Inflation

Let’s talk about inflation.

Inflation enters the economy in stages. It’s not as though the Fed begins to print money and POOF! inflation appears. It takes time.

The first stage occurs in the manufacturing/ production segment of the economy when you see producers suddenly paying more for the raw goods and commodities they use to manufacture/ produce finished goods.

You can see this development in the chart below. The highlighted periods featured times in which Producer Prices for commodities or raw goods spiked approached record highs.

One or two months or higher Producer Prices for commodities or raw goods is no big deal, but once you’re talking 6-8 months of steadily rising Producer Prices it’s significant. At that point manufacturers/ producers have to start raising the prices of finished goods or face shrinking profit margins.

At that point you move into the second stage of inflation. That didn’t happen in 2008 (the deflationary crisis removed the inflationary stresses). But it did happen in 2011. And it’s happening again now.

When the price of finished goods begins to rise, you’re in stage 2 for inflation. Again, this can be temporary, but if you have multiple months of this, you’re talking about a significant development.

Bear in mind, that phase 2 can happen in different ways. Management at companies don’t just say “raise the price now!” Instead they can do different things such as charge the same amount for less of a finished product/ shrink the size of the container. This is called shrinkflation.

Another strategy is to start using cheaper/ lower quality raw goods (to reduce costs/ quality) while charging the SAME amount for the finished good. This too is inflation as the cost of the SAME item is MORE expensive, though it’s being masked because the QUALITY is LOWER and the price is the same.

You get the general idea.

I’ve marked periods in which “Stage 2” of inflation occurred in the last 10 years on the chart below.

It’s HERE that inflation begins to appear in the economy. However, it doesn’t become a SERIOUS problem until you reach the point at which the price of finished goods remain elevated long enough that people start to demand raises/ higher wages to maintain their living standards.

THAT is Stage 3 for inflation… the inflation that most people think about when they use the word. And it marks when it’s fully seeped into the economy.

We are now hitting this stage.

We hit phase 1 back in mid 2016. We hit phase 2 in early/mid 2017. We are now hitting phase 3.

Average hourly earnings rose eight cents, or 0.3 percent last month after edging up 0.1 percent in April. That pushed the annual increase in average hourly earnings to 2.7 percent from 2.6 percent in April.

Source: Reuters.

You read that correctly… while the CPI and other inflationary measures show inflation only slightly above 2%, WAGES have been rising by over 2.5% year over year for months (since at least January 2018).

Put another way, “INFLATION” as most refer to it, is finally seeping into the economy. By multiple measures it’s already north of 2.5%… and the Fed is hopelessly behind the curve with rates at a mere 1.75%.

This is THE trend going forward for financial markets. And those who are well prepared for it will do extremely well.

Remember, stocks LOVE inflation at first. But that relationship quickly goes south once inflation becomes so aggressive that it eats into profit margins no matter WHAT the company does.

On that note, we just published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay you as it rips through the financial system in the months ahead.

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

To recap yesterday’s piece concerning the recent shift in Central Bank policy, from mid-2016 onward:

1)   Central Banks engaging in emergency levels of QE at a time in which their respective economies were growing.

2)   Inflation bottoming then beginning to rise.

3)   Bond markets starting to revolt.

4)   Central Banks opting to walk back their QE programs.

Which brings us to today.

In the last month, both the ECB and the BoJ have “thrown in the towel” regarding any kind of monetary tightening.

First came ECB President Mario Draghi who suggested that the EU’s economic growth rate may have “peaked.” The ECB then follow suit by stating that it will be

waiting until JULY to announce how it intends to end QE in yet another bid to see how the market reacts before it makes a final decision.

European Central Bank policy makers see scope to wait until their July meeting to announce how they’ll end their bond-buying program, according to euro-area officials familiar with the matter.

Governing Council members want sufficient time to judge if the economy is overcoming its first-quarter slowdown, the officials said, asking not to be identified because the internal deliberations are confidential. That could mean the June meeting, which would have the advantage of linking the decision to updated economic forecasts, might be too soon.

Source: Bloomberg

Put simply, the ECB is terrified that the markets can’t handle the end of QE. So they’ll keep “moving the finish line” out farther and farther away.

The ECB is not the only one… The BoJ pulled a similar stunt last week as well:

Japanese monetary policy must remain loose until the world’s third-largest economy achieves a higher inflation rate, Bank of Japan Governor Haruhiko Kuroda said.

“In order to reach 2 percent inflation target, I think the Bank of Japan must continue very strong accommodative monetary policy for some time,” Kuroda told CNBC’s Sara Eisen this weekend. “It’s necessary.”

His comments will be closely watched ahead of the central bank’s two-day policy meeting this Thursday and Friday. In March, the BOJ said it would keep the short-term policy rate unchanged at negative 0.1 percent and the 10-year yield target around 0 percent.

Source: CNBC

What does this mean?

Central Banks are giving up any pretense of being able to end their monetary stimulus.

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The ECB can’t even hit a TWICE extended deadline without having to panic and extend it a third time. Meanwhile, the BoJ has given up any pretense of having a deadline at all. Instead it will continue to print money and buy assets until its most heavily massaged data metric (inflation) hits some arbitrary target (Japan’s inflation numbers, much like those in the US and EU are total fiction).

Put simply: Central Banks have “thrown in the towel” on any pretense of monetary hawkishness and will continue printing money to support risk assets until something breaks.

This is what the inflation/ deflation bond market ratio picked up on last month.

I’m referring to the TIP:TLT ratio. When this ratio rallies, it’s inflationary. When it falls, it’s deflationary.

As you can see the TIP:TLT ratio has now staged a CONFIRMED breakout from a 10-year deflationary channel.

This is a truly TECTONIC shift. It is telling us that Central Banks have “thrown in the taper towel” and will be printing ad infinitum. Any pretense of fiscal or monetary responsibility is out the window.

THIS, combined with what is looking like the one of the greatest quarters for corporate results in modern history, is what will trigger new all-time highs in stocks.

This is the BLOW OFF TOP stage. And we all know what’s going to follow.

On that note, if you are growing concerned about the current Central Bank created bubble bursting…. we are putting together an Executive Summary outlining all of these issues as well as what’s coming down the pike when the Everything Bubble bursts.

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

(we’ll soon find out)

The economy (GDP) appears to be rolling over… right as inflation is heating up.

GDP growth for 1Q18 clocked in around 2.3%. Under normal circumstances, this wouldn’t be particularly bad. However, in light of the fact that 4Q17 GDP growth was 2.6%, which itself was down from the growth rate of 3.2% in 3Q17, it quickly becomes evident that the US economy is now softening.

Unfortunately, this is ALSO occurring at a time when inflation is rising sharply. To whit:

• The NY Fed’s UIG inflation metric shows inflation to be 3.1%

• The Atlanta Fed’s Sticky Inflation metric shows inflation to be 2.5%

• Even the “official” inflation metric, the Bureau of Labor Statistic’s CPI metric, shows inflation at 2.5%.

It is easy to shrug off these data points as being short-term spikes, however, we are already beginning to see signs of REAL inflation cropping up in the REAL economy.

As I’ve noted previously, inflation enters the financial system in stages.

The first stage involves a jump in prices paid by producers. This means that those firms responsible for manufacturing goods and services suddenly see a sharp spike in the cost of basic materials they use to build/ manufacture their finished goods.

That process began in early 2016 and accelerated throughout 2017 into this year. Indeed, the Producer Price Index has risen in 8 out of the last 9 months.

A few months here and there is no big deal, but a persistent trend such as this means firms will soon have to raise the prices of the finished goods they are selling or risk seeing their profits drop.

We hit that point in March 2018: according to the National Federation of Independent Business (NFIB), a net percent of 25% of small business owners plan on raising prices, a 10-year high and up from just 2% in 2016.

The NFIB is straightforward in its assessment: “This should raise the overall average increase in average prices for the economy.” In plain terms, higher prices will soon be hitting the economy.

A weakening GDP and higher inflation… there is a word for this, it’s stagflation.

Put simply, STAGflation is on its way. And smart investors are already taking steps to profit from it..

On that note, we just published a Special Investment Report concerning a FIVE secret investments you can use to make inflation pay youas it rips through the financial system in the months ahead

The report is titled Survive the Inflationary Storm

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

For years the Fed has been lying about inflation.

There are many methods of doing this, but the simplest was to use a “measure” of inflation that did not actually measure inflation at all.

This is the famous Consumer Price Index of CPI. It is meant to measure inflation, but ignores obvious costs of living items like food and energy usage.

Why lie about inflation?

Two main reasons:

1. Doing so allows the Fed and others to overstate economic growth in the US.
2. Doing so allows the Fed to hide the fact that living standards have been in sharp decline in the US for decades.

Regarding #1, all GDP growth estimates include an inflation component. If GDP grows 10%, and inflation also rises 10%, then REAL GDP growth was zero.

But what if GDP growth was 10%, inflation was 10%, but you claim inflation was just 6%.

Poof! You’ve got a great GDP growth number of 4% to produce in the media. Also, this supports your claims that your policies are working.

The US has been doing this for years. But it’s gotten increasingly worse.

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Which brings us to #2…

Living standards have been in decline in the US for decades. By some measures, incomes peaked in the early ‘70s and have declined by almost 40% since then.

Rather than spout off a bunch of detailed metrics to support this, let’s use common sense: in the ‘60s and before, most families lived comfortably off of one working parent. Today more often than not both parents work and can barely scrape by.

By lying about inflation, the Fed and others are able to hide the fact that it is getting harder and harder to get by in the US. This supports the BIG LIE, that the Fed and its monetary policies have been a net positive for the US.

They have not.

However, cracks are beginning to emerge in the Big Lie.

More and more members of the media are beginning to note that the Fed has an incredibly terrible record of forecasting growth. This has lead to increased scrutiny of the Fed’s policies and methods for forecasting.

Which is FINALLY leading to some disclosures about how the Fed measures inflation.

The precision of the forecasts, or lack thereof, needs to be kept in mind when setting monetary policy. We must be forward looking, which means we must rely on models to forecast inflation, but there is no one model that forecasts with much accuracy. The best we can do in this situation is to recognize that there is uncertainty around our forecasts.

Despite the central role inflation expectations play in our theories of inflation dynamics and monetary policy transmission, there is still much we don’t know about how such expectations are formed or even whose expectations matter for forecasting inflation and setting monetary policy.

https://clevelandfed.org/newsroom-and-events/speeches/sp-20160512-recent-inflation-developments-and-challenges-for-research-and-monetary-policymaking.aspx

Here is the Cleveland Fed President admitting in “Fed speak” that the Fed’s forecasts, particularly regarding inflation, are bogus.

The Fed is run by money printers. They cannot generate growth, they can only depreciate the US Dollar to create inflation.

We’re currently preparing for a similar situation today.

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

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