The Road To Inflation In Post-COVID TimesTyler DurdenTue, 08/18/2020 - 21:45
Submitted by Christopher Dembik, head of Macro Analysis at Saxo Bank
Summary: No theme is more important in the macroeconomic space than inflation right now. All the clients we are talking to share their worries about inflation risk and are looking for investment strategies to hedge against inflation. In recent weeks, we have seen a series of upside surprises in inflation data, that mostly reflect the big imbalances in the economy following the COVID recession and some data noise. However, we cannot rule out that we will experience in the recovery phase a prolonged period of high inflation due to a sudden change in regime shift characterized by rising protectionism and more redistributive policies to fight against inequalities. If I could give only one piece of advice to investors, read everything you can about inflation and especially stagflation.
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There is a large consensus among economists that the initial COVID-19 shock is a massive disinflationary impulse. However, there is no consensus regarding what may come next, let’s say in two or three years. Some argue that the massive surge in money supply will continue to inflate asset bubbles in real estate and in the stock market, as it has been the case since the GFC, but will have little impact on the real economy as a whole due to the persistent decline of both the money multiplier (the amount of money that banks generate with each dollar of reserves) and money velocity (the rate at which money is exchanged in the economy). Others fear that in the long run the boom in money supply combined with a regime shift characterized by rising protectionism and more redistributive policies to fight against inequalities will create lasting inflationary pressures and push inflation above the 2% threshold on a sustainable basis. This view is reinforced by the fact that inflation has always been responsive to sudden regime shifts in the past.
Most economists consider that the most powerful leading indicator for inflation is M2 money supply. It is fair to say that we have never experienced in the past, not even during the 1970’s stagflation, money supply growth as high as it is today in COVID-times, skyrocketing at more than 20% YoY.
We are not there yet. Recent upside surprises in inflation data, such as the surge in U.S. July CPI or the boom in U.S. unit labor cost in Q2, are not linked to the expected regime shift. To be fair, it mostly reflects data noise due to the strict lockdown and the following recession. If we dig into details, it appears that the strong CPI is the consequence of relative shifts in specific markets rather than a general increase in prices. In regards to the jump in unit labor cost by 12.2% in Q2, it is essentially the reflection of more job losses amongst low-wage workers, thus causing distorting measurements. For at least some period of time, we need to get used to inflation noise and refrain from drawing hasty conclusions regarding immediate change in inflation regime.
It’s all relative. In a very insightful interview to MACROVoices (see here), Vincent Deluard, macro strategist for StoneX Group Inc., proposes another way to approach the inflation problem. He rightly argues that inflation has not disappeared from the real economy over the past years, it is still here, but it cannot be captured by CPI as it measures the average inflation in the economy. Actually, focusing on CPI results in masquering the generational inequality problem:
“The great moderation of inflation in the past two decades has been the result of two offsetting forces. On the one hand, the cost of medical insurance premia, college tuitions, rents in major urban areas, and childcare has exploded. On the other hand, the cost of most of the things which can be bought at Walmart (and are generally manufactured overseas) has collapsed.
This had led to two very different experiences for inflation: retired boomers, who generally own their homes, live in the small towns and suburbs, shop at superstores and get their medical expenses paid by Medicare have experienced deflation (…). Conversely, new jobs openings for younger generations have been almost exclusively created in major urban areas where costs have exploded”.
Deluard draws two main conclusions:
Generational inequality is prevalent in society.
The level of inflation strongly depends on which age group you belong to.
Said differently, the young generations (Millennials and Gen-Z-ers), who contribute most to society based on productivity measure, pay more than anyone else and still face no access to capital to buy home and live properly.
By sacrificing the young and poor to save the old and rich, the COVID-19 crisis has strongly exacerbated generational inequalities and millennial anger against Boomers. One way to solve this issue is for politicians to step in and implement redistributive policies and other popular stimulus programs that can take the form of UBI/Helicopter money. Now that governments and the U.S. Congress are critical players in driving money supply growth, it is likely they won’t give up anytime soon this new power.
Inflation is always and everywhere a political phenomenon. Its evolution will mostly depend on future policy decisions that will be taken after the crisis. We think that redistributive policies and other stimulus programs will play a key role to create favorable conditions to an inflation episode once the recovery will start to materialize, let’s say in a 12-18 month horizon.
If we combine redistributive policies with the emerging trend of supply chain relocation and rising protectionism, we have a almost perfect inflation narrative for 2022 and beyond that can (temporarily) overwhelms deflationary forces driven by demographics and technology.
After a yearlong and extensive nationwide search, the American Society for Metabolic and Bariatric Surgery (ASMBS), the nation’s largest professional organization of bariatric and metabolic surgeons and integrated health professionals, has named healthcare association veteran Diane M. Enos MPH, RDN, CAE, FAND, to serve as its new executive director.
Credit: ASMBS
After a yearlong and extensive nationwide search, the American Society for Metabolic and Bariatric Surgery (ASMBS), the nation’s largest professional organization of bariatric and metabolic surgeons and integrated health professionals, has named healthcare association veteran Diane M. Enos MPH, RDN, CAE, FAND, to serve as its new executive director.
Before joining ASMBS, Enos, a registered dietitian and certified association executive with a master’s degree in public health from the University of Texas Health Science Center in Houston, was Chief Learning Officer of the Academy of Nutrition and Dietetics, the country’s largest organization of food and nutrition professionals. Enos was with the group for more than 20 years in various leadership positions and remains a Fellow of the Academy (FAND). Previously, Enos was Manager of National Consumer Communications for the USA Rice Federation.
“Diane brings a wealth of experience, a track record of success and new insights that will help strengthen our organization at a time of rising obesity rates and new thinking on how best to treat the disease and when,” said Marina Kurian, MD, President, ASMBS. “We expect increased utilization of metabolic and bariatric surgery and growing demand for the new class of obesity drugs to usher in a new era of obesity treatment that could transform public health.”
According to the ASMBS, more than 260,000 people had metabolic or bariatric surgery in 2021, the latest estimates available. This represents only about 1% of those who meet the recommended body mass index (BMI) criteria for weight-loss surgery. CDC reports over 42% of Americans have obesity, the highest rate ever in the United States.
“I’m looking forward to working with our team and our members to grow the specialty and increase the role of metabolic and bariatric surgery in the treatment of obesity,” said Enos. “Obesity remains the public health issue of our time and we owe it to our patients to remove barriers to treatment and help them navigate the new treatment landscape so they can turn their concerns about the dangers of the disease into action.”
Earlier this year, the ASMBS released a survey published in SOARD that found more than 6.4 million people thought about having bariatric surgery or taking obesity drugs for the first time amid the pandemic due to concerns over the link between obesity and severe outcomes from COVID-19.
Enos becomes only the second executive director in the organization’s history succeeding Georgeann Mallory who retired from the role in 2021. Kristie Kaufman, who has been with ASMBS for more than 20 years, served as interim executive director between 2021 and 2023, and has been promoted to Vice President of Operations.
About Metabolic and Bariatric Surgery
Metabolic/bariatric surgery has been shown to be the most effective and long-lasting treatment for severe obesity and many related conditions and results in significant weight loss.The Agency for Healthcare Research and Quality (AHRQ) reported significant improvements in the safety of metabolic/bariatric surgery due in large part to improved laparoscopic techniques.The risk of death is about 0.1%,and the overall likelihood of major complications is about 4%.According to a study from Cleveland Clinic, laparoscopic bariatric surgery has complication and mortality rates comparable to some of the safest and most commonly performed surgeries in the U.S., including gallbladder surgery, appendectomy and knee replacement.
About ASMBS
The ASMBS is the largest non-profit organization for bariatric surgeons and integrated health professionals in the United States. It works to advance the art and science of metabolic and bariatric surgery and is committed to educating medical professionals and the lay public about the treatment options for obesity. The ASMBS encourages its members to investigate and discover new advances in bariatric surgery, while maintaining a steady exchange of experiences and ideas that may lead to improved surgical outcomes for patients with severe obesity. For more information, visit www.asmbs.org.
From LTCM To 1966. The Perils Of Rising Interest Rates
Based on some comments, it appears we scared a few people with A Crisis Is Coming. Our article warns, "A financial crisis will likely follow the Fed’s…
Based on some comments, it appears we scared a few people with A Crisis Is Coming. Our article warns, “A financial crisis will likely follow the Fed’s “higher for longer” interest rate campaign.” We follow the article with more on financial crises to help calm any worries you may have. This article summarizes two interest rate-related crises, Long Term Capital Management (LTCM) and the lesser-known Financial Crisis of 1966.
We aim to convey two important lessons. First, both events exemplify how excessive leverage and financial system interdependences are dangerous when interest rates are rising. Second, they stress the importance of the Fed’s reaction function. A Fed that reacts quickly to a budding crisis can quickly mitigate it. The regional bank crisis in March serves as recent evidence. However, a crisis can blossom if the Fed is slow to react, as we saw in 2008.
Before moving on, it’s worth providing context for the recent series of rate hikes. Unless this time is different, another crisis is coming.
LTCM’s Failure
John Meriweather founded LTCM in 1994 after a successful bond trading career at Salomon Brothers. In addition to being led by one of the world’s most infamous bond traders, LTCM also had Myron Scholes and Robert Merton on their staff. Both won a Nobel Prize for options pricing. David Mullins Jr., previously the Vice Chairman of the Federal Reserve to Alan Greenspan, was also an employee. To say the firm was loaded with the finance world’s best and brightest may be an understatement.
LTCM specialized in bond arbitrage. Such trading entails taking advantage of anomalies in the price spread between two securities, which should have predictable price differences. They would bet divergences from the norm would eventually converge, as was all but guaranteed in time.
LTCM was using 25x or more leverage when it failed in 1998. With that kind of leverage, a 4% loss on the trade would deplete the firm’s equity and force it to either raise equity or fail.
The world-renowned hedge fund fell victim to the surprising 1998 Russian default. As a result of the unexpected default, there was a tremendous flight to quality into U.S. Treasury bonds, of which LTCM was effectively short. Bond divergences expanded as markets were illiquid, growing the losses on their convergence bets.
They also wrongly bet that the dually listed shares of Royal Dutch and Shell would converge in price. Given they were the same company, that made sense. However, the need to stem their losses forced them to bail on the position at a sizeable loss instead of waiting for the pair to converge.
The Predictable Bailout
Per Wikipedia:
Long-Term Capital Management did business with nearly every important person on Wall Street. Indeed, much of LTCM’s capital was composed of funds from the same financial professionals with whom it traded. As LTCM teetered, Wall Street feared that Long-Term’s failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system.
Given the potential chain reaction to its counterparties, banks, and brokers, the Fed came to the rescue and organized a bailout of $3.63 billion. A much more significant financial crisis was avoided.
The takeaway is that the financial system has highly leveraged players, including some like LTCM, which supposedly have “foolproof” investments on their books. Making matters fragile, the banks, brokers, and other institutions lending them money are also leveraged. A counterparty failure thus affects the firm in trouble and potentially its lenders. The lenders to the original lenders are then also at risk. The entire financial system is a series of lined-up dominos, at risk if only one decent-sized firm fails.
Roger Lowenstein wrote an informative book on LTCM aptly titled When Genius Failed. The graph below from the book shows the rise and fall of an initial $1 investment in LTCM.
The Financial Crisis of 1966
Most people, especially Wall Street gray beards, know of LTCM and the details of its demise. We venture to guess very few are up to speed on the crisis of 1966. We included. As such, we relied heavily upon The 1966 Financial Crisis by L. Randall Wray to educate us. The quotes we share are attributable to his white paper.
As the post-WW2 economic expansion progressed, companies and municipalities increasingly relied on debt and leverage to fuel growth. For fear of rising inflation due to the robust economic growth rate, the Fed presided over a series of rate hikes. In mid-1961, Fed Funds were as low as 0.50%. Five years later, they hit 5.75%. The Fed also restricted banks’ reserve growth to reduce loan creation and further hamper inflation. Higher rates, lending restrictions, and a yield curve inversion resulted in a credit crunch. Further impeding the prominent New York money center banks from lending, they were losing deposits to higher-yielding instruments.
Sound familiar?
The lack of credit availability exposed several financial weaknesses. Per the article:
As Minsky argued, “By the end of August, the disorganization in the municipals market, rumors about the solvency and liquidity of savings institutions, and the frantic position-making efforts by money-market banks generated what can be characterized as a controlled panic. The situation clearly called for Federal Reserve action.” The Fed was forced to enter as a lender of last resort to save the Muni bond market, which, in effect, validated practices that were stretching liquidity.
The Fed came to the rescue before the crisis could expand meaningfully or the economy would collapse. The problem was fixed, and the economy barely skipped a beat.
However, and this is a big however, “markets came to expect that big government and the Fed would come to the rescue as needed.”
Expectations of Fed rescues have significantly swelled since then and encourage ever more reckless financial behaviors.
The Fed’s Reaction Function- Minksky Fragility
Wray’s article on the 1966 crisis ends as follows:
That 1966 crisis was only a minor speedbump on the road to Minskian fragility.
Minskian fragility refers to economist Hyman Minsky’s work on financial cycles and the Fed’s reaction function. Broadly speaking, he attributes financial crises to fragile banking systems.
Said differently, systematic risks increase as system-wide leverage and financial firm interconnectedness rise. As shown below, debt has grown much faster than GDP (the ability to pay for the debt). Inevitably, higher interest rates, slowing economic activity, and liquidity issues are bound to result in a crisis, aka a Minsky Moment. Making the system ever more susceptible to a financial crisis are the predictable Fed-led bailouts. In a perverse way, the Fed incentivizes such irresponsible behaviors.
The tide is starting to ebb. With it, economic activity will slow, and asset prices may likely follow. Leverage and high-interest rates will bring about a crisis.
Debt and leverage are excessive and even more extreme due to the pandemic.
The question is not whether higher interest rates will cause a crisis but when. The potential for one-off problems, like LTCM, could easily set off a systematic situation like in 1966 due to the pronounced system-wide leverage and interdependencies.
As we have seen throughout the Fed’s history, they will backstop the financial system. The only question is when and how. If they remain steadfast in fighting inflation while a crisis grows, they risk a 2008-like event. If they properly address problems as they did in March, the threat of a severe crisis will considerably lessen.
Summary
The Fed halted the crises of 1966 and LTCM. They ultimately did the same for every other crisis highlighted in the opening graph. Given the amount of leverage in the financial system and the sharp increase in interest rates, we have little doubt a crisis will result. The Fed will again be called upon to bail out the financial system and economy.
For investors, your performance will be a function of the Fed’s reaction. Are they quick enough to spot problems, like the banking crisis in March or our two examples, and minimize the economic and financial effect of said crisis? Or, like in 2008, will it be too late to arrest a blooming crisis, resulting in significant investor losses and widespread bankruptcies?
The World Economic Forum (WEF) was founded fifty years ago. It has gained more and more prominence over the decades and has become one of the leading platforms of futuristic thinking and planning. As a meeting place of the global elite, the WEF brings together the leaders in business and politics along with a few selected intellectuals. The main thrust of the forum is global control.
Free markets and individual choice do not stand as the top values, but state interventionism and collectivism. Individual liberty and private property are to disappear from this planet by 2030 according to the projections and scenarios coming from the World Economic Forum.
Eight Predictions
Individual liberty is at risk again. What may lie ahead was projected in November 2016 when the WEF published “8 Predictions for the World in 2030.” According to the WEF’s scenario, the world will become quite a different place from now because how people work and live will undergo a profound change. The scenario for the world in 2030 is more than just a forecast. It is a plan whose implementation has accelerated drastically since with the announcement of a pandemic and the consequent lockdowns.
According to the projections of the WEF’s “Global Future Councils,” private property and privacy will be abolished during the next decade. The coming expropriation would go further than even the communist demand to abolish the property of production goods but leave space for private possessions. The WEF projection says that consumer goods, too, would be no longer private property.
If the WEF projection should come true, people would have to rent and borrow their necessities from the state, which would be the sole proprietor of all goods. The supply of goods would be rationed in line with a social credit points system. Shopping in the traditional sense would disappear along with the private purchases of goods. Every personal move would be tracked electronically, and all production would be subject to the requirements of clean energy and a sustainable environment.
In order to attain “sustainable agriculture,” the food supply will be mainly vegetarian. In the new totalitarian service economy, the government will provide basic accommodation, food, and transport, while the rest must be lent from the state. The use of natural resources will be brought down to its minimum. In cooperation with the few key countries, a global agency would set the price of CO2 emissions at an extremely high level to disincentivize its use.
In a promotional video, the World Economic Forum summarizes the eight predictions in the following statements:
People will own nothing. Goods are either free of charge or must be lent from the state.
The United States will no longer be the leading superpower, but a handful of countries will dominate.
Organs will not be transplanted but printed.
Meat consumption will be minimized.
Massive displacement of people will take place with billions of refugees.
To limit the emission of carbon dioxide, a global price will be set at an exorbitant level.
People can prepare to go to Mars and start a journey to find alien life.
Western values will be tested to the breaking point..
Beyond Privacy and Property
In a publication for the World Economic Forum, the Danish ecoactivist Ida Auken, who had served as her country’s minister of the environment from 2011 to 2014 and still is a member of the Danish Parliament (the Folketing), has elaborated a scenario of a world without privacy or property. In “Welcome to 2030,” she envisions a world where “I own nothing, have no privacy, and life has never been better.” By 2030, so says her scenario, shopping and owning have become obsolete, because everything that once was a product is now a service.
In this idyllic new world of hers, people have free access to transportation, accommodation, food, “and all the things we need in our daily lives.” As these things will become free of charge, “it ended up not making sense for us to own much.” There would be no private ownership in houses nor would anyone pay rent, “because someone else is using our free space whenever we do not need it.” A person’s living room, for example, will be used for business meetings when one is absent. Concerns like “lifestyle diseases, climate change, the refugee crisis, environmental degradation, completely congested cities, water pollution, air pollution, social unrest and unemployment” are things of the past. The author predicts that people will be happy to enjoy such a good life that is so much better “than the path we were on, where it became so clear that we could not continue with the same model of growth.”
Ecological Paradise
In her 2019 contribution to the Annual Meeting of the Global Future Councils of the World Economic Forum, Ida Auken foretells how the world may look in the future “if we win the war on climate change.” By 2030, when CO2 emissions will be greatly reduced, people will live in a world where meat on the dinner plate “will be a rare sight” while water and the air will be much cleaner than today. Because of the shift from buying goods to using services, the need to have money will vanish, because people will spend less and less on goods. Work time will shrink and leisure time will grow.
For the future, Auken envisions a city where electric cars have substituted conventional combustion vehicles. Most of the roads and parking spaces will have become green parks and walking zones for pedestrians. By 2030, agriculture will offer mainly plant-based alternatives to the food supply instead of meat and dairy products. The use of land to produce animal feed will greatly diminish and nature will be spreading across the globe again.
Fabricating Social Consent
How can people be brought to accept such a system? The bait to entice the masses is the assurances of comprehensive healthcare and a guaranteed basic income. The promoters of the Great Reset promise a world without diseases. Due to biotechnologically produced organs and individualized genetics-based medical treatments, a drastically increased life expectancy and even immortality are said to be possible. Artificial intelligence will eradicate death and eliminate disease and mortality. The race is on among biotechnological companies to find the key to eternal life.
Along with the promise of turning any ordinary person into a godlike superman, the promise of a “universal basic income” is highly attractive, particularly to those who will no longer find a job in the new digital economy. Obtaining a basic income without having to go through the treadmill and disgrace of applying for social assistance is used as a bait to get the support of the poor.
To make it economically viable, the guarantee of a basic income would require the leveling of wage differences. The technical procedures of the money transfer from the state will be used to promote the cashless society. With the digitization of all monetary transactions, each individual purchase will be registered. As a consequence, the governmental authorities would have unrestricted access to supervise in detail how individual persons spend their money. A universal basic income in a cashless society would provide the conditions to impose a social credit system and deliver the mechanism to sanction undesirable behavior and identify the superfluous and unwanted.
Who Will Be the Rulers?
The World Economic Forum is silent about the question of who will rule in this new world.
There is no reason to expect that the new power holders would be benevolent. Yet even if the top decision-makers of the new world government were not mean but just technocrats, what reason would an administrative technocracy have to go on with the undesirables? What sense does it make for a technocratic elite to turn the common man into a superman? Why share the benefits of artificial intelligence with the masses and not keep the wealth for the chosen few?
Not being swayed away by the utopian promises, a sober assessment of the plans must come to the conclusion that in this new world, there would be no place for the average person and that they would be put away along with the “unemployable,” “feeble minded,” and “ill bred.” Behind the preaching of the progressive gospel of social justice by the promoters of the Great Reset and the establishment of a new world order lurks the sinister project of eugenics, which as a technique is now called “genetic engineering” and as a movement is named “transhumanism,” a term coined by Julian Huxley, the first director of the UNESCO.
The promoters of the project keep silent about who will be the rulers in this new world. The dystopian and collectivist nature of these projections and plans is the result of the rejection of free capitalism. Establishing a better world through a dictatorship is a contradiction in terms. Not less but more economic prosperity is the answer to the current problems. Therefore, we need more free markets and less state planning. The world is getting greener and a fall in the growth rate of the world population is already underway. These trends are the natural consequence of wealth creation through free markets.
Conclusion
The World Economic Forum and its related institutions in combination with a handful of governments and a few high-tech companies want to lead the world into a new era without property or privacy. Values like individualism, liberty, and the pursuit of happiness are at stake, to be repudiated in favor of collectivism and the imposition of a “common good” that is defined by the self-proclaimed elite of technocrats. What is sold to the public as the promise of equality and ecological sustainability is in fact a brutal assault on human dignity and liberty. Instead of using the new technologies as an instrument of betterment, the Great Reset seeks to use the technological possibilities as a tool of enslavement. In this new world order, the state is the single owner of everything. It is left to our imagination to figure out who will program the algorithms that manage the distribution of the goods and services.
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