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2022-06-30 08:48 by Karl Denninger
in Macro Factors , 451 references
[Comments enabled]  

From the headline:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.0 percent in May on a seasonally adjusted basis after rising 0.3 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 8.6 percent before seasonal adjustment.

Food at home was up 1.4% on the month, which is catastrophically bad.  Fuel, of course, was up ridiculously in May, which we all know (4.1% for gasoline, 3.9% for all energy.)

Annualized figures are not relaxing.  Food at home is up 11.9% with protein sources being up 14.2%.  Energy commodities are up a stunning 50.3% overall, with fuel oil (that's diesel, fools) a clean double.  This is entirely a policy decision by the Biden Administration who said this was what he was going to do during the campaign, and he did.  Do not kid yourself -- the last barrel's price of oil today is what you pay for all of them; that's just how it works.

The media is all happy-talk about things "rolling over"; the only thing rolling over is the economy and jobs will follow.  Inertial elements in the CPI are going to remain sticky and until and unless truly restrictive monetary policy is put into place there is no reason to believe this trend will actually change.  Simply put Friedman was and is correct: Inflation is always and everywhere a monetary phenomena, and my statement of years ago is also correct: Behind every unit of economic output is a unit of energy, so until our government stops the war on energy there is no resolution of this problem that is possible.

One way or another will get that.  Either the government will stop it or demand will collapse along with economic output and balance will be restored in that way.  There are no other alternatives.

Note that the intentionally distorted "Owner's Equivalent Rent" says house prices only went up in the last 12 months by 5.1%, and the even more-ridiculous and direct lie is that allegedly rents only went up by 5.2%.  That's nonsense and we all know it, but there you have it.  Put a more-realistic national number on both and you wind up with a headline annualized inflation well into the double digits.

The personal income and spending report says that the rollover in the economy is here right now.

PCE has basically collapsed, down to 0.2% on the month of May where the last four months were all three or more times that, with two of them well clear of 1%.  Worse, price indices were up 0.6% headline and 0.3% core, which means on a price-adjusted basis its negative.  In addition goods spending decreased on a gross basis, and since gasoline and other fuels are a good (which went up wildly in price) this is a flat-out recession print.

No, folks, its not "resolving" -- its getting worse, exactly as I expected and which is blindingly obvious from the PPI data, which says that we're in for a long, nasty slog here with the most-likely path looking a lot like the late 1970s and early 1980s.

That went on for about four years so if that pattern holds, and I bet it will, we're at least three years away from resolution and this assumes The Fed follows through, which I fully expect them to not because they want to -- but because they must.

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2022-06-23 07:00 by Karl Denninger
in Macro Factors , 1426 references
[Comments enabled]  

"Oh nos, there's a recession coming!"

CHEERS, say I.

What, you say?  You must be nuts!  People lose their jobs in a recession and the economy stinks!

Oh, so what's going on right now doesn't stink?  Sky-high gas prices and a 50% inflation built into the PPI which has yet to work itself through the system -- and won't for at least another year even if all the crazy policies stopped now?  Of course it does.

The only reason to fear recessions and higher interest rates is if you, or your firm, is over-levered.  To put not so fine a point on it you cheated to obtain what you claim as "prosperity" and now you're staring down getting caught out while both unprepared and having done stupid things.

Key to this is that you did the stupid things.

What was the smart thing to do in such a time?

Live below your means and sock back capital during the good times.


Because then you have it, and its yours, when the bad times come -- which means you get to pick on the people who did stupid things and, by doing so, get far ahead and you didn't have to cheat in order to do so.

Twice in my time running MCSNet I feasted on other people's stupidity in regard to taking on leverage they could not service.  Neither time was I personally responsible for the stupidity of said others, but both times I made out like a bandit -- precisely because I had cash and, when the opportunity arose, could slap it on the table in exchange for what I wanted to grow the business at a ridiculous discount to what I would have otherwise paid.

One of those was Class "A" office space in downtown Chicago which I was able to lease for $8/ft, about one fifth of the going rate at that general time.  I had cash and thus was able to slap a big check on the desk in the management office and prove that I was able to fund the space and wanted it now.  I got it.

Why was that so critical?  In business you make your money when you buy things, not when you sell them.

This may sound counter-intuitive but it isn't.  Marketing (and its subset of advertising) are expenses. You not only have to out-market the other guy you must do so while every dollar you spend on same dilutes the results.  That's hard, and while marketing is necessary going at competitors from that angle is an uphill slog.  Necessary, yes, but still uphill.

On the other hand if you can acquire office space at a fifth of what the other guy had to pay now you spend less on said overhead every single month until the lease runs out, and during that time your operation costs less to run than his does.  That's a wild advantage that, assuming you're both equally good at what you do, drops immediately to your bottom line.

So do not fear recession, rather plan for it and patiently wait for the advantage, then take it.  There is nothing wrong with exploiting someone else's stupidity and it is in fact the way the patient and smart make money over time.  Not instantly to be sure, but certainly, and with no or little risk of blowing yourself up economically.

If you're one of those people screaming about an imminent recession you just marked yourself as either one of those who has been stepped on by various corporate interests over the last decade (in which case you have a valid complaint, but its not with an impending recession) or you're over-levered and starting at your own economic destruction, knowing its coming, and demanding that someone save you from yourself.

Sorry, not this time.

And, incidentally, my expectation is that this won't be over quickly either.  The closest analog is the 1970s in our recent economic past and the sucky economic picture went on for about four years.  Thus it is likely to this time as well, and in fact the PPI data, which I have reported on repeatedly, strong suggests that the Biden Administration component of this is just starting to show up at the consumer  level in the last few months and even if we were to stop all the craziness right now, which of course we won't, it would be 12-18 months before it started to improve.

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2022-06-14 09:00 by Karl Denninger
in Macro Factors , 1238 references
[Comments enabled]  

Oh my look what we have here!

The Producer Price Index for final demand increased 0.8 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This rise followed advances of 0.4 percent in April and 1.6 percent in March. (See table A.) On an unadjusted basis, final demand prices moved up 10.8 percent for the 12 months ended in May.

So.... two points, more or less, higher than CPI.  PPI leads, I remind you, so the consumer inflation level has not peaked.

Let's look inside.

Final demand goods: The index for final demand goods moved up 1.4 percent in May, the fifth consecutive rise. Over 70 percent of the increase in May can be traced to a 5.0-percent advance in prices for final demand energy. The index for final demand goods less foods and energy moved up 0.7 percent, while prices for final demand foods were unchanged.

Oh really?  Only 5% eh?  Well, don't look at June, because gasoline, for example, has risen by more than 10% in the last two weeks which is all in June.  Oops.

Product detail: Nearly 30 percent of the May increase in the index for final demand services can be attributed to prices for truck transportation of freight, which rose 2.9 percent.

No kidding?  You mean $6+ diesel fuel turns directly into higher shipping prices?  I just got back from a cross-country trip and saw lots of dead dinosaurs coming out of the stack of 18 wheelers and every one of them had better keep moving or you're not eating, never mind being able to buy and consume anything else.  The current Administration's war on fossil fuels might make you feel good but it is also directly responsible for this insanity.  Choose one and only one: Feel good or be able to afford food and basically everything else.

The really nasty is that the 12 month trend is unbroken and, as I noted, it all started right after Biden was inaugurated.  He said he was going to do this during the campaign and he has.  It takes time for the PPI to reflect down into the final shelf price and it has.  But the 12 month final demand number, less food, energy and trade from 12 months prior stands at 6% which it has run at or above since August of last year.

Shut it off now and it will be next summer before that has all worked its way through and there's nothing you can do about the time requirement.

What's even worse is this table, which portends an inflationary detonation of your pocketbook:


That is catastrophic.  Note that the right-most column is wildly above the left -- by about double -- and has been for the entire last year.  While productivity can absorb some of that the fact remains that unprocessed goods are turned into processed ones and then finally into the above table.  This is a direct result of both the Trump and Biden Administration policies -- Trump first with wildly insane money printing and then Biden with not only doubling down on that but in addition declaring war on energy.  Do not for one second think this resides only in the executive; it does not.  In point of fact it is Congress that is primarily responsible for all of it and both sides of the aisle are equally to blame.  Make sure you provide proper thanks to your Congress critter and Suckators for screwing you blind.

Of course that would be redundant since the American people demanded all of it, so for once we got what we demanded.

Trade and transportation have not shown any slowdown either -- not that it much matters with the goods and services side generally.

Anyone who thinks "inflation will moderate" over the next 12 months has rocks in their head.

More tomorrow.

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2019-07-27 07:00 by Karl Denninger
in Macro Factors , 426 references
[Comments enabled]  

This garbage is just flat-out ridiculous:

I earn my living investing other people’s money in the stock market. I am terrified contemplating how I am going to save my clients’ money, as well as my own, if a Democrat is elected president. The policies that the Democrats are advocating will destroy the American economy, not just the stock market, but the whole US economy. My first instinct will be to raise cash ahead of the stock market crash, but even that is only a temporary safe harbor.

The Green New Deal, renewed regulations, Medicare for All, free college,  as well as the 70-90% tax rates proposed by Democrats, will tank the stock market and US economic growth, leading to higher unemployment and reduced wage gains. All these programs require higher taxes and not just the soak the rich fantasy of the 70-90% rates. Most of the Democratic candidates have pledged to roll back the 2017 Republican tax cuts that fueled the renewal of economic growth in the US.

All of this is true.

But it's irrelevant.

As I've pointed out for more than a decade by 2024 CMS -- that's Medicare and Medicaid -- are incapable of the shenanigans that they use to suppress their budgetary deficit impact.  This is not rocket science, it's arithmetic, exactly as is the so-called "doom dates" on Social Security.

But Social Security's "doom dates" are in fact rather minor.  Being able to pay 80% of a promised benefit (that is, you're running a ~20% fiscal deficit which is consuming assets) is sort of ugly, but that's fixable.  Nobody's going to like a 20% tax increase on FICA (7.65% of wages up to the cap, plus another half you don't see) but raising the cap, increasing that tax by 20% or some combination that gets to the same place resolves the problem.

That's not catastrophic.  Nor, for most people, is a 20% reduction in payments, although the howling (and election losses) that result from the latter guarantees that won't be the outcome.  Those tax changes will and can be made and will not result in a collapse of the economy.

However, CMS is not running a 20% fiscal deficit; in their case roughly one dollar in five is covered, not four dollars in five!  When they run out of that stoked-back powder there are two choices, and only two choices:

1. Essentially default in its entirety on the promises made to Medicare recipients, both current and forward, forever.  This will simply cost-shift basically all of that onto Medicaid, particularly with regard to nursing home care once you bankrupt the vast majority of Medicare (retired) people, which will happen almost instantly.


2. Congress changes the law so as to permit CMS to run without backing, that is, the entirety of their operating deficit shows up on the federal budget as a fiscal deficit.

Social Security and Medicare are currently prohibited by law from doing #2.  Congress will have no choice but to permit #2 for at least Medicare, and since utterly nobody in the political or news space de-aggregates these two programs when talking about "fiscal cliffs" even though they have radically different exposures and funding problems the pressure to do it for both in the same bill will be overwhelming.

Not that it really matters; #2 will roughly double the federal deficit on an essentially immediate and permanent forward basis.

The "big lie" is this:

Whatever you think of President Trump, you know by his record that he will put America first and that his policies have created a robust economy. Unless you want to see the US economy and your standard of life destroyed, there is no alternative to voting for President Trump.

No, he has not.

The GDP data is here.

It shows a 4% gross GDP advance over the last 12 months (to Q2/2019.)

Debt to the penny shows a 3.91% fiscal deficit as percentage of GDP over the same period of time.

In other words there is no "robust economy" at all; it's a lie.

Actual GDP expansion in real terms over the last 12 months is 0.09%!

Statistically-speaking that's zero.

These are not my numbers and not my assertions; they're the government's figures and they're widely-regarded as facts.  Trump's most-recent "budget deal", which he is advocating for, has passed the House and will almost-certainly pass the Senate and be signed into law will remove all fiscal rectitude until the middle of 2021 by suspending the debt ceiling entirely.

Again, I remind you, by 2024 on current trajectories that roughly trillion dollar deficit ($828 billion on a rolling 12 month basis at present, and accelerating) will permanently double.

Yes, GDP will go up, since every dollar of that deficit will be immediately spent.  That's how borrowing works; you borrow money and you spend it, and as soon as you spend it GDP increases.  That's basic math and economics.

However, diluting the currency as a means of "goosing" GDP doesn't actually advance anything in terms of actual economic output.  Worse, productivity, if you believe the BLS, is "advancing" at 3.4% annually as of the last read.  This is, paradoxically, very negative in light of the fiscal deficit because "doing more with less", which is the definition of productivity, means that GDP should be running at least at that level on a fiscally-adjusted basis!

In other words if you include productivity, and for honest numbers you have to, the US is currently in a deep recession as it is in fact contracting real output on a roughly 3.3% annual rate.

How is this possible given "full employment" and the stock market soaring?

It's not hard to figure out; it's happening the same way you're "just fine" if you make $100,000 a year but continually add another $4,000 a year to your credit card balances.  That $4,000 is quite a lift in your standard of living.  It allows your family of four "another" week-long cruise per year, for example, or a very nice trip to Disney, or, for that matter, more than half of the monthly payments on a brand new $50,000 "loaded" pickup truck or Lexus.  Note that if every family did this GDP would increase at that same 4% since you're all spending 4% more than you make and the gross output will thus lift by that same 4%.  The (obvious, to anyone with more than two firing neurons in their brain) problem is that you're not really gaining any prosperity at all; in fact you're going backwards as you're accumulating an obligation that at least has an interest expense and at least in theory eventually must be paid off!

This illusion of "prosperity" can continue for a very long time -- so long as your credit card company doesn't call the loan, or even just shut off the spigot and deny any more charges. But even if just the latter happens not only does that $4,000 a year of "spending" disappear the interest payments do not disappear, and since you can't afford to pay down any of the principle those interest costs go on forevermore into the future.

Again -- as things stand right now we're consuming our capital base at a roughly 3% annual rate.  That depletion rate is set to double within the next five years.

I do not know when the markets will wrap their arms around this just like I don't know when you as a family would if you were running up your credit card on those Disney vacations.  But I do know that the day when it happens will come.  Not might, not could, will.

The willful and intentional denial of this fact by you, Greenwald, along with the others drum-beating for the flying-hair monster currently in office will simply make it worse when it does happen.  After all a market crash from DOW 27,000 to DOW 5,000 is very, very bad.  But one from DOW 35,000 to 5,000 is demonstrably worse because more and more people will believe that the so-called "value" in those assets is not only real but theirs to consume over the coming years when in fact it is not.  How many of those people have a half-million dollar "retirement fund" that is, in fact, really a $50,000 one?

What really galls me, however, is so-called "money managers" like the cited one in this quoted article, who believe that (1) this "prosperity" is real despite the data saying its not being literally in their face, (2) Trump is responsible for it and (3) voting for Democrats will be a disaster while not doing so will continue the "prosperity."

The root problem is that there is no prosperity in the first place; it's a chimera and fraud writ large and has been the case and policy of both parties since approximately 2000, when the accumulation of federal debt crossed the zero boundary and began resulting in negative contribution to GDP.

This is an exponential series.  Like all exponential series the negative impact starts slowly and thus the "belly" in the curve from the two lines on the chart for a while expands.  Yes, the top-line (debt) is accelerating but the imposed cost starts at a lower level and thus there's more "gap" between the two curves for a while.

But arithmetic tells us that exponents always behave exactly the same way.  That the appearing-safe "belly" will disappear, the gap will close and when it does you have a catastrophe because you can't cover the expense.  There is nothing you can do about it other than to halt the excessive spending and pay down the outstanding balance, but this requires not just halting the excessive spending (that is, cutting it to income levels) but going even further in order to pay off some of the outstanding balance.

At present the Federal Government is spending approximately 25% more than it takes in from all taxes combined.  To halt the detonation the spending cuts must therefore be more than 25% in total, now and forevermore into the future.  Everyone in DC has a wipe-out, toddler-style screamfest if you propose not spending more every single year yet the corrective action required is for one quarter of all money spent today be whacked off the budget.  That's how far down the rabbit hole we've gone, all without a single whimper of revolt or refusal to consent by the public at-large.

The mantra for the last 30+ years is that we're "leaving this mess to our kids and grand-kids", implying that we're saddling those who either cannot yet vote or worse, aren't yet born.  That was true 30 years ago,  It was probably true 20 years ago, as the generation just being born then would become adults about...... now.

But today it's no longer true.  We're not leaving anything to anyone.  The problem is here, it's ours, and we either stop it now or it will blow up in our faces.  Five years is a very short period of time to make fiscal adjustments and allow the economy to adjust and come back into balance.  Trying to eke out another 10, 20, or even 50% in stock prices over the next five years is not only unwise it's literally suicidal on a national basis and those advocating for same deserve to be held to account when, not if, their continued drum-beating for a fiscally, economically, politically, morally and ethically bankrupt position results in mortality.  One can only hope it's their progeny, spouses and then theirs personally, in that order first.  Sadly while I can hope and pray for them to be first it will not be only them no matter who goes first; the count of ordinary people who will be utterly destroyed and likely die is going to reach all the way from top to bottom with those at the bottom bearing the greatest percentage of losses.

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2018-07-05 07:00 by Karl Denninger
in Macro Factors , 300 references
[Comments enabled]  

This man is flat-out nuts.

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them? The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

He goes on to argue that it's not China's fault -- it is the fault of our corporations, and thus we have to deal with "our" corporations.

Uh huh.

A business exists to make a profit.

Laws define what is legitimate to do in the pursuit of said profit, and what is not.

Millions of Americans lost their jobs because the law allowed their jobs to be offshored to literal slave-labor encampments without consequence.

And it is not just China.  In fact, China is just one of many offenders.

The results are plain. In Kuala Lumpur cranes stretch outward among the gleaming towers in a perpetual construction boom powered by foreign investment. The streets are spotless and well policed, the water is clean, and the politics are relatively stable. Consumers around the world benefit from products like mobile devices, circuit boards, and LED screens.

At the heart of this economic success are migrant workers. From Bangladesh, Nepal, the Philippines, Indonesia, and India, they arrive at Kuala Lumpur International Airport by the scoreful, papers in hand, hoping for a better life. Estimates of the number of foreign workers in Malaysia vary widely, from the government’s count of almost 1.8 million to perhaps twice as many, which would amount to a quarter of the country’s workforce. Migrant-worker advocates estimate one-third of those workers are undocumented.

Malaysia allows and prospers through what amounts to slave labor; in other words, modern-day human trafficking to obtain labor for pennies an hour.

This is nothing new; in fact it's as old as people.  Mexico was once one of the worst in this regard; they didn't give a crap about the health of their slaves or even their longevity; they had access to so many of them that there was no economic incentive to even feed their slaves.  In other words it was cheaper to buy a new slave than feed the one you have.  America's slavery, for all its warts, didn't devolve into that but it wasn't from the "caring" of the slave-owners -- it came from the economics.

Has it really changed?  Nope, nor will it ever except where the law forces it to.

This is why in my book Leverage I pointed out that the only way to deal with this crap and stop it is to apply Wage and Environmental parity tariffs without exception and to ensconce those in law for any firm that wants to do business in the United States, without exception.

PCR says this is the fault of the Fed.  Of course he does -- he doesn't want to deal with the fact that he, personally egged on the offshoring and "free trade" bullshit, never mind his time in advocacy with the Hoover Institution, Georgetown, George Mason University, an associate editor for the Wall Street Journal (which has an unabashed record of promoting so-called "free trade") and, of course, Reagan's "supply side" economics which were little more than a sop to offshoring and exploitation of slavery.  Oh, and let's not forget his advisory role to J.P. Morgan!

It's not like the big banks had anything to do with this, right? smiley

Reagan had the distinction of running enormous deficits during his Presidency, which inflated GDP.  Everyone cheers for GDP increases but nobody in the media, nor Roberts himself, points out that mathematically GDP will always increase by the exact amount all branches of government combined spend in deficit, whether they allegedly issue "bonds" to "fund" that or not.

Nobody issues bonds or takes down a deficit for money they do not immediately use.  If your local district issues a $20 million bond for a school improvement it immediately spends the $20 million.  If they taxed the money from you first the net GDP impact would be zero -- you forfeit the $20 million to the school (which means you don't spend it) and then the school spends it.  $20 million minus $20 million is zero.

But if they can spend it first then they take nothing from you initially and GDP goes up by $20 million.

The problem is that theoretically they must take the $20 million later to pay off the bond but history says they never do. Instead the bond is rolled over and only the interest is paid, so the $20 million appears to be "free" in economic terms and thus GDP continues to go up when they issue the next one too.

It's not true in fact and what's worse is that the "extra money" flying around makes the price of everything go up.  Now if there was no turd-world slave labor there would be a check and balance on this that would come in the form of rapidly-rising wage demands (when you get to the point of being unable to feed yourself why go to work?) and that cuts off the game.

To prevent a replay of this after it happened during Nixon's administration (and interest rates were forced higher in response) PCR and the rest of the "free market" screamers passed law and policy to make it both legal and trivially easy to find a source of slaves to replace those pesky people in America who would otherwise demand more money to keep making both cars and computers.  They are also the same people who insist that illegal Mexicans be allowed to flood the nation to pick oranges, strawberries and roof houses.

It's not that Americans can't do those jobs it's that you can't ask Americans to do so them for $3/hour and expect them to be able to survive.  The price of a house or strawberry package would skyrocket immediately and cut off the unbacked credit issuance.

In other words it's all fraud and PCR knows it.

But this is what passes for "economic wisdom" these days, never mind "reporting."

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