The Inflation Death Spiral has Begun: Inflation Hits Stocks, Bonds and Government Like a Bomb Cyclone

One or two dimwits told me I was stupid to be thinking inflation would be the driving force of 2021 due to shortages and Fed money printing. The cockiest one even assured me his second-grade education in economics said inflation wasn’t even happening, yet inflation has relentlessly surged higher every month to finally now hit a forty-year high:

That is pretty good for something that wasn’t even happening. This flickering bulb, of course, thought I was even stupider to believe inflation could damage the stock market! Yet, on Wednesday, stocks and bonds became all about inflation. So did politics. So did reassurances from former Feds who should best be known for the gap in their understanding that exists between the intention of their policies and what actually comes out of them.

One has only to remember President Biden’s Treasury Secretary, Janet Yellen, assuring us all there would never be another financial crisis in her lifetime, only to see the nation plunge two years later into a crisis that is still gaping open like a split rib cage, trillions of Fed rescue dollars later still not sopping up all the blood.

Apparently, Yellen did not expect to live as long as she has when she made that comment, which was patently ridiculous at the time she made it. It was as absurd as her concurrent claim that the Fed’s tightening in 2018 would be as boring as watching paint dry and, so, would continue for a few years on autopilot.

Uh huh.

Instead, the Fed’s QT rankled the market all year, then plunged in the last quarter of the year into a negative market close. That crash stopped at 20% down only because the Fed indicated it would rapidly pull the plug on the autopilot and turn things back around. You see, once again the people who think they are so smart based on their education or position have turned out repeatedly to be the dimmest of all.

So, believe Yellen now if you want to:

Yellen Says Fed Wouldn’t Allow Repeat of 1970s-Level Inflation

Treasury Secretary Janet Yellen repeated her view that elevated U.S. inflation won’t persist beyond next year and said the Federal Reserve will act if needed to prevent a rerun of 1970s-style price rises. “I’d expect price increases to level off, and we’ll go back to inflation that’s closer to the 2% that we consider normal”

MSN

… but that is pretty poor assurance. The only way the Fed can act is to tighten faster and harder, and that will destroy the fractured recovery it has attempted to build, which is what I’ve been predicting all along: Either inflation tears the whole economy apart, or it forces the Fed to tear the economy apart by tightening in order to curtail the monster they have helped set in motion.

The vicious cycle begins while Fed is out to lunch

Inflation becomes self-reinforcing when it starts running faster than gains in wages, causing people to push hard for wages to keep up, driving up the cost of everything all over again.

Yellen, who was chair of the Fed from 2014 to 2018, said the high inflation that persisted through parts of the 1970s and 1980s occurred “because people thought that policy makers wouldn’t bring it to an end, and inflation expectations became embedded in the American psyche. That isn’t happening now and the Federal Reserve wouldn’t permit that to happen.“

Uh huh.

And horses are born pink and sparkly with a tiny horn and can fly if you only believe. Inflation expectations are going to start becoming embedded as of right now. Yellen’s comment is like the one I’ve often ridiculed her predecessor, Ben Bernanke, for when he proudly proclaimed there was no recession in sight; but, as it turned out when the stats finally came in, he was already standing knee-deep in the middle of one.

Oops.

Such is the work of our top economists as well as those who take their second-rate or second-grade education too seriously. It’s why I started writing The Great Recession Blog in the first place to counter all the retarded things I was hearing out of economists and to speak into the vacuum of foresight that existed among nearly all of them who didn’t see that recession coming, and who don’t see this one coming either. As I recently wrote,

What few of the gurus are telling you, which I will, is that we’ll be in a recession by sometime this winter.

“Warning Signs of Recession in GDP and Especially its Components“

You can wait for the experts with the economic credentials to warn you after it begins, or you can be forewarned here. I hope that my warnings this fall have, at least, helped some of my readers put a little hedge on high inflation by stocking up on the things you know you will use in the months ahead for those days when shortages may come to your favorite goods. Not only will you have some of what you need, but if the shortage doesn’t come, you will have bought it at a much better price.

It’s already getting a little late to get a jump on the inflation-fearing crowd:

Inflation-Pinched Shoppers Are Turning To Discount Stores Ahead Of The Holidays

U.S. consumers are increasingly shopping at discount stores, a sign that families are feeling the pinch from highest inflation since the 1990s as the holiday season approaches. Spending at discount stores was up 65% last week compared with 2019, and 21% from the prior week…. The discount-stores category, which includes Dollar Tree Inc. and Five Below Inc., had the largest increase by far among all types of retailers…. The sharp uptick suggests that consumers, especially lower-income households, sought lower prices wherever they could find them last week.

Financial Advisor

That is a strong sign the cycle Yellen says isn’t happening and won’t happen and will be prevented by the Fed before it happens has already begun. People are significantly changing their buying habits already. The change in the body politic suddenly has the politicians who readily inhaled the Fed’s froth to claim inflation wasn’t worth worrying about because it was only transitory now paying rapt attention to inflation front and center.

Joe Biden’s next political nightmare is inflation, a force that can destroy family budgets and political careers and is being driven by domestic and global factors tough for a president to quickly fix. Government data showing the cost of living rose 6.2% over the last 12 months — the highest rate in 30 years — set off White House alarm bells on Wednesday….

There were clear signs of a shift in tone on Wednesday after officials spent months insisting that higher prices were merely a transitory byproduct of the pandemic…. Biden’s speech and his clear urgency about inflation came across as something of a political reset as his approval ratings dip into the mid-to-low 40s….

Inflation is an especially damaging political force because of its immediate impact on the well-being on voters. A rate of 6.2% is well above levels at which policymakers can be relaxed about rising prices and threatens to also wipe out wage gains, in effect giving everyone in the country a pay cut.

CNN

It doesn’t threaten to wipe out wage gains. It has already entirely wiped out wage gains.

Inflation has taken away all the wage gains for workers and then some.

Real average hourly earnings when accounting for inflation, actually decreased 0.5% for the month. A 0.9% inflation increase negated a 0.4% rise in wages. Consumer confidence has been sliding despite the rising wages, which are up nearly 5% nominally year over year but have declined 1.2% in real terms. The Fed finds itself under increasing pressure to adjust policy accordingly. What looked like a big jump in workers’ wages during October turned into just another gut punch after accounting for inflation.

CNBC

Inflation came in much hotter than the leading experts were expecting (but still lower than where I’ve been saying it will end up).

Top-line inflation for the month increased 0.9%, far more than what had been expected. That was the bad news – very bad news, in fact.

While that’s very bad news, it was worse for some areas than others. In Atlanta, inflation hit 7.9%! Phoenix and St. Louis also came in above 7%.

Think wage growth has been helping people out? Well, look again:

Of course, the FedExperts are missing all of this. They are even slow at reading their own tarot cards:

Consumers have responded by ramping up their inflation expectations…. The New York Federal Reserve’s most recent survey of inflation expectations, released Monday, indicated that consumers expect inflation to run at a 5.7% pace over a one-year horizon, the highest ever for a data set that goes back to June 2013.

“That means there is a potential structural break in inflation expectations,” LaVorgna said. “Unless there is a collapse in growth where you have a recession, we could be entering a new inflation regime.”

So, consumers see it, but former Fed head, Janet Yellen, does not. I’ll go a step further and say consumers are not seeing it well enough while Yellen ain’t see’n’ nuttin’ at all.

Inflation just gave a gut punch to politicians

The above graph with its steep upward path of inflation throughout 2021 doesn’t look at all transitory to me. Missing the truth on inflation by hoping it would just go away on its own has left Biden open to attacks on the basis that he didn’t see it coming and is going to make it worse with his big plans.

Republican Rep. Kevin Brady of Texas, the ranking member of the House Ways and Means Committee, said. “No wonder Americans now rank inflation alongside Covid as their biggest concerns — and believe Biden’s $4 trillion tax-and-spending binge will only make prices worse.

CNN

You cannot solve an inflation problem by dumping more money on it. You cannot solve a shortage of workers by creating more jobs. Thus, inflation suddenly is the biggest threat to Joe Biden’s big plans.

By all accounts, the threat posed by record inflation to the American people is not “transitory” and is instead getting worse. From the grocery store to the gas pump, Americans know the inflation tax is real and DC can no longer ignore the economic pain Americans feel every day.

— Senator Joe Manchin (@Sen_JoeManchin) November 10, 2021

That’s from Manchin, the one Democrat Joe Biden cannot afford to lose if he wants to pass his next massive spending bill. In fact, Manchin just announced he may kill the bill:

Manchin may delay Biden social spending plan over inflation

Red-hot inflation data validates the instinct of Sen. Joe Manchin (D-W.Va.) to punt President Biden’s Build Back Better agenda until next year — potentially killing a quick deal on the $1.75 trillion package, people familiar with the matter tell Axios. The data released Wednesday set the president and White House staff scrambling. Slowing down work on the massive tax-and-spending plan is against the fervent desire of the administration and House progressives.

Axios

They just didn’t see it coming!

Again, #inflation is significantly hotter than median forecast
Month-on-month, US CPI rose 0.9%, compared to 0.6% consensus expectation. Takes the annual measure to a stunning 6.2%.
“Transitory” downplaying of inflation is ending up being a real issue,economic and socio-political

— Mohamed A. El-Erian (@elerianm) November 10, 2021

You can also expect the Fed has received this news as a gut punch. The CNBC article above claimed,

Heat’s on the Fed. The Fed finds itself under increasing pressure to adjust policy accordingly.

That also means you can expect the Fed to increase the speed of its tapering in the months ahead or get to raising interest rates sooner than it indicated at its last meeting because the Fed has been, once again, blindsided.

Central banks raise interest rates to combat inflation, though officials have said repeatedly they don’t anticipate doing so until at least well into 2022. While central bank officials mostly insist that inflation will abate over the next year or so as conditions unique to the pandemic subside, the data pattern shows the Fed has underestimated price pressures.

The last people you would expect to see these things coming are economists.

Supply chain issues probably “will ease markedly over the next year and do not require a monetary policy response,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But the Fed is now putting a great deal of faith in the idea the wages soon will be constrained by rebounding participation, and that stronger productivity growth will hold down unit labor costs growth too,” Shepherdson added in a note. “This is entirely reasonable, but not certain, and in the meantime core CPI inflation is going to rise further; the October print is not a fluke.”

Entirely reasonable? How about entirely wrong? If wages are “constrained” as inflation keeps rising, there will be a lot of effort by workers to unconstrain them. Remember, rapidly rising wages are already effectively constrained by inflation as the graph above shows. Even though they are rising faster than they have in decades, they are still steadily going lower in buying power. So, if they actually become nominally constrained, the problem becomes that much worse for the American wage-earner, and the politicians will have hell to pay at the polls in the midterm election, something now solidly on their minds.

But, of course …

Almost all economists join Fed policymakers in believing that the current inflation run bears little resemblance to the pernicious stagflation – high inflation, low growth – of the 1970s and early ’80s.

Of course, they do! No one ever said economists are the brightest candles on the Christmas tree. (And, yes, we may be back to candles soon at the rate energy prices are rising. Well, except you won’t be able to afford those either because the petroleum-based wax will be too expensive.) They are, like weather forecasters, apparently paid to be wrong.

It is already like the seventies. It is already stagflation, meaning inflation is not rising because the economy is so strong, but is rising, in spite of a rapidly falling economy. We even already has a massive energy crisis based on oil like the seventies. It couldn’t be more like the seventies if you did your best to fashion a seventies period of stagflation because nothing fifty years down the line is ever going to be exactly like it was fifty years ago.

If you look back at the graph at the top of this article, you’ll notice inflation now is just a touch below the level it was at in the seventies at the very leading edge of that graph. However, you have to bear in mind that inflation is calculated much differently than the seventies numbers were. If it were calculated in the same way it was back at the start of that graph, inflation today would be as bad as the worst of the seventies. Take things back to calculating inflation the way it was calculated in the days we are comparing back to, and it looks like this:

Now, that’s a much different picture, showing we are actually right about where seventies inflation peaked out! Almost all economists forget to tell you that. (There are still a few smart ones like John Williams at Shadowstats, who tries to keep things honest.) The Fed will certainly never tell you that; nor will all the dim bulbs who keep parroting “this is not like the seventies!”

Expecting an exact match to the seventies is stupid! This is as close a match as you will ever find. That doesn’t mean it won’t be quite as bad — just that there are, of course, going to be ways it is a little different. That should go without saying. It shouldn’t become the excuse for saying, “This is not like the seventies.” It may even become worse than the seventies! I believe it will if measured by the same calculus. In fact, I would not be surprised if we see some months where the annualized amount will become double-digit figures even under the present calculus!

The present inflation is as much like the seventies as anything ever will be or can be; but naturally it will have some different flavors. So, the denial doesn’t do us any good … just as it hasn’t done Jumpin’ Joe or the Fed any good to keep pretending inflation is transitory. At least, Joe seems to have given that delusion up. The Fed is still hoping and still mouthing meaningless words.

Said the economist above,

“We remain baffled as to why Chair Powell chose not to warn markets explicitly of the risk of a run of big increases in the core CPI over the next few months; the components which drove up the October reading were all foreseeable.”

I don’t remain baffled by it. It is exactly what I expected the Fed to do, and exactly what this economist did when he said the Fed’s belief that wages will be constrained in the months ahead by a rebounding economy is “reasonable.” This inflationary economic crisis has all been foreseeable for over a year! Economists can only talk about how they are surprised by the Fed’s blindness after the fact.

I could say, the following is to that economist’s credit:

He expects core inflation, now around 4.6% year over year, to top out over 6% and run that high through March, “massively increasing the pressure on Chair Powell and other Fed doves.”

… except that, with inflation already at 6.2%, I think the object of his foresight is already self-evident. Economists are generally doing well if they can predict things slightly after they happen.

The crisis is already here. People are already changing their buying habits to focus on discount stores. Wages are already falling way behind inflation. Inflation has already reached the summit it attained in the seventies. Oil shortages are already spread across the world. And this is just the beginning, not the mid-term or end as it was in the seventies. On top of that, this time we have a plague that acts like a flock of black swans circling every day.

Stocks and bonds didn’t like the news on Wednesday

As I’ve said, inflation will rise hot enough to where it starts tearing the soft underbelly out of market sentiment. We’re not there yet because the denial of economic reality that is necessary to maintain the testosterone-driven climb is that extreme, but we can see the market flinching, and by that, we know it is vulnerable. For now, the transitory narrative is the only lie it needs to keep on climbing a little higher. But here was the flinch:

Dow ends 240 points lower as inflation surge sends Treasury yields sharply higher

U.S. stocks ended lower Wednesday, extending Tuesday’s losses, after data showed consumer price inflation jumping to the highest in three decades…. A poorly received auction of long-dated U.S. government bonds midday didn’t help the market’s complexion either…. The 10-year Treasury note yield … rose by the most in one day since Nov. 9, 2020….

MarketWatch

As, I’ve said, a crash will happen in both stocks and bonds due to this period of inflation that is not about to let up. I don’t know how long that will take. The only part I have ever said I was certain of was that inflation will rise high enough and stay up long enough to do the job. So, keep your eyes on inflation. Today, denial appears to have bounced back in place. And, of that I’m not surprised at all, which is why I did’t jump on yesterday’s news yesterday.

For the thirty-year bond, it was not just a bad auction; it was a horrible auction:

The decline in stocks and the sale of 30-year government debt that some analysts described as “disastrous,” comes after inflation data revived concerns that the resulting rise in borrowing costs may upend the current bull run for stocks…. “If inflation doesn’t subside, the Federal Reserve may need to taper at a more substantial rate and hike interest rates, which could hurt stocks and bonds.”

The immediate reaction to the data by equity investors makes sense, but doesn’t indicate that they’re convinced inflation that is in large part the product of strong demand and supply-chain bottlenecks will pose a significant danger to earnings, said Art Hogan, chief market strategist at B Riley-National, in a phone interview.

Overall, the data was running hotter than investors would like to see, but they don’t appear convinced that having more demand than supply will be a problem, he said, or that the Federal Reserve is going to speed up its tapering process or move to give up its patient stance on rate increases….

Investors can deny what is coming all they want, but that won’t cause it to not come. While they are not selling the news, though it did make them flinch, they will sell the reality. The data will cause the Fed to move faster, and the Fed’s move will be disastrous because the market has not priced it in. Or the data keeps pounding away and the market eventually gets some sense and starts pricing it in.

My point about the market getting sense is not meant to mean the market is not entirely driven by sentiment. It certainly is right now. It is that sentiment, itself, that has no sense. It’s pure emotion. That is why it can change suddenly as it did in March, 2020, and in the fall of 2018 when economic reality smashed into it.

Market witchers, who read the ripples and the waves, could see the sentiment start to change prior to March because the reality about COVID in China was starting to slowly seep in. But the market kept rising in denial for a month or so, though the signs of a big change were building beneath the waves.

When COVID hit America, and businesses closed, reality smashed in. The market suddenly got religion and crashed to fit the economic disaster that actually happened. As I’ve said repeatedly, eventually, economic reality always wins. It’s just that the longer denial holds out against it, the worse the market crash will be when it happens.

This crash is coming. I can’t tell you when this time, but I can tell you what will cause it (and have been telling you that). I can tell you inflation will keep rising until it finishes off the job, and we have several times seen the market tremble to inflation news (only to shrug it off again), but those tremors in the rafters and walls should tell you the structure is not sound.

The pressure is building

The October CPI report released today makes ugly reading for the Fed and risk-takers with a further broadening of excess inflation pressure….

Stocks already were under selling pressure early Wednesday but tipped decidedly lower, following a poorly received auction of $25 billion in supply, which was described by Jefferies economists Thomas Simons and Aneta Markowska as one of the worst since 2011, by one measure.

Wait until the Fed actually tapers out of the treasury market so that it no longer sets bond prices as it currently still does by being the whale tail on the scale.

“Heavy thumb?” Forget it. We’re way past that, but that is changing soon. And the Fed, blind as it has already proven to be many times, thinks it will get away with that. Uh uh. Yellen gets to see yet another financial crisis in her lifetime if she lives another year. When the Fed actually backs out, it is the economic and financial reality that comes from that act that will matter, whether the news of its coming is currently ignored or not.

Market watchers are also split on whether the reasons behind the movements are merely technical and thus easy to dismiss or indicative of something more troubling…. “It’s not all noise, there is some signal in here.”

AP

The movements are indicative of something much more troubling. Right now, the Fed is still master of the marketplace in bonds. So, there shouldn’t be much movement. Wait until you see what bond prices look like when the Fed is no longer interfering! That, as I laid out in clear detail for donors (thank you) in my last Patron Post, is the market’s big blind spot.