy that could deliver on that recovery promise, it would be badly broken. The economy cannot deliver! It’s not up to the demands.

I said that GDP growth rates would look outstanding, but I also said that, if you looked at TOTAL GDP by the time this year rolled around, it would remain obviously subpar, never getting back to its old trend line, which largely just followed population growth anyway. And here we are! Each major economic breakdown has left us weaker than where we had been headed with a whole lot more debt as baggage to carry and now a lot less production (the “P” in GDP) to help us carry it:

As the graph above shows, there has been no full recovery out of either the Great Recession or the COVIDcrash. We are weaker in terms of being able to produce at a level that keeps up with our population growth than ever. That is why prices will rise due to scarcity. That is why it takes endlessly greater amounts of Fed stimulus and government stimulus to keep powering us along. But that path of greater and greater money printing with ever lower production has its own dead end, which is high inflation. If it gets far enough out of control, we’ll call it “hyperinflation,” which I would define as anything over 100% a year. (Others might define it higher, and I’m not saying, so far, we will even see anything like 100% annual inflation overall, though we have seen a lot more than that in a few commodities already. I am saying the Fed is either wishfully blind or lying; but what else can it do? Tell you inflation will skyrocket, and thereby assure it to happens more quickly? It could, of course, lift its foot off the accelerator, but that would crash all markets in a hurry.)

As we now enter a summer of searing droughts, we are entering a new superheated economic climate, ripe for consumption because of the massive financial intervention taken to shoot us out of the instant recession, but badly weakened in production. That hot and cold contrast is the perfect climate of supercells for a destructive inflation vortex. This is not your father’s inflation. This has the ingredients to be the seventies on steroids. (We are actually already as bad off as the seventies if we measured inflation the same way it was measure back then when it hit double digits.)

So, yes, this is an economic regime change, and you’ll see how facts on the ground are lining up with to show that change below.

The job market is burning up

The following article from The Washington Post is particularly useful for pointing out how we are entering a new economic regime while also dealing with the persistent labor issues I said I’d come back to.

One of the biggest reasons inflation will not give way easily and will run hotter is the current labor situation, which still matches up precisely to what I said we’d see over a year ago — a peak of employment improvement reached last summer that wouldn’t improve much more by this summer. Those who believe the economy’s labor pains will end as soon as the government stops enhancing unemployment benefits and extending the eligibility for unemployment are not apprised of all the current facts:

The WAPO just called the economic regime change in an article titled “The economy isn’t going back to February 2020. Fundamental shifts have occurred.”

A new era has arrived of greater worker power, higher housing costs and very different ways of doing business.

The U.S. economy is emerging from the coronavirus pandemic with considerable speed but markedly transformed, as businesses and consumers struggle to adapt to a new landscape with higher prices, fewer workers, new innovations and a range of inconveniences.

What Americans are encountering … is almost unrecognizable from just 16 months ago. Prices are up. Housing is scarce. It takes months longer than normal to get furniture, appliances and numerous parts delivered. And there is a great dislocation between millions of unemployed workers and millions of vacant jobs.

The Washington Post

The shortages of products on the shelves sound more like the former Soviet Union than the US economy of abundant choices we once knew. The article confirms my own statements that Chairman Powell and his central-planning cohorts misjudged how quickly inflation would reach serious levels of concern.

On a long enough timeline, everything is transitory, including this whole planet. So, we need to know what the Fed means when it says our current high inflation rate is “transitory” in order to gauge how far off the Fed’s judgment is. We got a reading on that in an interview with Atlanta Federal Reserve Bank president Raphael Bostic on Wednesday:

When I talk to businesses, they are saying that it’s going to be temporary. Still, temporary is going to be a little longer than we had expected initially. So rather than it being a two- to three-month, it may be a six- to nine-month factor.

NPR

They meant “transitory” as a VERY short-term reopening phenomenon. Bostic admits they have clearly blown past the timeframe the word originally meant. They were wrong. So, now they have extended it to mean something lasting well under a year. That is why we see the Fed already starting to switch and mix its signals about how far off tapering will be. Even thinking it will only last nine months is wishful thinking in light of everything I’m about to present, especially in labor.

Their now proven inability to judge the rapid inflation their own actions would help create calls into serious question their plans or ability to continue fueling this fire without burning us all in the months to come. Even Powell admitted this week the Fed is flying by the seat of its pants and doesn’t really know how to handle the situation:

“This is an extraordinarily unusual time. And we really don’t have a template or any experience of a situation like this,” Powell said Wednesday. “We have to be humble about our ability to understand the data.”

“The Best Arguments Against ‘Persistent Inflation’ Have it Wrong“

The shortcoming in their newfound humility is that they have already led everyone to believe they do understand the data, so they are only now admitting they do not. One of Powell’s claims against persistent inflation that I said I’d come back to in this Patron Post was his statement that inflation could be blamed on …

… the exacerbating factor of supply bottlenecks, which have limited how quickly production in some sectors can respond in the near term. As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.

One of the essentials for ending the supply-chain bottlenecks we hear about is getting people back to work so they are productive. Right now we have an extra 6,000,000+ people in the labor force who consume but do not produce as compared to just before the COVID lockdowns. The rapid-transit-to-full-recovery crowd that follows the Fed wistfully believes this problem will end when the unemployment benefits are curtailed in September. You are about to see there is not a snowman’s chance in hell of that proving true. The situation will get better when those benefits end, but we’ll still be left well short of the production force we once had. The WAPO sums up the enduring nature of the problem that will extend the situation many months past September:

Inflation, which hit a 13-year high in May … is widely viewed as the biggest risk that could sink — or at least stall — the recovery’s progress. Although the Fed predicts this will be a short-lived phenomenon, businesses and consumers are already changing some behaviors….

All of this is coming at a time when workers are increasingly demanding more pay and better working conditions. They want more flexibility, more opportunities for workers of color and more understanding from employers of mental health and child care needs. Businesses are paying attention, largely because they are desperate for workers. There are an estimated 9.7 million job openings right now, according to job site Indeed. That’s a record, and several million more than the nation has seen before.

The Washington Post

And then it tells us what the persistent labor problems will be, which will continue to press wages and benefits higher and, hence, inflation higher:

If a lot of people start believing inflation of 5 percent a year is here to stay, then they will demand higher pay and businesses will respond by raising consumer prices again, igniting a vicious cycle….

“In the next few months, we’ll have very high inflation numbers. It’s unlikely to persist, but it’s a real risk that it does. That risk is higher now than it has been for decades,” said former Fed official Randall Kroszner. “Will consumers accept it as temporary? We really don’t know. In some ways, this is faith-based monetary policy….”

And that’s from a former Fed official! Faith-based policy? Faith in whom? In experts who thought high inflation would last only three months due solely to the initial reopening surge when an idiot should have known that was way overoptimistic? Faith in experts who have now doubled or tripled their timeline for “transitory” to 6-9 months? When people who are from the Fed and who believe in the Fed admit the risk of a Fed fail is greater than it has been in decades and tell us it takes a lot of faith to believe the Fed’s plan will work, you have to know the plan is not going as expected. At least, we can be thankful it was a candid statement.

Over on the hiring front, there’s nearly one unemployed person for every job opening, but it’s never that easy to fill vacancies. People don’t necessarily live where the jobs are or have the right training and skills. After such a harrowing year, workers are also reluctant to do the same thing they did pre-pandemic for the same pay and conditions….

“This could be a real shift in the bargaining power of labor, which we really haven’t had since the demise of unions,” said Diana Farrell, the former chief executive of the JPMorgan Chase Institute….

Many are waiting to see if they can make their dream job a reality. After a tough year, they long for something more, and the stimulus payments and unemployment aid have given them enough money to not have to take the first job available…..

Many, for example, are demanding remote working situations, something that rapidly got accepted as the new norm, so jobs that are not remote may go unfilled.

The Post quotes one disaffected worker who summarizes what many are probably feeling:

“There’s this feeling and accusatory tone that you must just be lazy if you aren’t working right now. But people’s lives have been disrupted drastically,” Tran said. “People tell me I should just go work at McDonald’s, but that’s not my career.”

Just because jobs are there does not mean they are all quality jobs people are willing to go back to or that they have the experience for those jobs. They’ve saved enough off unemployment benefits and not having to pay for their home for a year and, in some cases, off investments in stocks to where they have plenty of strength to hold out. This is great news for the labor force, which hasn’t participated in the gains of the recovery from the Great Recession and hasn’t seen a real wage increase since the Reagan era, but it is not good news for inflation because it means the bottlenecks in production are likely to be quite persistent, and the cost of undoing them higher than price inflation supports right now.

The high number of job openings has given Americans confidence to ask for higher pay and try out new fields, knowing they can likely fall back on restaurant or hospitality work if it doesn’t pan out. Workers are quitting their jobs at the highest rate ever recorded, and many Americans are launching start-ups they’ve wanted to do for years. New business applications jumped 24 percent in 2020, the biggest surge in history, and they remain at a much higher level then precrisis. These are signs that workers feel they have more power, a shift likely to endure…. About the only certainty is that the economy coming out of the pandemic is going to look much different than it did before.

That is economic regime change.

More evidence that Powell is out to lunch on his wish that labor shortages will be transitory on the basis that the labor situation will rectify itself when unemployment benefits end is given by Goldman Sachs:

According to a brand new analysis from Goldman’s economists, the US is on pace to experience a permanent loss of about 1.2 million workers from early retirement and reduced immigration…. Goldman is looking for the labor force participation rate to rise by 100bps over the next year-plus to 62.6% (… still 0.8% below the 63.4% pre-pandemic rate)

Zero Hedge

There are two things to note here. First, the obvious, which is that GS believeS the improvement will still leave us short of the old participation rate. More importantly, however, Goldman warns that the labor force has become permanently smaller. That means the rise in the percentage of the labor force that participates in working is a rise to smaller percentage of a smaller total group.

The vampire squid starts off by reminding us that in December, it warned about a surge in early retirements.

You see, by definition of “LABOR FORCE,” once you retire, you’re not part of the labor force.

Since then, the number of excess retirees – defined as the difference between the actual number of retirees and the number of retirees implied by the age-specific retirement rates observed in 2019 – has soared to 1.2 million.

Here is Goldman’s picture of what has happened to the current retiree count versus the number of permanent retirees we would have by now had the pre-pandemic trend continued (dotted line):

Zero Hedge mistakenly refers to this as a drag on the labor force participation rate, but that is wrong. It actually reduces the size of the total labor force:

Persons who are neither employed nor unemployed are not in the labor force. This category includes retired persons, students, those taking care of children or other family members, and others who are neither working nor seeking work.

Bureau of Labor Statistics

Reducing the overall size of the labor force by taking people permanently out of the count actually helps the participation rate because those who remain and are participating are part of a smaller overall number; therefore, they constitute a larger percentage of that number.

What GS is saying is that the total available labor force has been made 1.2 million peopler smaller since the pandemic, and a slightly smaller percentage of the remainder will be participating in actually working.

Many of those who are holding out from going back to work say they are not holding out because of unemployment benefits but, because of health concerns due to their age. Until they are convinced COVID is behind us, they have no intention of risking death (in their view) just to return to work.

To make matters worse, Goldman’s anticipation that the labor force participation rate will eventually get to a smaller percentage of a smaller total number is a target they do not expect the US to hit until next year. Well, that is well beyond the Fed’s newly revised definition of transitory, and this is only one factor creating the supply bottlenecks.

As an indication of just how hard the pandemicly unemployed intend to fight the return to work once unemployment insurance benefits are terminated, ZH reports,

A group of Indiana residents have filed a lawsuit against state officials, challenging the state’s decision to end federal unemployment benefits by the end of the week. The lawsuit, filed last Monday, seeks to preserve what was supposed to be temporary pandemic safety net of $300 per week on top of other state or federal benefits, after indiana Gov. Eric Holcomb announced last month that the state would pull out of the federal program before it’s official September end date in order to motivate unemployed people to help fill the state’s more than 116,000 open jobs.

Zero Hedge

Labor is finally feeling some empowerment after not having seen real wages rise meaningfully since the Reagan union-busting years. That lack of rise in real wages is something David Stockton, Reagan’s budget advisor, has frequently pointed out with graphs. Labor is not going down this time without a fight now that it has some leverage on its side.

Says one worker in the fight, showing how she is preparing for a long siege,

“We’ll have to decide which utility bill to pay, which household items to let go of,” she added (despite the 116,000 open jobs), “… We’ll have to change what kind of shampoo we use, what kind of toilet paper we use.”

In other words, “We’re digging in, laying in provisions, figuring out how to ration supplies and getting ready for a drawn-out battle.”

The labor force is seizing its one opportunity to get a bigger cut of the pie. To hell with the rich and their idea that they are the only ones who deserve to benefit when corporations do better by plowing all the profits into dividends or share buybacks, which benefit only them. The labor force is saying, “You’re making our piece of the profits much larger or we’re not playing and you’re not profiting!” They have been empowered by all the Fed’s money printing to do so for awhile at lest, which is not going to make Chairman Powell’s inflation-management job any easier.

One strong indication that the labor force is shrinking and that the percentage of people within that force who are participating in the job world is also shrinking can be seen in the “quits rate.” As noted in the article, a record number of people have recently quit their existing jobs. That also doesn’t bode well for Chairman Powell’s wishful thinking.

As a result of this general strike, average hourly earnings in April and May are up 7.4% on an annualized basis — the greatest rise in decades! Yay for the little guy! (Who will now be blamed entirely for inflation.)

Even some financial experts think Powell is full of hot air

Lest you think my thoughts about persistent inflation have no support in the higher echelons of the financial world, not everyone up in those heady realms of financial wizardry buys the Powell positivity:

BofA’s response was simple: as the bank’s chief economist Michelle Meyer said “we don’t buy it”, noting that as signs of shortages and inflation continue to arrive, including several warnings this week, “individually the arguments for complacency make sense; collectively they are becoming increasingly unconvincing”; it’s also why Meyer continues to believe that “the groundwork for more sustained inflation down the road is building.“

Zero Hedge

BofA, in fact, lays out a list of all the excuses used to claim inflation is transitory and states they aren’t buying any of it:

• not the “people will return to work once unemployment benefits end” excuse,
• nor even that they will return to work when fear of COVID subsides,
• or that the link between rising wages and inflation has gone away over the years;
• not the baloney that bottlenecks will subside as reopening pressures even out,
• nor even that they will subside as trade wars that caused some of them fade away,
• or that food and energy prices are about to fade because shortages in those categories won’t endure;
• not even the baloney in the bank’s own area of expertise that says inflation won’t last because the bond market isn’t predicting it will,
• nor even the odd notion that it won’t rise because economists don’t see it coming.

Economists, after all, completely missed seeing the Great Recession coming, too, so they got their heads kicked in by it. And the bond market is owned by the Fed, which now buys half of all US treasuries, so all bond price information has been lost. Moreover, as demonstrated clearly by historic fact in my last Patron Post, the bond market’s historic record reveals it never really had any predictive power when it comes to inflation in the first place; it merely responds to the inflation it sees already happening around it and is sometimes slow to react to that.

Last of all, BofA points out the lamest excuse of all for not worrying about inflation:

“Don’t worry about inflation getting too high, the Fed can raise interest rates as much as needed to cool inflation.” Sure it can… It can also crash the precious stock market in 15 minutes.

Notably, BofA says,

There is some truth to all of these arguments, but it is implausible to argue that all of the recent inflation problems are temporary, and most important these “temporary” pressures will probably persist for many months and could become embedded in inflation psychology. This is particularly likely given that monetary and fiscal authorities have demonstrated in word and action that they want a red hot economy and rising inflation in the next few years.

“Many months” is a lot longer than the Fed ever intended by “transitory.” Given that consumer price inflation has already put in three months higher than the Fed intended, it’s a lot longer than the revised 6-9 month window, too. Inflation history, the bank notes, shows that putting the inflation genie back in the bottle has always been difficult for the Fed, requiring extreme measures over a period of 2-3 years, which cause economic nose-dives into recession. The Fed’s cure for inflation, in other words, is a good stiff recession!

Former Fed Chair Ben Bernanke said that “Expansions don’t die of old age, they get murdered.” To clarify this statement, former Chair Janet Yellen placed the murder weapon in the Fed’s hands: “Two things usually end them…. One is financial imbalances, and the other is the Fed.”

“Federal Reserve Confesses Sole Responsibility for All Recessions“

Sure, but who creates the financial imbalances? So, that answer amounts to “Two thing usually end them — the Fed and the Fed.”

Well, we have an overabundance of Fed actions right now and an extraordinary abundance of financial imbalances right now, so this should be a heck of an ending! With the Fed still promising to expand longer than necessary and tighten later than normal, the recession should be one grand blowout, and it doesn’t look like inflation is going to give the Fed much time to delay.

Thus, ‘Big Short’ investor Michael Burry warns the ‘mother of all crashes’ is coming! He believes it will be a crypto crash first and foremost, as he sees crypto as nothing more than a meme market that makes little sense — tulip-bubble euphoria.

Regardless of where the crash starts — stocks, bonds, crypto, whatever — Burry has made a fortune off of his other predictions over the past year just as he did off the Great Recession or Great Financial Crisis:

He’s previously used the social-media platform to issue warnings about Tesla – which he’s short – as well as GameStop, bitcoin, dogecoin, Robinhood, inflation, and the wider stock market.

Business Insider

So, “Big Short” Bellwether Burry also doesn’t buy the Fed’s fantasy. He thinks they’ve masterminded and economic atom bomb. We might all do well to remember he’s famous precisely because he didn’t buy the Fed’s fakery before the GFC either.

The Scion chief has attracted a cult following since he anticipated the housing-market crash that precipitated the global financial crisis…. Burry also helped pave the way for the GameStop short squeeze in January, which kicked off the meme-stock boom.

Fighting inflationary fires not so easy, not so quick

It took a couple of years for our most stalwart Fed president in history, Paul Volcker, to knock down the inflationary flames that began in the seventies, and it won’t be as easy for Fed firefighters this time around to knock down the inflation vortex as it was back in Volcker’s day because of all the shortage issues that have proliferated around the world. Volcker had only a major oil shortage to contend with, and that was artificially created as, effectively, an oil strike by OPEC nations that wanted to get more for their natural resources than First-World nations of the day were paying. It worked and got oil prices forever higher. Volcker still got the rest of inflation tamed, but there are no rigorous old bankers like him running the Fed today, and now we have shortages of everything all over the planet. So, this is an exponentially tougher situation with a weaker set of bosses running the show.

Let’s focus on just one shortage to examine this “transitory” wishful thinking of the Fed. Think the computer chip shortage that has beleaguered auto production is going away soon? Think again:

Producers of all kinds cannot get parts of all kinds — not just chips — for reasons of all kinds. Shipping ports are clogged. In some cases borders are closed due to COVID. Other countries are not doing so well with COVID so some factories in those countries remain closed due to health precautions. This problem is not going to unjam easily. Piece by piece, chip by chip, sure. Even then, only if the more detrimental COVID variants do not continue to get worse in the nations where the parts are made. There is a LOT of blue sky in that wishful thinking!

Many businesses shut down for good during the global COVID lockdowns. They are not going to rehire and not going to start making parts all over again. They’re gone. Get it? They will be replaced as one fool argued to me, of course, as economics dictates investors of some kind will fill the vacuum. However, it may take years before they do because all the same restraints make filling the vacuum difficult. Filling the vacuum may involve building new factories in other countries that don’t have as much of a COVID problem, a situation fraught with international legal complexities, or it may be as simple in some cases as a competitor taking over the plant that closed and restarting it. Yet, no one is going to rush in during the still-developing COVIDcrisis with all its new variants because restarting is expensive, so many investors and entrepreneurs will be hesitant to take such risk so long as COVID still remains a question mark over the global economy. (No one knows if we’re open for good now or not.)

Inventory was depleted all over the world when manufacturing slowed in order to avoid the higher cost of materials and the shortage of labor, hoping things would pick up in a few months. They did not. Now it will take a long time to rebuild inventory and fill backorders, which means new orders will become back orders for a good long time, too. And it means new factories or reopening factories will face much larger obstacles than in the past, making investors all the more hesitant to fill the vacuum right now.

People who quote economic theories at me often have no grounding in the real world of business. Eventually, yes, we’ll catch back up from all of this. I anticipate that will take, IN THE VERY LEAST, another year — probably a couple of years to get up to full production — and that is if COVID goes to bed. All of that runs far beyond the timeline the Fed believed it had for avoiding dealing with inflation. Even then, based on history as shown in the Fed graph of total GDP I presented above, full production will be continually lower production than the level of GDP we would have travelled without the crisis. (We get back to the same rate of rise, but reset the whole at a lower level.) These are some tough hurdles if you are realistic about them.

Here is an example of how easily extreme inflation is being passed along in the chip world of consumer electronics:

The ongoing global semiconductor shortage is causing prices of electronics to rise while at the same time pressuring suppliers and material providers to continue raising prices. In the midst of the shortage, demand for consumer electronics has continued to rocket higher.

Zero Hedge

In other words, there is a lot of room to raise prices in consumer electronics right now. Price elasticity is an economic term referring to how much demand bends (is elastic) when prices push or pull on it. Right now, prices are pushing hard, and demand isn’t bending much. It’s standing strong (inelastic). That is exactly what happens in an environment of too much money chasing too few goods.

The consumer currently has the buying strength to withstand the pressure of higher prices in order to get what he or she wants from the limited supply. So demand is inelastic in its response to price changes, meaning it doesn’t flex much with a large rise in prices. Producers have to raise prices because, in order to meet the demand, they have to negotiate against other producers just to get their hands on limited parts and materials. At the same time, the shortages in produced items means low competition in product pricing, helping the producers get their price from customers.

The price increases, thus, move easily right now through the entire industry from raw resources to the ultimate consumer. According to The Wall Street Journal, this situation will persist:

Price increases are snowballing their way through suppliers and key materials in chip making as the industry rushes to meet rising demand and plug supply holes. As a result, many of the world’s large chip makers are raising prices they charge to the brands that make PCs and other gadgets. Industry officials say the increases may continue.

The Wall Street Journal

They don’t just mean that the prices will remain high, but that additional raising of prices will continue to happen, and we’re already talking massive increases. For example,

HP has raised consumer PC prices by 8% and printer prices by more than 20% in a year, according to Bernstein Research. HP Chief Executive Enrique Lores said the increases are driven by component shortages and that the company may adjust prices further to reflect cost increases.

As I’ve said all along, the let’s-get-serious formula for price inflation is “too much money chasing too few g ods.”We’re there! And the Fed is committed to keeping us there! So, inflation will rip the Fed’s face off. (And yours.)

Dell Technologies Inc. Chief Financial Officer Thomas Sweet recently said: “As we think about component cost increases, we’ll adjust our pricing as appropriate…..” Certain components now cost 40% more than they used to, according to David Stein, the company’s vice president of global supplier management…. Contract prices for computer memory have risen about 34% since the beginning of last year.

Meanwhile, chip inventory, in the face of all this, has not been able to rise back anywhere near normal levels, which means continued supply shocks because there is no buffer:

Looks like we’ve got a long way to clime to get back to normal inventory levels, which mean normal prices. Does that look like a picture that says the chip bottleneck is going to resolve anytime soon as Pontiff Powell proclaimed from the Eccles temple?

Dale Ford, the chief analyst at the Electronic Components Industry Association, concluded … “I think people are now saying this is not a temporary situation. Price increases are going to be durable.”

The Fed apparently has its head up its bottlenecked butt if it really believes these shortages are the kind of transitory it needs in order to avoid dealing with inflation. More likely, the Fed simply has no alternative but to hope this will all go away on its own and hope it can convince you it will all go away on its own because the Fed has no tool against inflation, other than forced economic wreckage via severe financial tightening.

And what would constitute “severe financial tightening” in this massively over-indebted world supported economically by massive government spending? Oh, a rise in the Fed’s base interest rate to any number above its current zero baseline. That will create a tantrum because a base rate of about 2% is likely to create an avalanche of defaults in the loans that have to refinance at rates based off of that 2% in a world where productivity is down.

The bottlenecks that Proctologist Powell believes will end soon on their own are not just due to factories being shut down from ongoing COVID in other nations. They are also due to COVID clogging the infrastructure pipelines that move products around the world.

Maersk warns Yantian port congestion a ‘much bigger disruption’ than Suez Canal closure

Yantian International Container Terminal (YICT) has experienced significant disruption due to a Covid-19 outbreak in the port area and prevention and restriction measures put in place as a result.

Seatrade Maritime News

As I’ve been saying, COVID is still taking its toll on other parts of the world, even though vaccinated areas like the US are seeing infection rates decline and seeing their economies reopen.

Ditlev Blicher, Maersk Asia Pacific Managing Director told an online media briefing that Yantian port was currently operating at around 40% of capacity and that, “We’re expecting that to continue for the next month with significant delays for vessels to be able to berth.”

A month wouldn’t be bad and would provide Chairman Powell some wish fulfillment, except that, even when the cause goes away, it will time to work through all the backlog.

The blockage of the Suez Canal only lasted for six days, while the situation in Yantian has already lasted several weeks with no end in sight for the coming weeks either. The port handles around 13.5m teu a year or about 36,400 teu a day, making a key gateway port on a global scale…. With charter rates for containerships at record levels due to an almost complete lack of available tonnage the lengthy delays in vessels schedules will see lines such as Maersk being forced cut sailings due to reduced available capacity. “We will see lost sailings as a result of these delays which will only compound the congestion that we’re seeing,” Clerc stated…. “I won’t beat around the bush when it’s happening in a port as significant as Yantian this will have significant ripple effects.”

In other words, it will spread and get much worse before it starts to clear. And that is the best-case scenario for the Fed’s wishes. What happens if the more devastating strains of COVID make the situation worse in nations that are not as highly vaccinated? You know, the nations most of us have come to rely on for cheap labor in order to get the cheap parts that our formerly lower prices depended on.

The Fed’s predictions for inflation rest on blue-sky scenarios based on COVID being tamped down in places like the US and Canada and Europe, but that is not where many of our parts come from, and we’ve seen how the loss of ability to get a single key part can shut down an entire automotive line now that computer chips are integral and essential to making a car run. We’re not talking vulnerability in upholstery supply here that can be made up elsewhere. We’re talking engines that won’t run until those proprietary chips arrive. Refrigerators that won’t chill until the chips are baked and delivered. We’re talking about elevators that won’t take you to the top floor (or any floor) of new buildings until their chips make it out of the bottom tier in Yantian, potentially holding up the opening of entire new buildings. The only thing going up is prices.

And, as we consider the Fed is operating from blue-sky scenarios with respect to COVID clearing up, what about too much of blue skies in another respect? Is a nation suffering from trade-war FOOD shortages, hugely compounded from COVID food shortages, in a robust position to deal with nearly certain additional shortages in food and timber that will be caused by drought and wildfires due to skies that are too clear for too long? We can hope the record heat will finish off COVID, but it will also certainly finish off its share of crops and burn up more of those homes that are in short supply and more of that growing lumber that is in short supply just as we saw last year and the year before. This year looks to be worse.

A nation that has a robust economy and ample supplies to start out with can deal with all of that. We’ll deal, of course, but it won’t be as easy. A nation that is already experiencing extreme inflation due to shortages across the landscape is not likely to see any kind of reprieve from inflation during a summer like this one is starting out to be.

All of this adds its own heat to the inflation tornado.

Housing will soon add its explosive heat to the CPI

Speaking of houses, housing costs, a major factor in calculating inflation, have routinely been understated in the CPI because the factored cost of housing is based solely on rent; but CPI is about to get a massive rent boost:

A major concern is what happens now that so many first-time home buyers are being priced out because they can’t afford the hefty down payments. They will have to stay as renters. Susan Wachter, co-director of the University of Pennsylvania’s Penn Institute for Urban Research, predicts the nation is on the verge of a rental housing crisis…. investors have scooped up cheap single-family homes in the hopes of renting them out for good profits. Single-family home rents were already up 5.3 percent a year as of April, according to research firm CoreLogic.

“I see this coming year as a year where rents will increase by a surprisingly high amount,” Wachter said. “The affordability problem is going to extend out into more places, especially second and third-tier cities.”

Sky-high prices for lumber remain at stores and many suppliers because they still have to sell all the wood they bought at the top. Konter doesn’t expect retail prices to change until August or September….

“I personally believe we are about to kill the golden goose in the economy with these supply issues,” Konter said, adding, “There are so many people that are being left out of getting a home because of the additional input costs. It’s almost impossible to build an entry-level home.”

WAPO

Those left out will pay higher prices for rent as those who have not paid their rent for a year get shoved out the door. A lot of people will be looking for place to rent and paying a premium to get it — especially the pariah who get evicted for a year of non-payment. Imagine the rent premium they’ll have to pay to find anyone who will rent to them! (Of course, the government may just kick this can down the road again or bail it out all with free Fed funds; but creating all that new money for more bailouts adds its own force to inflation.)

High inflation is self-perpetuating

Just as a wildfire creates its own weather, so expectations of inflation create more inflation. People start anticipating it and building it into their budgets and pricing their products ahead for the cost increases they think will keep coming in their materials and labor by the time they are ready to ship. Investors start hedging for it by putting money into commodities, which rapidly pushes up the prices of the resources that go into future products, assuring more consumer price inflation down the road. Producers see those input costs rising, so they buy a lot more of those commodities now for future delivery in order to stockpile the resources they need, driving commodity prices up even more right now. The loop repeats as Investors see commodities are rising faster than ever, and so pile in with even more purchases. It become a tornado of inflationary fire.

It becomes almost impossible to take the heat out of that rising inflation vortex with so many components fueling the fire without taking drastic action as Volcker did. That, when it happens, will certainly destroy multiple markets BECAUSE we did not have this Fed-dependent Everything Bubble going on back in Volcker’s day. We just had high inflation to deal with due to rising oil input costs driving up the cost of everything. Once oil rose as high as it was going to go, inflation would have likely stopped its rampant rise, too. The Fed had not been the primary fuel for stock and bond and housing market bubbles back then — not to anywhere near the degree that it has been for the past two decades. We did not have global shortages of almost all commodities and parts. The government also had a lot more room to absorb a period of high interest on its debt.

An inflation tornado is chasing the stock market. It doesn’t have to persist long enough to destroy the economy. It only has to persist long or grow high enough to force the Fed to take action against it. Then the Fed will destroy the economy. It’s already begun to adjust its tone, if not its message by admitting inflation is worse than it thought it would be and “may be persistent.”

Oh, it will be! Because there is already plenty more in the pipeline headed this way.