June 21, 2022

This Will Break Our Economy

Inflation is arguably our number one economic problem currently. But just how bad is inflation? That's a difficult question to answer. 


We all feel the effects of rising prices every day. We go to the grocery store, the gas station, and when we pay our bills. Everything costs more. 


At times like this, it's easy to assume this is normal. That we've had inflation before, and this is just another bout of a rather unpleasant economic condition. Psychologists tell us that this happens often. They call this condition "normalcy bias." And honestly, I found myself thinking that what we're in today is just a slightly more severe bout of recurring inflation.


But I don't think so anymore.


And I'd like to share with you the chart that convinced me this time is different. We are now orders of magnitude beyond where we've ever been before.


The reason it's been so impossible to get our hands around this current inflation is that inflation is hard to measure. Maybe that's why we have so many different ways to measure inflation. We estimate it at the consumer level, the Consumer Price Index. At the wholesale level, the Producer Price Level. At the overall economic status, the GDP Deflator. And on and on it goes. 


There are dozens of ways to measure the rise in overall price levels that we call inflation.


I want to introduce a measure of inflation that's fallen out of favor in the past few years. It's a survey. It is a survey of the basket of goods and services purchased by the average Urban Consumer. A good approximation of the cost of living for people living in our major cities. And it includes as close to everything as researchers can get. Little to nothing is left out. Altogether it is estimated that this survey has 88% of all Americans.


So a pretty good measure of inflation, wouldn't you say?






You and I discussed this last week. In the last half-century, there have been two times that this measure of inflation, called the Consumer Price Index for All Urban Consumers, has topped 10%. The first time was at the beginning of the 1980s when then-Fed Chairman Paul Volcker raised interest rates and stopped the spread of inflation.


The second time that inflation by this measure topped 10% was the mania leading up to the Great Financial Crisis of 2007 and 2008. At that time, a sudden and severe recession stopped inflation. And looking at this past 50-year history, it's easy to see that this recession was the most severe contraction of modern times. 


So, two significant bouts of inflation in 50 years. Both topped out when inflation hit roughly 10%.


Where do we stand today?


Answer. Today's inflation is double the worst of these two other inflation storms. 


When last measured, the Urban Consumer Price Index stood at 22% at the end of March. Double the worst that went before. And as you and I know, inflation has not been slowing since. I believe it has gotten much, much worse. 


It is likely accelerating and climbing ever higher.


In short, today's inflation is like cancer, eating away at our economy's heart and soul. Now the causes of this inflation are many and varied, and we've spent a great deal of time discussing them. A horrific energy policy that has sent the price of gasoline soaring. We've had an ill-conceived stimulus program that doubled our money supply. Natural disasters like drought and disease wreak havoc on our food supply. All these and others have contributed to the situation we're in now.


Unfortunately, this current Administration seems ill-prepared or disinclined to address the issues that lie before us entirely. 


As Jamie Diamond, CEO of JP Morgan Chase, said a couple of weeks ago, we need a modern-day Manhattan Project. A massive focused program to deal with energy and other issues like food also contributes to more and more inflation.


But from Washington, all I hear are crickets. Perhaps a tepid trip to Riyadh to beg for oil. Or a nasty letter to our own oil companies. But I see no effective strategy addressing our growing supply issues in food and fuel.


So ahead of us lies the most probable alternative. It was the kind of alternative that followed both the inflation of the 1980s and 2000s: recession. I'm sorry to say a recession will likely be all the most severe because of this Administration's unwillingness to deal with the issues we face now.


In the end, this level of inflation will break our economy.





Turkey looks like a place to visit. It's cheap and getting cheaper. Where are the best places to vacation? How about where their currency is falling at the highest rate? Turkey has the developed world's top inflation rate. And Turkey has just reported three times more tourists visited in May this year than the month before.


With this logic, Argentina should be close behind.


Yesterday, while we were on holiday, the European Central Bank met to address rising bond yields. Italy, in particular, seems to see some unwelcome jumps in its Sovereign Bond Yields. Perfectly understandable in this inflation-driven environment.


 However, the ECB is none too pleased. And is in the middle of creating a new "anti-fragmentation" (quote/unquote) instrument. An instrument, I assume, that will somehow combine all of the EU Nation's bonds.


Good luck with that. There's nothing quite like repealing the law of supply and demand. The European Bond Markets have spoken. The European Central Bank over-rules.


Here at home, we will see the latest report on Existing Home Sales. The Street is looking for another drop in sales of about 200k


If this plays out, it will continue a four-month drop in sales as home buyers have to deal with rising interest rates and declining real incomes.


Speaking of Home Sales, one nation's largest real estate developers will report earnings shortly. Lennar Homes will hold their conference call in just a minute. 


I'll be looking at their forward guidance. It will be interesting to hear Lennar's current take on the real estate market. 


Also reporting this morning will be everybody's favorite recliner: La-Z Boy.



Have a great day!