Neil Irwin reminded us yesterday morning that a lot of hopes are riding on inflation easing this year. But it hasn’t happened yet—or over the last year.
Consumer prices surged more than expected over the past 12 months, suggesting a bleak outlook for inflation and increasing the likelihood of more than a few interest rate hikes this year.
The CPI (all urban index) rose 7.5% in January over a year ago, the Labor Department reported yesterday—the highest since February 1982. Economists were expecting an increase of 7.2%.
The so-called core CPI, which excludes volatile food and energy prices, increased 6%, compared with the estimate of 5.9%—its highest since August 1982.
Inflation raged on in February, driving consumer price increases to a place we haven’t been to in four decades.
The latest numbers include a paucity of signs that inflation us leveling off, muchless subsiding.
What’s more, they largely exclude the impact of Russia’s invasion on oil, gas and other global commodity prices.
Most economists and WallStreeters, the Biden administration and members of Congress—especially Democrats—have been counting on inflation peaking early this year.
Unfortunately for them—not to mention consumers and businesses—the numbers are suggesting persistently high inflation for the foreseeable future.
The economy doesn’t want for problems—there are plenty of them, both at home and stemming from rising geopolitical volatility in eastern Europe.
But as Neil Irwin writes, wherever the movers and shakers of the Federal Reserve look right now, “they're seeing flashing green lights that the world wants them to get moving on raising interest rates.”
Yes, the Fed acts independently based on its best analysis of economic data—in theory anyway.
But other factors shape the tone and outcomes of internal debates, too—like discussions by outside economic thinkers and financial market reactions to potential and actual Fed moves.
Right now, Irwin believes those reactions are almost uniformly pointing toward more aggressive action to try to rein in high inflation.
In fact, Fed future traders say another rate hike by the Fed’s May meeting is a done deal—38.4% see a hike of 50-75 basis points (0.5%-0.75%), while 61.6% see a hike of 75-100 basis points (0.75%-1.0%)
Crack spreads — vernacular for oil refiners’ profits — have soared this year as gasoline demand outstrips supply.
They measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.
Matt Phillips of Axios believes crack spreads will see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.
Already, stocks of the major oil refiners got hammered on Wednesday, heading into yesterday’s meeting between Energy Secretary Jennifer Granholm and top industry executives.
Marathon Oil fell 7%, Phillips 66 and Conoco Phillips both dropped 6%, while Chevron and Exxon both fell about 4%.
President Biden publicly is urging an increase in U.S. refinery production, saying bluntly, "I'm calling on the industry to refine more oil into gasoline and to bring down gas prices."
But earlier this year, as crack spreads soared, so did the share prices of major American refining companies, which are up a whopping 38% since January – even as the S&P 500 index has entered bear territory.
While surging profit margins for the makers of gasoline open the industry up to charges of price gouging, industry officials claim that they’re producing as much gas as they can right now.
Industry capacity utilization is running at 94% these days – the highest since 2018 when it hit 97%.
But a recent government report also showed that overall refining capacity has fallen in the last two years.
In fact, it’s now back down to where it was in 2014, meaning that supply will remain hurt even if refineries were to run at 100%.
So, with little chance of bringing new sources of gasoline – domestic or imported – online anytime soon, the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.
That, I predict, will become a growing source of agita for investors in oil companies – and other industries.
Debate is flourishing on Wall Street and at Main Street kitchen tables over the Federal Reserve's fight to lower inflation and how high unemployment will jump as a result.
On the one hand, Fed policymakers believe its rate hikes will eventually drive down strong demand in the economy without causing too much pain in the job market – in other words, a soft landing.
On the other hand, influential economists like Larry Summers say the Fed's ideal outcome hasn't materialized before, and there's no reason to think it will now.
The fight is being debated in various academic papers, but the real stakes for workers and their families are high.
Courtenay Brown and Neil Irwin write today that the issue “is not whether unemployment rises, but by how much as the Fed tightens.”
They believe the crux of the debate is the inverse relationship between unfilled job openings and the unemployment rate.
Other things being equal, as job vacancies rise, unemployment falls and vice versa.
As of May, job openings trended lower but remained near their highest levels ever at 11.3 million.
Plus, the headline unemployment rate is holding near a half-century low (remember, the headline rate is significantly underreported).
The result is an unprecedented 1.9 job openings for each unemployed worker.
Well maybe a few more than two. But first off, did you all see Biden promising 31 more tanks to Ukraine? I watched his 20 minute word salad speech and I was speechless. They want this war to go on and on and on. They want all the spending they can squeeze out of this, and boy the money is flowing.
It took me a long time…over two hours. But I wanted to look up the first time I said that when the economy is in the toilet, they will spark a war, open the debt gates and spend their way out of the hole. Well it was all the way back during the NASDAQ meltdown, and sure enough, we went into Iraq over the BS of weapons of mass destruction. 20 years ago. I probably said it sometime in the 90’s also, but got tired of searching.
Once the war time spending hits, they can spend their way out of most recessions. Well, they’ve done it again. They set up the Ukraine since 2013 to be the area ( patsy) for the next multi billion dollar war spending spree. So it worked. They pushed and pushed Russia to the point where Putin did what any world leader would do…he snapped and pushed back.
That was and is the plan and the reason all these politicians are saying things like “what ever it takes” concerning helping Ukraine win. Listen folks, these people don’t give a rats ass about the Ukrainian people. They do like the Ukrainian chemicals, rare earths, and oil and gas…but the people? To the politicians they’re just as expendable as the people in Libya, Iraq, Sudan, Yemen, Palestine, and a hundred other places. Cannon fodder, nothing more. Oh and a good place to launder their millions of dollars…they do like that too.
But they’re playing a very dangerous game this time around. Russia isn’t Iraq or Libya. Russia isn’t Vietnam or Afghanistan. Russia is a very formidable opponent. So, while they’re all in on this war because of the debt that the Central banks can create and the money that gets spent on more armaments…if it gets out of control, we are in WWIII, with the death and destruction that brings. War is a racket, as quoted by Gen. Smedly Butler so long ago. Well this is one of their biggest rackets ever.
Okay, so lets me get back to market land. This coming week is yet another two day FOMC meeting, where they will determine what they’re going to do with interest rates. Then, on the second day of the meeting, Powell himself will give a Q&A press conference, where he’ll get asked 25 times “when are you going to pause and when are you going to cut rates.” Both of which he will dance around in Fed speak. He’s not as good as Mumbles Greenspan, but he’s pretty deft at it.
Pull up a chair folks, we need to chat a bit. As I expected when news of 3 different banks went belly up, I got a lot of Emails from people in a bit of a panic. “What do I do?”” was a common theme.
The most common question was about gold. “Should I take my money out of the bank and buy gold?” Then there were the ones asking about “should I move my money to smaller local banks, or stay with the big one’s?” The list of questions is pretty long folks.
But to be honest with you and I try and be as much as I can, the questions sort of “bothered” me. If you’ve been reading what I write for any length of time, you should know the basic answers to these types of questions. Now I don’t want to sound snarky here at all, I’m just being serious. We’ve put out two articles a week for over 25 years. Every one of those type questions has been answered in the past.
Which means I either don’t get the message across properly, or some folks don’t “get” what I mean, and others simply don’t/didn’t believe that big trouble could come. But trouble will come. Remember the series I wrote about Dark Winter? I didn’t write that to show you that I know how to grow vegetables, or shoot guns. I did it because trouble is indeed in our future.
So let me see how much of this I can pack into a single article. We are in a debt based system. As completely bizarro as that sounds, our economy is based on the idea of ever rising debt levels. Let me ask you a question, how many times since say 1970 have you heard people in Congress say that they have to get spending under control and our National debt reduced? A hundred? Five hundred? And how has that worked out?
Here's the little secret that they don’t want you to know. They NEVER plan on paying back the debt. The system was designed to be milked for all they can get out of it. Very bright people many decades ago knew exactly how to create a stable vibrant economy, one backed by “something.” But they shelved that idea for a fiat, unbacked, unlimited debt deal. Why? Because if you can print so called money out of thin air, why not print the hell out of it, use it to build roads, and bridges, and military toys, and rockets and “stuff” you want? Then when the debts are at the most unimaginable levels, when it’s impossible to keep playing the whack-a-mole game, you simply default on it all, and then “restart” with a stable currency backed by something. Gold comes to mind.
Courtenay Brown and Neil Irwin open their Friday column with these startling headline-like declarations:
“Sunday night bank bailouts on both sides of the Atlantic. Joint announcements by global central banks. Fear and uncertainty sweeping markets.”
Brown and Irwin say the last 10 days have felt similar to the 2008 Great Recession.
But there are crucial differences, they point out, that lower the risk that recent events will have “the same seismic impact on the world economy” as back then.
Undoubtedly, the still-unfolding run on bank deposits has raised the odds of a recession, especially with a Fed’s hellbent focus on bringing down inflation at virtually whatever cost.
Crisis? What Crisis?
The government’s Producer Price Index for March, out today, showed that wholesale prices out and out declined from February – a possible sign, some say, of further cooling in prices in the coming months.
Axios’ Courtenay Brown and Neil Irwin say the latest numbers highlight a shift in America's inflation dynamics – namely, falling energy prices earlier this year, which is putting downward pressure on overall inflation.
The PPI, which is a measure of the change in the cost of suppliers' goods and services, fell 0.5% in March after a flat reading the month before.
The index is up 2.7% year-over-year through March (PPI peaked at more than 11% last June).
A good chunk of last month’s decline is a result of plunging energy prices that fell 6.4% in March (they’ve been rising again since then). Food prices rose 0.6%, after three straight months of declines.
Economist Bill Adams at Comerica says, "PPI surprised to the downside, but its details show the release is unlikely to bring the Fed off of the inflation fighting warpath."
That’s a sentiment shared by others. Over two-thirds (68%) of CME Fed futures traders see another 25-basis point rate hike announcement at the end of the next FOMC meeting on May 3rd.
Adams explained, "March's slowdown was concentrated in goods prices, especially energy goods.
“By contrast, core services prices are still running hotter in year-over-year terms than they were between last April and January."
In one of its banner anthems from the early 2000s – “Roll with the Changes” – the popular classic rock band REO Speedwagon belts out the sing along chorus, “Keep on rollin’, keep on rollin’…”
NY Times columnist David Brooks seems to feel the same way about the American economy.
In a recent column, he observed: “You can invent fables about how America is in economic decline…But the American economy doesn’t care. It just keeps rolling on.”
Brooks’ colleague David Leonhardt notes that when it comes to economic innovation and productive might, no country can match the U.S. – with Apple, Google, Amazon, Tesla and OpenAI blazing new trails.
Leonhardt writes, “The standard measure of a nation’s economic performance is per capita gross domestic product — the value of the economy’s output divided by the size of the population.”
He points out that even as China’s share of global GDP has skyrocketed over the past few decades, the U.S. still comprises virtually 25% of worldwide output – about the same as in 1990.
But as Nobel laureate and economist Paul Krugman reminds us, GDP doesn’t measure everyday Americans’ standard of living.
Because per capita GDP is an average, it can be distorted by outliers. One major example: income inequality in the U.S. is significant, which means the wealthy own a much larger share of output than in other countries.
As Leonhardt points out, per capita GDP in the U.S. has risen 27% in the new millennium – from around $50,000 in 2000 to a little over $60,000 at the end of 2021 (it was less than $25k in 1970).
“But median household income has risen only 7%,” while income for the top 0.1% of earners has [soared] 41%.”
Broader quality of life metrics show even more clearly how the U.S. isn’t looking so good relative to other comparable nations.
Leonhardt notes we have the lowest life expectancy of any high-income country, with “uniquely poor access to health insurance and paid parental leave.”
Krugman says, “It’s always important to bear in mind that GDP, at best, tells us how much a society can afford.
“It doesn’t tell us whether the money is well spent; high GDP need not translate into a good quality of life. Individuals can be rich but miserable; so can countries.
“And there are good reasons to believe that America is using its economic growth badly.”
Leonhardt thinks it’s a mistake to see the economy as separate from living standards:
“The unequal American economy continues to churn out an impressive array of goods and services while also failing to deliver rapidly improving living standards. And polls suggest that most people aren’t fooled.”
I’ve been trying to climb out of crisis mode lately.
Soulful Bob Marley keeps replaying in my head: “Don’t worry ‘bout a ‘ting. Cause every little ‘ting gonna be alright…”
But as we get ready to head into another spring weekend, I’ve been finding it hard to find a meaningful and timely topic to write about that doesn’t entail some impending disaster, tragedy or danger.
There’s the Inflation Crisis…
Fed governor Michelle Bowman traveled all the way to Germany to tell a crowd attending an ECB symposium that the Fed will likely have to continue raising interest rates if price growth and the jobs market don’t further cool down.
She's clearly an outlier right now. Over 83% of Fed Funds Rate futures traders on the CME believe the Fed will (although not necessarily should) pause rate hikes at the Fed's next meeting in mid-June.
I think they should have paused a few months ago -- mainly to avoid the coming recession -- but that's another story for another time.
(FYI...inflation, as measured by the CPI – All Urban Index, increased 4.9% year-over-year in April. Core inflation, which excludes food and energy prices, rose 5.5% annually – despite a 12.6% fall in oil and other energy commodities.)
And the Debt Crisis…
The government is another day closer to X Day when it runs out of extraordinary measures to continuing paying its bills – and when global financial markets start to implode.
But with President Biden and House Speaker McCarthy delaying until next week their next “negotiating” pow wow that had been scheduled for today – while their staffs presumably get closer to a blueprint for compromise, I’m waiting to write about that, too.
So, the Banking Crisis…
You know what “they” say: past performance does not guarantee future results.
What we can say, however, is that some statistical measures are better at predicting the future than others that make investors’ lives easier.
And one such metric that's been capturing the attention of economists and investors for over 60 years is the New York Fed's recession probability tool.
Writer Sean Williams explains this indicator as the difference in yields between the 3-month and 10-year Treasury bonds (the “spread”) to forecast how likely it is that a recession will come to pass in the coming year.
A normal yield curve is sloped upward and to the right, showing bonds with longer maturities (10-20-30 years) with higher yields than bonds scheduled to mature sooner – kind of what we typically see in a healthy economy.
When troubles in the economy stir up, though, the yield curve tends to become inverted – that is, shorter-term bonds have higher yields than longer-term bonds.
A yield-curve inversion doesn't guarantee a forthcoming recession. But Williams (and others before him) note that every recession after World War II has been preceded by a yield-curve inversion.
According to the latest NY Fed's recession-probability indicator, there's a 68.22% chance the country will enter a recession over the next 12 months.
Williams notes that's the highest probability of a recession occurring in the next 12 months in over 40 years.
“Not coincidentally,” he says, “we're also witnessing the largest yield-curve inversion between the 3-month and 10-year note in more than four decades.
Since 1959, there have been eight instances when the NY Fed's recession-forecasting tool has exceeded a 40% probability of an economic downturn.
With the exception of October 1966, every other previous time a reading has been above 40% the economy has dipped into recession – that's 57 years without a miss.
One of the reason recessions matter is because no bear market has bottomed since World War II before the National Bureau of Economic Research has officially declared a recession.