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Is “Running Hot” Inflation Wise And Humane?

Is "Running Hot" Inflation Wise And Humane?

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

“To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.” – Janet…

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Is "Running Hot" Inflation Wise And Humane?

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

  • “To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.” – Janet Yellen

  • To me, the weather is perfect when it’s 75 degrees.”

Both statements have some truth to them but severely lack context.

Even if it is 75 degrees, can I call it a perfect day if a hurricane is bearing down with torrential downpours and 150 miles per hour winds?

Letting inflation rise “above target” may have some benefit, but the rate at which incomes are changing versus inflation and its effect on confidence is far from inconsequential.

Yellen’s comments align with most Fed members who wish to see inflation run “hot.”

In this article, we explore the consumer’s plight and whether letting inflation run “hot” is a wise and humane way to keep the economic recovery rolling.

What’s Supporting the Economic Recovery

The robust economic recovery is in part the result of nearly $5 trillion in deficit spending.

To grasp how the government supported the economy, consider the graph below. The orange line is total personal income. After the second set of direct payments to citizens went out in March, personal income was 25% more than before the Pandemic.  The blue line shows organic income, or that earned solely through employers. The difference, the gray area, is payments from the government, known as transfer payments. These direct benefits represented nearly a third of income on multiple occasions over the last year. 

Personal consumption represents nearly two-thirds of economic activity (GDP). Over the last six months, consumption was significantly boosted by stimulus programs. Further, the government allowing forbearance of rent, mortgage, student loan, and utility payments provided many with additional money to spend.

Resulting from surging income and reduced liabilities, retail sales are running about 15% above the trend of the prior decade. For historical recessionary context, consider retail sales fell by about 13% from its trend during the 2008 recession.

With the economy reopening quickly, the government is handing the recovery baton to consumers. As such, the strength of wages and employment, the means with which we consume, are critical if the recovery is to continue without enormous support from Uncle Sam. 

Atlanta Fed Wage Tracker

The data and graphs in this section and other informative data are from the Atlanta Fed Wage Tracker website.

When wages rise, consumers feel more confident in their financial standing and are more willing to spend. Consumer confidence is vital for the continuation of economic recovery. The data and graphs highlight recent wage trends allowing us to gauge potential changes in consumer confidence as we advance.

The first graph below shows wage growth was running in a 3.5-4.0% range for a few years before 2020. Since the Pandemic, wage growth has been gradually declining.

Despite declining wage growth in 2020, wage growth outpaced CPI by around 2%, as shown below. That was because inflation was running at a below-average 1.3% rate. Unfortunately, the real (after inflation) wage growth from 2020 was erased. In 2021 CPI is running at a 5.4% annualized rate, dwarfing wage growth.  

The following graph shows wage growth declined in 2020 for all categories except paid hourly workers. The trend continues in 2021 as all classifications are falling. 

The takeaway from the graphs above is that wage growth is falling, and inflation is picking up. As a result, as shown in the first bar chart, real wages are falling by about 2% this year.

Chart 3 below shows the percentage of those not receiving pay raises has been up ticking since 2020, after trending lower for the prior decade. Median wage growth is also falling, like the average wage growth shown above.

Chart 2 below shows that average wage growth is falling at all income levels.

Lastly, we add one more important consideration. The series of graphs above solely focus on those with jobs. Left out of the data are nearly 10 million people who have lost jobs in the last year and a half.

Taking Off the Training Wheels

Like riding a bike for the first time, confidence is imperative once your teacher lets go and pushes you forward. Confidence, along with balance, allows the rider to peddle forward and at increasing speeds. New bike riders often lack confidence in their abilities and fall many times before speeding ahead.

The government is weaning consumers from critical support at a rapid rate. There are no more direct checks, unemployment benefits are expiring, and forbearance rules are ending. Consumers must start peddling at a fast pace to keep the economy going. Like riding a bike, confidence will play a vital role if the handoff from the government is to be successful. 

The University of Michigan Consumer Sentiment survey, shown below, is improving but shows confidence is not what it was.

The Atlanta Fed graphs show wages are shrinking on a real basis. Recent BLS data confirms the message. Real average weekly and hourly earnings fell 2.2% and 2.8%, respectively on a year-over-year basis.

Is now the time for the Fed to promote policies that effectively reduce wages via inflation? We find it hard to believe consumers will be gung-ho about spending when their wages do not go as far as they used to.  

Back to Janet Yellen’s quote. Is more inflation wise at such a precarious spot in the recovery? To paraphrase, is damaging consumer sentiment in our best interest?

Is Inflation Humane?

As far as her characterization of more inflation being humane, we have choice words for Mrs. Yellen.

In Two Pins Threatening Multiple Asset Bubbles, we quantified how low-wage workers are more affected by rising inflation. To wit: “Only accounting for food and housing, two necessities, the lowest income classes saw their annual expenses rise by 6.05%. The highest income classes saw their expenses rise by 2.10%.”  

There is nothing humane about reducing purchasing power for a large majority of citizens. What can we possibly hope to gain by reducing the economic standing of the many for the benefit of a few? Further, growing wealth inequality does not bolster confidence, quite the opposite in fact.

Summary

The Atlanta Fed and BLS show wages are failing to keep up with inflation. While nominal economic data may improve due to the effects of higher prices, inflation-adjusted data, which is the reality we all live by, does not benefit.

It is now common to hear people complain about sharply rising prices. Social and traditional media fan the flames as they increasingly bring inflation to light.  While some consumers may take inflation with a grain of salt, many others are likely to become more frugal.

Consumer confidence is vital to keep recovery rolling.

So, with proper context, do you believe more inflation is wise or humane?

Tyler Durden Wed, 06/16/2021 - 12:37

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International

The next pandemic? It’s already here for Earth’s wildlife

Bird flu is decimating species already threatened by climate change and habitat loss.

I am a conservation biologist who studies emerging infectious diseases. When people ask me what I think the next pandemic will be I often say that we are in the midst of one – it’s just afflicting a great many species more than ours.

I am referring to the highly pathogenic strain of avian influenza H5N1 (HPAI H5N1), otherwise known as bird flu, which has killed millions of birds and unknown numbers of mammals, particularly during the past three years.

This is the strain that emerged in domestic geese in China in 1997 and quickly jumped to humans in south-east Asia with a mortality rate of around 40-50%. My research group encountered the virus when it killed a mammal, an endangered Owston’s palm civet, in a captive breeding programme in Cuc Phuong National Park Vietnam in 2005.

How these animals caught bird flu was never confirmed. Their diet is mainly earthworms, so they had not been infected by eating diseased poultry like many captive tigers in the region.

This discovery prompted us to collate all confirmed reports of fatal infection with bird flu to assess just how broad a threat to wildlife this virus might pose.

This is how a newly discovered virus in Chinese poultry came to threaten so much of the world’s biodiversity.

H5N1 originated on a Chinese poultry farm in 1997. ChameleonsEye/Shutterstock

The first signs

Until December 2005, most confirmed infections had been found in a few zoos and rescue centres in Thailand and Cambodia. Our analysis in 2006 showed that nearly half (48%) of all the different groups of birds (known to taxonomists as “orders”) contained a species in which a fatal infection of bird flu had been reported. These 13 orders comprised 84% of all bird species.

We reasoned 20 years ago that the strains of H5N1 circulating were probably highly pathogenic to all bird orders. We also showed that the list of confirmed infected species included those that were globally threatened and that important habitats, such as Vietnam’s Mekong delta, lay close to reported poultry outbreaks.

Mammals known to be susceptible to bird flu during the early 2000s included primates, rodents, pigs and rabbits. Large carnivores such as Bengal tigers and clouded leopards were reported to have been killed, as well as domestic cats.

Our 2006 paper showed the ease with which this virus crossed species barriers and suggested it might one day produce a pandemic-scale threat to global biodiversity.

Unfortunately, our warnings were correct.

A roving sickness

Two decades on, bird flu is killing species from the high Arctic to mainland Antarctica.

In the past couple of years, bird flu has spread rapidly across Europe and infiltrated North and South America, killing millions of poultry and a variety of bird and mammal species. A recent paper found that 26 countries have reported at least 48 mammal species that have died from the virus since 2020, when the latest increase in reported infections started.

Not even the ocean is safe. Since 2020, 13 species of aquatic mammal have succumbed, including American sea lions, porpoises and dolphins, often dying in their thousands in South America. A wide range of scavenging and predatory mammals that live on land are now also confirmed to be susceptible, including mountain lions, lynx, brown, black and polar bears.

The UK alone has lost over 75% of its great skuas and seen a 25% decline in northern gannets. Recent declines in sandwich terns (35%) and common terns (42%) were also largely driven by the virus.

Scientists haven’t managed to completely sequence the virus in all affected species. Research and continuous surveillance could tell us how adaptable it ultimately becomes, and whether it can jump to even more species. We know it can already infect humans – one or more genetic mutations may make it more infectious.

At the crossroads

Between January 1 2003 and December 21 2023, 882 cases of human infection with the H5N1 virus were reported from 23 countries, of which 461 (52%) were fatal.

Of these fatal cases, more than half were in Vietnam, China, Cambodia and Laos. Poultry-to-human infections were first recorded in Cambodia in December 2003. Intermittent cases were reported until 2014, followed by a gap until 2023, yielding 41 deaths from 64 cases. The subtype of H5N1 virus responsible has been detected in poultry in Cambodia since 2014. In the early 2000s, the H5N1 virus circulating had a high human mortality rate, so it is worrying that we are now starting to see people dying after contact with poultry again.

It’s not just H5 subtypes of bird flu that concern humans. The H10N1 virus was originally isolated from wild birds in South Korea, but has also been reported in samples from China and Mongolia.

Recent research found that these particular virus subtypes may be able to jump to humans after they were found to be pathogenic in laboratory mice and ferrets. The first person who was confirmed to be infected with H10N5 died in China on January 27 2024, but this patient was also suffering from seasonal flu (H3N2). They had been exposed to live poultry which also tested positive for H10N5.

Species already threatened with extinction are among those which have died due to bird flu in the past three years. The first deaths from the virus in mainland Antarctica have just been confirmed in skuas, highlighting a looming threat to penguin colonies whose eggs and chicks skuas prey on. Humboldt penguins have already been killed by the virus in Chile.

A colony of king penguins.
Remote penguin colonies are already threatened by climate change. AndreAnita/Shutterstock

How can we stem this tsunami of H5N1 and other avian influenzas? Completely overhaul poultry production on a global scale. Make farms self-sufficient in rearing eggs and chicks instead of exporting them internationally. The trend towards megafarms containing over a million birds must be stopped in its tracks.

To prevent the worst outcomes for this virus, we must revisit its primary source: the incubator of intensive poultry farms.

Diana Bell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked…

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked by the NY Fed Consumer Survey extended their late 2023 slide, with 3Y inflation expectations in January sliding to a record low 2.4% (from 2.6% in December), even as 1 and 5Y inflation forecasts remained flat, moments ago the NY Fed reported that in February there was a sharp rebound in longer-term inflation expectations, rising to 2.7% from 2.4% at the three-year ahead horizon, and jumping to 2.9% from 2.5% at the five-year ahead horizon, while the 1Y inflation outlook was flat for the 3rd month in a row, stuck at 3.0%. 

The increases in both the three-year ahead and five-year ahead measures were most pronounced for respondents with at most high school degrees (in other words, the "really smart folks" are expecting deflation soon). The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at all horizons, while the median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined at the one- and three-year ahead horizons and remained unchanged at the five-year ahead horizon.

Going down the survey, we find that the median year-ahead expected price changes increased by 0.1 percentage point to 4.3% for gas; decreased by 1.8 percentage points to 6.8% for the cost of medical care (its lowest reading since September 2020); decreased by 0.1 percentage point to 5.8% for the cost of a college education; and surprisingly decreased by 0.3 percentage point for rent to 6.1% (its lowest reading since December 2020), and remained flat for food at 4.9%.

We find the rent expectations surprising because it is happening just asking rents are rising across the country.

At the same time as consumers erroneously saw sharply lower rents, median home price growth expectations remained unchanged for the fifth consecutive month at 3.0%.

Turning to the labor market, the survey found that the average perceived likelihood of voluntary and involuntary job separations increased, while the perceived likelihood of finding a job (in the event of a job loss) declined. "The mean probability of leaving one’s job voluntarily in the next 12 months also increased, by 1.8 percentage points to 19.5%."

Mean unemployment expectations - or the mean probability that the U.S. unemployment rate will be higher one year from now - decreased by 1.1 percentage points to 36.1%, the lowest reading since February 2022. Additionally, the median one-year-ahead expected earnings growth was unchanged at 2.8%, remaining slightly below its 12-month trailing average of 2.9%.

Turning to household finance, we find the following:

  • The median expected growth in household income remained unchanged at 3.1%. The series has been moving within a narrow range of 2.9% to 3.3% since January 2023, and remains above the February 2020 pre-pandemic level of 2.7%.
  • Median household spending growth expectations increased by 0.2 percentage point to 5.2%. The increase was driven by respondents with a high school degree or less.
  • Median year-ahead expected growth in government debt increased to 9.3% from 8.9%.
  • The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 0.6 percentage point to 26.1%, remaining below its 12-month trailing average of 30%.
  • Perceptions about households’ current financial situations deteriorated somewhat with fewer respondents reporting being better off than a year ago. Year-ahead expectations also deteriorated marginally with a smaller share of respondents expecting to be better off and a slightly larger share of respondents expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 1.4 percentage point to 38.9%.
  • At the same time, perceptions and expectations about credit access turned less optimistic: "Perceptions of credit access compared to a year ago deteriorated with a larger share of respondents reporting tighter conditions and a smaller share reporting looser conditions compared to a year ago."

Also, a smaller percentage of consumers, 11.45% vs 12.14% in prior month, expect to not be able to make minimum debt payment over the next three months

Last, and perhaps most humorous, is the now traditional cognitive dissonance one observes with these polls, because at a time when long-term inflation expectations jumped, which clearly suggests that financial conditions will need to be tightened, the number of respondents expecting higher stock prices one year from today jumped to the highest since November 2021... which incidentally is just when the market topped out during the last cycle before suffering a painful bear market.

Tyler Durden Mon, 03/11/2024 - 12:40

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Spread & Containment

A major cruise line is testing a monthly subscription service

The Cruise Scarlet Summer Season Pass was designed with remote workers in mind.

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While going on a cruise once meant disconnecting from the world when between ports because any WiFi available aboard was glitchy and expensive, advances in technology over the last decade have enabled millions to not only stay in touch with home but even work remotely.

With such remote workers and digital nomads in mind, Virgin Voyages has designed a monthly pass that gives those who want to work from the seas a WFH setup on its Scarlet Lady ship — while the latter acronym usually means "work from home," the cruise line is advertising as "work from the helm.”

Related: Royal Caribbean shares a warning with passengers

"Inspired by Richard Branson's belief and track record that brilliant work is best paired with a hearty dose of fun, we're welcoming Sailors on board Scarlet Lady for a full month to help them achieve that perfect work-life balance," Virgin Voyages said in announcing its new promotion. "Take a vacation away from your monotonous work-from-home set up (sorry, but…not sorry) and start taking calls from your private balcony overlooking the Mediterranean sea."

A man looks through his phone while sitting in a hot tub on a cruise ship.

Shutterstock

This is how much it'll cost you to work from a cruise ship for a month

While the single most important feature for successful work at sea — WiFi — is already available for free on Virgin cruises, the new Scarlet Summer Season Pass includes a faster connection, a $10 daily coffee credit, access to a private rooftop, and other member-only areas as well as wash and fold laundry service that Virgin advertises as a perk that will allow one to concentrate on work

More Travel:

The pass starts at $9,990 for a two-guest cabin and is available for four monthlong cruises departing in June, July, August, and September — each departs from ports such as Barcelona, Marseille, and Palma de Mallorca and spends four weeks touring around the Mediterranean.

Longer cruises are becoming more common, here's why

The new pass is essentially a version of an upgraded cruise package with additional perks but is specifically tailored to those who plan on working from the ship as an opportunity to market to them.

"Stay connected to your work with the fastest at-sea internet in the biz when you want and log-off to let the exquisite landscape of the Mediterranean inspire you when you need," reads the promotional material for the pass.

Amid the rise of remote work post-pandemic, cruise lines have been seeing growing interest in longer journeys in which many of the passengers not just vacation in the traditional sense but work from a mobile office.

In 2023, Turkish cruise line operator Miray even started selling cabins on a three-year tour around the world but the endeavor hit the rocks after one of the engineers declared the MV Gemini ship the company planned to use for the journey "unseaworthy" and the cruise ship line dealt with a PR scandal that ultimately sank the project before it could take off.

While three years at sea would have set a record as the longest cruise journey on the market, companies such as Royal Caribbean  (RCL) (both with its namesake brand and its Celebrity Cruises line) have been offering increasingly long cruises that serve as many people’s temporary homes and cross through multiple continents.

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