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2022-05-12 09:35 by Karl Denninger
in Macro Factors , 444 references
[Comments enabled]  

What sort of insanity is this?

The Producer Price Index for final demand increased 0.5 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This rise followed advances of 1.6 percent in March and 1.1 percent in February. (See table A.) On an unadjusted basis, final demand prices moved up 11.0 percent for the 12 months ended in April.

The "final demand" 12 month run rate is stuck at 11.0%.  I remind you that it has been rising radically through that entire table and is well above The Fed's alleged "target."  The claim of "transitory" is proved to be a howling lie by this table, since this is literally a year's worth of "triple the target rate" inflation at the producer level, which then must work its way down to retail.

Food and energy are monsters in everyone's budget, like it or not.  Energy is the hydra that wipes out everyone else because it literally is in everything.  As I have often observed behind every unit of GDP is a unit of energy; this is a fact and no amount of arm-waving will change it, so if you wish to attack energy sources and consumption you are, by definition, attacking economic output and the economic health of the common American person.

It does not matter how you feel about various energy sources.  Mathematics does not care about your feelings, and neither does physics -- and thermodynamics.

What's much worse is that we are seeing 2%+ monthly increases in intermediate demand goods -- and 48% annualized for unprocessed.  That too is a more than a year long trend with 12 month annualized prices in excess of fifty percent.  Folks, that's a doubling in less than two years and these are unprocessed goods, which means they're yet to work their way through the system.

Don't think "services" are ok either -- they're not, with the price increase running three to four times the so-called 2% "inflation target."

No, folks, it's not slowing down -- at all.

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2022-05-11 09:00 by Karl Denninger
in POTD , 168 references


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2022-05-11 08:46 by Karl Denninger
in Macro Factors , 957 references
[Comments enabled]  

It might be the dog.... but do check the curtains -- they may be on fire.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in April on a seasonally adjusted basis after rising 1.2 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 8.3 percent before seasonal adjustment.

The 900lb Gorilla in the room is the food index, which was up 0.9% on the month, and 1% for food at home.  Much worse, all items less food and energy was up 0.6% which was double the same index for last month.  This is the much-watched "core" inflation number and it is smoking hot, as I expected to both occur and continue since while everyone loves to claim fuel is "transitory" it matters not what you think since everything moves by truck for the last miles, and often for all the miles.  Stick diesel north of $5, in some places materially so, and the price of literally everything rises.

A lot.

Food is up 9.4% for the last 12 months, a figure last eclipsed in April 1981.  We all know what was going on then, right?


50 bips increases?  We should have an emergency 100bips right now, but you know they won't.  And just like it took a year for Trump's Congressional crazy from the pandemic "credit shower" to show up in wild price acceleration it will take 12-18 months for it to stop if and when Congress does stop it, and that is after The Fed stomps it.

Which they have to, because at this rate of acceleration people starve in relatively short order.

Again, to remind you -- you can't give away more welfare of whatever form to "help" because the sequestration mechanism of the last 30 years, which is international trade where the clearing is in dollars, has been permanently shut down by the Russian sanctions related to the Ukraine war.  This is not reversible in the short term and, in all probability, will never be restored at all, with the most-likely outcome over the intermediate term that sanity comes back (that is, international trade clears in the currency of the producing entity) since that is the one the producer ultimately needs to spend for the next order to be produced.

Looking through the table all manner of things completely unrelated to food and energy, and unrelated to Russia/Ukraine, so everyone thinks, are up double-digits.  Floor coverings, curtains, furniture, major appliances, clocks, tools and hardware, outdoor equipment (e.g. lawn mowers and weed whackers), tires, vehicle parts, oil, coolant and other vehicle fluids and even stationary.  Want to take a trip?  Lodging (e.g. motels, hotels and similar) is up 22.6% over the last 12 months.  Maybe a six-pack on the back porch will do instead.

Oh, and lest you think insurance is not in the game, health insurance is up 10% too.  Gee, I wonder why.

The other Gorilla in the room, fuel oil aka diesel fuel, is up 80% from last year.  Until and unless that is stopped and the price comes back downwhich will only happen if and when the government ceases its war on fossil fuels, there is no way for the general upward pressure on prices to be reversed.  Every piece of farm equipment forward to the delivery of the food to your store runs on diesel.  Every single item you buy travels at least the last part of its journey moved by diesel.  I do not care how you "feel" about the issues related to the use of fossil fuels, the simple reality is that without them you have no fertilizer, no food and nothing in the store so all of the claims of virtue you issue will make you broke or even cause you to starve.

That's your choice America.  Either be broke or not, but stop thinking that's not what the cause of this comes down to.  It does, and anyone who fails to appreciate that trade sequestration is why we got away with credit emission for 20 years without it instantly blowing up in our face -- and that this is permanently gone as a direct result of our own actions with regard to the Russia/Ukraine conflict -- adds wild-eyed crazy to go along with being broke.

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2022-05-11 07:00 by Karl Denninger
in Interviews , 293 references
[Comments enabled]  

From the intro:

"Congress has defrauded the American public by claiming we could issue this credit created from deficit spending by the United States Federal Government and sequesters it overseas. Our guest this week on the Retirement Lifestyle Advocates radio program, Karl Denninger, talks with your host Dennis Tubbergen about how the Biden administration has overplayed its hand by confiscating Russia’s dollar assets. Similar policies may have worked in places like Iraq, Iran, and other small nations, but in Russia, we’ve taken the largest industrial producer of things like potash, fertilizers, rare earths, and copper and destroyed all links to sales in US dollars. It’s a fascinating conversation you do not want to miss."

I always find it amusing that people think the government (or Fed) can "print money."

That's impossible.  Money is what you receive after you perform some act that has value to another person.  It is the exchange of value that marks what you receive as money

Government, however (including The Fed) can print credit.  Credit is a promise to do something of value tomorrow.  Unfortunately when the entity doing the promising is the government -- or The Fed -- that promise is ephemeral because the entity issuing the promise won't be the party that has to fulfil it and you can't force anyone to perform to their potential.

Commodities, particularly inputs to agriculture, are in trouble -- which of course means food inflation.

Come and get it folks!

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2022-05-09 07:00 by Karl Denninger
in Monetary , 1588 references
[Comments enabled]  

Don't be the fool.

We've spent the last nearly forty years, as you can see here, in a generally declining-rate environment.

Let me explain what this means for corporate America.

I borrow $1 million at 13% interest.  This costs me $130,000 a year to keep "outstanding."  I produce nothing for the next five years and pay the coupon with the $130,000 each year.  I've now got $350,000 in cash left (the rest I paid in interest) and I'm very bankrupt since I can't pay the million back -- right?


I roll it over.  I don't have to pay the million dollars.  It's five years later and the rate is 9%.  Now it costs me $90,000 to keep it out, not $130,000.  Note that I just bought myself more time, but since the market is "looser" I can borrow a second million.  This costs me $180,000 a year to keep out, but, in five more years.... I refinance it again at 5%.

Now I've only got $450,000 in cash left -- remember, I've produced nothing -- but now my "nut" annually is $100 large.  Can I get another $2 million?  Probably.  With which I sit for another five years or so and do it again, and again, and now I am eventually down to a 2% rate on the money.

I'm not out of money.  I should have been out of money seven years into this game but I got away with it for close to 40 years.  If I produce anything whatsoever with the funds I'm even better off in terms of my credit posture, and I've probably borrowed even more.  Not $4 million, probably $20 million.

My stock price, which was $5/share back then, is now $3,000 split-adjusted -- and it has split several times.

All I have to do is convince Wall Street -- or some venture hack -- that he's got something here and since the market keeps running and the cost of borrowing keeps getting cheaper they finance folks will keep letting me do it!

Here's the problem: None of that was ever paid back.  None of it can be, because I have no assets that are worth anything and I certainly don't have any money in the bank.  If I had assets originally they're 40 years old and likely out of date and worthless.  How much is an old open-hearth style blast furnace worth these days?  Zero.  In fact it probably has negative value because you would have to pay someone to wreck it out and haul it away, likely more than the iron and steel in the unit is worth.

But now those days, my friends, are over.

I pointed this out in Leverage back in 2011.  Oh yes, there was another burst of stupid left.  There shouldn't have been but there was and in 2020 the 10 year Treasury yield was 0.65% (!!)  You would have thought that the roughly 3% rate in and around 2011 would have been the bottom because with actual inflation running around that number you shouldn't be able to borrow for less than the inflation rate because you will pay it back (if you pay it back) with inflated dollars.

You'd have been wrong.

The difference between 3% and 0.65% is nearly a factor of five in terms of interest cost and thus the amount of leverage that can be out at 3% is less than one quarter of that which can be out at 0.65% for an equivalent coupon.

Right now the TNX stands at roughly 3.1% so that entire 4x multiple has disappeared.

The policies of our government have led to this.  The belief that we can spent six trillion dollars on alleged "pandemic relief" without consequence because rates will stay pinned to the floor was stupid.

Worse what we've done to Russia with sanctions has slammed the door on sequestering trade flows in dollars.  Why?  Because if you produce things overseas you'd be out of your mind to price them in dollars rather than your own currency when your nation might be next.  "Oh, that will never happen" sounds quaint, but how certain are you when if you're wrong you're instantly bankrupted?  Why would you take that risk when you can insist on payment in your currency?  Nobody would, nobody is and nobody will going forward.

This in turn means that every dollar spent in deficit by the federal government will instantly be reflected back into inflation.  No exceptions.

Has the Biden Administration -- and Yellen, who I remind you was running The Fed before she was running Biden's Treasury Department -- said anything about cutting that crap out?  To the contrary; they intend to continue it.

Well, good luck with that.

Note above -- a four times multiple on the amount borrowable at a given interest payment has already disappeared.

Now where was the S&P 500?

About 1350.

What is the difference between 1350 and where it is now?

About four times.

Where do you think the S&P 500 should be trading right now assuming the TNX is going to at least stay here?

Oh sure, the markets will go up and down, maybe quite a lot.  But at the core of things is the cost of financing and whether you can allegedly "build a business" that produces nothing in actual profits yet keeps getting financed and allegedly is worth more and more, and thus has a higher and higher stock price, simply because you can roll over the debt at a lower carrying cost per million every time you feel like it.

Can The Fed turn around and change its mind?  Not really, because as I've pointed out without sequestering the funds overseas via trade, which is nobody is willing to do anymore if they have an IQ larger than their shoe size, all deficit spending instantly reflects back into inflation right here in the United States and the only way to stomp on inflation is to withdraw the excess credit from the system since there's nowhere to hide it anymore.

If you think the market run over the last five or ten years has been "reasonable" you're nuts.

If you think it can be sustained with a TNX at 3.1% and flat to rising you're wrong.

And if you think The Fed is going to allow 5, 6, 8 or 10% inflation prints to continue you're wrong there too because while you might escape being bankrupted by that others will not, it eventually drives people out of the workforce as there is no point if you can't make the bills despite working and the lower half of the economic strata, from the bottom up, starves, riots, burns, loots and revolts.


Oh by the way did you see the recent Consumer Credit numberJanuary revolving (credit card) debt was +11.8%, February 16.2% and March was up more than doubled February's rate at 35.3%, all annualized.

The average American has hit the wall, is surviving on wildly-accelerating credit card balances and either the current rampaging inflation is stomped on now or we're going to get a nasty recession and probable civil unrest -- or worse.

The recession has already started -- by the data -- and is inevitable so all we're debating now is the latter and whether the government and Fed do the right thing or not the stock market isn't going to be trading anywhere near where it is today.

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