Make Inflation Great Again! — Monetary Inflation is Great for Stocks

When it’s been a long time between corrections, a regulation sell-off feels frightening. After months…and months…of ‘worries’ about inflation, the market decided to actually worry overnight. From The Wall Street Journal:

U.S. stocks extended their losses Wednesday, with the Dow Jones Industrial Average and S&P 500 posting their steepest three-day declines in nearly seven months, after a sharp rise in consumer prices heightened concerns about inflation.

‘The jump in prices was steeper than expected and exacerbated fears that inflation could prompt the Federal Reserve to accelerate its timeline for scaling back its easy-money policies.

The Dow fell 2%, the S&P 500 2.1%, while the NASDAQ sank 2.7%.

Monetary Inflation is Great for Stocks

Monetary inflation is great for stocks…as long as the money goes into stocks. But as soon as it works its way into consumer prices and puts pressure on the alchemists to pause their swindle, it’s not so good.

More from the WSJ:

The consumer-price index jumped 4.2% in April from a year before, according to the Labor Department, the most in any 12-month period since 2008.

Hmmm…since 2008 huh?

This was BEFORE the crisis. Year-over-year inflation was heating up to levels that worried the Fed. Year-over-year inflation readings were actually increasing at a time when we subsequently learnt the US economy was in recession.

And in September 2008, the proverbial hit the fan and inflation wasn’t heard of again for a long time.

In other words, it was transitory. This is a theme picked up on by one of the better monetary economists in the world today, Jeff Snider of Alhambra Partners.

Jeff points out that the core CPI (excluding food and energy) jumped 2.96%, the most since 1996. The month-over-month change was an ‘astounding’ 0.92%, the most since the ‘last days of the great inflation’ of the 1970s.

Jeff asks:

How can any sane, rational person think this is just transitory?

Easy, it’s all transitory given that these things can and do happen. Acceleration of consumer prices during periods of high macro slack and weak demand aren’t gamechangers. In fact, they are most often indicative of outside factors — like helicopters — rather than the underlying facts of the real economy.

The monthly gain in the core CPI last month was absolutely impressive, eye opening, but we just did this a few months ago and for all the same reasons! Back in July 2020, after Reopening 1 had reached its frenzied apex bursting at the seams with Uncle Sam’s helicopter deliveries and unemployment bonuses, the monthly increase in the core was 0.54% which had been the highest in just short of three decades. Most impressive (sounding).

And it wasn’t just July — June, July, and August 2020 — when consumer prices went on an historic run. The reason we don’t remember or hear much about that run this year is how after the sugar rush wore off, by late summer, the frenzied elevation proved to have been, say it with me, transitory.

In fact, by the end of last year consumer price rates were noticeably decelerating all over again. Thus, not inflation. Government on; consumer prices up for a few months. Government off; back to disinflationary normal.

This one’s bigger than July, but it’s all the same factors including more helicopters, another round of reopening, plus a greater supply side squeeze pressing commodities toward outer space.

Inflation Is Here To Stay

Here’s the issue for the ‘inflation is here to stay’ crowd.

There is virtually no private sector demand growth for loans right now. Nearly all the growth is coming from government spending.

Let me show you what I mean, and why this matters for inflation…

In the year to March, bank credit in the US grew a robust 6.2%. Without bank credit growth, there is no economic growth. Commercial banks create and disperse money (credit) throughout the economy.

Of that 6.2%, nearly all of it was ‘securities in bank credit’. What does that mean?

Well, it refers to banks creating new credit to buy (mostly) government debt and mortgage-backed securities.

Loans and leases, which includes things like commercial and industrial loans and real estate loans, increased just 0.8% year on year. In other words, genuine demand from the private sector is at recessionary levels.

From here, keep an eye on the yield curve.

If the Fed starts to worry about ‘inflation’ and makes moves to tighten, it’s likely the yield curve will start to flatten. That is, the bond market will realise the move to withdraw stimulus will kill the recovery.

If this happens, you won’t hear about inflation again for a while.

It will be interesting to see whether the Fed has learned its past lessons. That is, will they keep their foot to the floor? Will they, along with the government, maintain massive stimulus to keep the ‘recovery’ going?

If so, don’t expect this correction to last long.


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Greg Canavan,
Editor, The Rum Rebellion

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