Producer Prices Index (PPI) April 2022 - Food On Fire!

Looking a little deeper at today’s Producer Price Index (PPI) report makes it pretty clear that our current bout of inflation is not only sustained, but placing a historic burden on consumer’s fundamental cost of living with finished consumer foods climbing 1.84% since March and a truly stunning 34.9% since April 2021.

While historically very volatile, consumer foods have never increased this sharply on an annual basis, nearly doubling the last most significant annual rate and far outpacing the levels seen in the 1970s when inflation was such a persistent and prominent issue (... more deep historical macro analysis).

The following data visualization shows PPI Finished Consumer Foods since 2017 (click for dynamic view) with the index value (in blue) on the left axis and the year-over-year change (in red) and month-to-month change (in green) on the right axis.

The following data visualization shows PPI Finished Consumer Foods since 1975 (click for dynamic view) with the index value (in blue) on the left axis and the year-over-year change (in red) and month-to-month change (in green) on the right axis.

The Financialization of the Everything Bubble

 

In a world awash in financialization, how is one to differentiate something from nothing?

The home you live in seems pretty tangible; it's framed with wood and finished with sheet rock and glass and stone.  It’s got a roof of asphalt or shake or slate, a paved drive and a yard of grass. 

It's also got "equity".  What a great term... “Equity”.  

People say "My house has equity" while bankers say "Your home has x amount of equity" almost as if this "equity" is a tangible attribute of the property, like the number of bedrooms or bathrooms.

But, the number of bathrooms doesn't decrease with adverse market conditions and neither can the home house more people when conditions improve.

So to an extent, "equity" is just a fiction... an ephemeral financial estimate of your net stake (after debt and transaction fees and with respect to current market conditions) in the house were you to liquidate it at this very moment.

But yet, it’s not a total farce as we all know people who have accomplished some substantial things with their "equity".  Real things, like educating their children or funding a vehicle purchase, a vacation or even covering critical matters like unexpected healthcare costs.

And therein lays the beauty and utility of traditional financialization.

A relatively simple conceptual framework is built up around a tangible asset, codified in a contract that once agreed to and executed, binds all parties to a specific performance based on expected conditions and norms.

Homeowners can access their real estate wealth without liquidating their actual property; farmers and wholesalers can make forward agreements (for delivery of real product) that are themselves fungible and able to be continuously traded into a secondary market of futures contracts for better, even more efficient agreements given ever changing conditions and considerations;  borrowers (both individuals and firms) can tap future expected income in the form of short or long-term credit while investors can hold stock in a business and, in so doing, share in the current profits and even the estimated value associated to future earnings.

All of this is made possible through the wondrous multitude of innovations in financialization.  
But too much financialization, as we have today, has worked to distort our sense of value, stoking our "animal spirits" and empowering the darker instincts of human nature.

Instead of freeing stranded value or binding voluntary parties to practical arrangements, rampant financialization has overwhelmed our sense of tangible value, ultimately stimulating immense mal-investment and inefficient and even absurd allocation of resources.

Whole cottage industries of dealers, brokers, agents, lawyers, underwriters and waves of other service-providers and middlemen have evolved over time to get their piece of our over-financialized economy while lawmakers, freed from the bounds of practical current accounting by epic monetary charades, craft policy in their never-ending quest to produce programs and initiatives that buy them votes. 

Over time, our whole economy has come to reflect, in one way or another, this distorted sense of value. 

As one fiction has piled atop another, we have gotten further and further from the fundamentals which, when taken together with our natural enthusiasm for technological progress, has made us apt to believe almost anything.

Should investors be suspicious of stocks with outlandish P/Es?

Can homes be so valuable that prices can continuously outpace incomes year in and year out?

Is $40 billion a fair amount to allocate to arm an ally in the support of the latest foreign policy concern? What about $1.37 trillion to fund 50 years of a supplemental nutrition program? 

Can an endlessly reproducible JPEG image or the “first tweet” really be worth millions if it's simply packaged and traded as an NFT?

Is $349 for an Andrew Dice Clay Cameo a fair price, particularly considering that you can get a Gary Busey for just $46 more or a Tommy Chong for $199 less?

What is a dollar actually worth?

Someday, possibly soon, we may really find out.

Bubbles and History, Harshly Rhyming

 

Mark Twain’s old adage that “History Doesn’t Repeat Itself, but It Often Rhymes” by my reckoning has never been more accurate with respect to the markets (both stocks and housing) but the difference between this cycle and the last is not just measure and verse but a long list of ever accumulating liabilities that will make this a harsher passage.

In many ways today’s economic climate bears a striking resemblance to the conditions that existed prior to the 2008 financial crisis.

Both periods saw historically accommodative central bank policies enacted to combat “temporary” crisis (then, the dot-com bust/911, now 2008 crisis itself and COVID-19 bookending the expansion) leading to obviously overheated conditions (in both stocks, housing and other assets) and then, finally, an accumulation of substantial head winds and a complicit Federal Reserve peddling “noble lies” in an feckless effort to obscure the severity of the situation.  

In 2007/08, Bernanke continuously insisted that “sub-prime is contained” while it obviously wasn’t, and the market bought that notion, until it didn’t. 

Today, Powell  pushed “inflation is transitory” while it also was obviously not, and the market bought that notion, until now. 

With the bear market pattern in stocks firmly established and a sell-off underway, we are currently experiencing a 2007/08-like recognition of the liabilities that have accumulated and the systemic risk they pose. 

One key point of difference though is that in 2007/08 the threat came as a result of the fallout associated to the bursting of the “Housing Bubble” while today, we are seeing a burst of the “Everything Bubble”. 

Coming as a direct result of the Federal Reserve and Federal Government’s (as well as their global counterparts) reckless efforts to bail out bag holders and prop up the failed economy in the wake of the “Great Recession”, these fraudulent “authorities” sowed the seeds of what will likely be seen as the single greatest economic calamity in human history.

Fearing the political consequences of the economic reckoning that was the housing downturn, the Feds embraced a policy of fiscal stimulus and money-printing the likes of which has never been seen and the scale of which most Americans don’t fully understand. 

The Fed not only supported the financial system through their conventional policy tools (Fed Funds rate, lender of last resort, discount window), they implemented unconventional measures (quantitative easing) that saw them purchasing trillions of dollars of mortgage securities and treasury securities from the Treasury and Federal agencies thereby directly funding much of the expansion seen since 2008. 

Where did this money come from to fund all of this economic activity?  

Nowhere.  This “money” was just bits on the Federal Reserve’s digital balance sheet. 

To put this in perspective, just the $2.715 trillion minted for mortgage backed securities alone is the equivalent of over 1 million American households’ lifetime earnings.  

But the Feds money creation provided no additional productive output… there was no real production associated to this effort, it was just more “hot” money available to chase existing goods and services as well as stimulate a multitude of options for mal-investment . 

So, it is no wonder that we are living in a time where bubbles abound… stocks, housing, cryptos, NFTs, Robinhood… the peak of the Everything Bubble brought boundless optimism for fast money across a host of asset classes and markets.   

But with this period drawing to a close and the Feds hands tied by un-tethered inflation and their credibility now firmly debased, how will the “authorities” respond to the oncoming economic calamity?

My guess is not very well.   

Aside from purely economic considerations, we now have a population deluded into believing the false notion that our federal authorities with their seemingly unending largess can ALWAYS step in to blunt any turmoil. 

From my perspective, we have stretched this falsity about as far as conceivably possible and are likely moving closer to a period where we all will learn hard lessons in the fundamentals… lessons that we should have learned last cycle. 

This downturn will be harsher and more punitive as the fiction of limitless economic engineering gives way to an unforgiving reality.

Stocks down, Housing down... everything down.

Hello Again! Now Where Do We Go From Here?

 

Its been quite a while since I posted to this blog!  

So long, that there is a good chance that some percent of my original readers from back in 2006 are already dead!

Oh well... as Keynes noted "In the long run we are all dead" so why not try to read the macroeconomic tea leaves and attempt to discern some "signal" from the "noise" of this nutty world while we wait out the inevitable cold hand of the Reaper?

First, I thought I might take a moment to recap a bit...

I started this blog back in 2006 in a fit of therapeutic rage (...something like scream therapy but on the web) while working through the frustrations of my own housing situation and the bubbly times we were all living in back then.

It was very obvious to me in 2005 - 2006 that we were at a pivot point... the housing market had topped and the massive bubble was about to burst, likely bringing with it, all the attendant collateral damage.. recession (maybe even depression), unemployment, crashing prices, fire, brimstone!

I truly did (as my pseudonym implies) sell my home at the "top of the market" though there were other circumstances that prompted that sale other than simply a seriously committed bubble trade.

In the years following the economic collapse, I continued to blog and watch the housing market evolve and eventually, in 2010, I bought a new home at what turned out to be pretty close to the "bottom of the market" in my area, though again, there were other circumstances that prompted that purchase... you can only wait on the sidelines for so long!

Throughout the years of blogging about housing and the macro-economy, I developed a pretty clear sense of my own position on economic matters and a better ability to communicate that position.

Generally speaking, I like to think of my views as that of a Austrian-economic realist living in a post-Keynesian hellscape replete with decades socialist malfeasance, fraud and mal-investment.  

But unlike many an economic "perma-bear" or doomsayer, I don't have any inherent ingrained philosophical reason to be pessimistic about the course of the economy... my pessimism, as I see it, is rooted in the basic "realist" understandings that human organizations are no less human than the constituent humans themselves (i.e. you have both the wisdom of the crowd as well as the madness), and that, over the course of the last 100 years (or so) we have allowed the sophistry and pomp and circumstance of our central planner overlords (both the Fed, Federal Government, and Globalists) to plan so much that they planned us all into a position where the path of least resistance leads to doom or at least a major wash-out reckoning.

From that perspective, I was able to get a lot of things right back in mid-oughts but I did also get some major points wrong.

So what did I get so wrong?  

While I correctly predicted the oncoming train-wreck that was the 2008 economic crisis, I thought that this event would be the seminal event of our lives... a second "Great Depression" leading to a period of deflation so substantial that only a major reformation of our monetary and political system could address.

Clearly, I seriously underestimated the power of the "full faith and credit" of the the Federal Reserve, the U.S. Federal government and the Globalist central bankers and planners.

As the collapse ensued (in the U.S., Europe and across the globe more widely), month by month and year after year, it was met with a steady stream of monetary depravity with central schemers bailing and printing and pumping the scale of which has never been seen in human history.

This on-going debasement of all that is real and true and honest, continued, largely unabated throughout the 2010s and only popularly fell out of the news cycle (likely to the great relief of central banks) with the election of Donald Trump, when the ascendance of this political firebrand completely overwhelmed the media and the collective zeitgeist. 

Still though, the Federal Reserve continued its recklessly accommodative policies, pumping, printing and quantitatively easing like there were no tomorrow, all ultimately with the explicit purpose of serving to artificially support the housing market, grossly inflate the stock market and, probably the most fundamental distortion, directly financing the Treasury in what can only be seen as the final metamorphosis of our system into a zombified and degenerate faux-economic con-game.

Even after only a mild attempt at re-normalization of the Federal Funds rate between 2016 and 2019, the Fed had to reverse course after barely reaching about 2.5%.  Clearly, the now highly rate-sensitive economy could not even withstand a moderate withdrawal of monetary stimulus.

During the fall of 2019, the Fed was even working to assuage concerns about tumult in the "repo market", and clearly retreated back to projecting a on-going accommodative policy when, in the face of the COVID-19 debacle, it abruptly gave up on any normalization charade and reset the Federal Funds rate back down to the zero-bound.

So, my primary oversight, as I currently see it, was really just one of timing.

I still hold that we are hurtling headlong to a fundamental wash-out epic economic reckoning, but the now older and (hopefully) somewhat wiser me knows that predicting this type of event, even to the precision of years, is folly.  

There is no Nostradamus and the last thing anyone really needs in this hyperbolic world is someone making up timed predictions just for the sake of of righteousness.

Going forward, I'll attempt to simply interpret the latest economic events and present my thoughts on where we are and where we may be going, particularly with respect to my overall thesis as stated above.

So, with that background context out of the way, let's take a look at the current picture to start our conversation about where things may be heading for the economy.

Not only is the recent bout of inflation not transitory (as Fed Chair Powell recently admitted), it is more than likely totally un-tethered, coming NOT only as a result of recent, COVID-era disruptions and emergency money creation, but as the sum total of ALL the reckless malfeasance and money creation that ensued since 2008.

The system is absolutely primed with hot money leading to epic levels of mal-investment... a fact that is easy to see simply by observing such recent manias as the Robinhood-powered meme-stocks, the tens of thousands of cryptos (with the special exception of bitcoin), NFTs, and now a new, absolutely absurd, housing market mania.

As for stocks, it seems pretty clear at this point that we are now well into a bear market with NASDAQ peaking last November, and the S&P and Dow peaking in early-2022.  

Similar to the 2007 and early 2008 period, the jig is up on stocks, the bear pattern has taken over and all we have to do now is wait for the bottom to simply drop out.

This is a particularly troubling moment for this type of stock market selloff given that 70 million Baby Boomers are now closer to their 60s and 70s where many will simply not have enough time left on this planet to wait out another major market downturn and certainly not the will or ability to replenish their losses.

This new stock market route will not be like the last one in one very important way though... there will not be some magical Federal Reserve prestidigitation that can magically be just whipped up to get things rolling again.... this time the market will have to bottom and (eventually) heal and mend of its own merit, a process that could take considerably longer (.. please refer to Nikkei 1990 to today) than anyone now expects.

Housing will likely be the next shoe to drop... but let's make that the topic of the next discussion.

Best to all!

Employment Situation: Nonfarm Payrolls and Civilian Unemployment July 2017

The latest Employment Situation Report indicated that in July, net non-farm payrolls increased by 209,000 jobs overall with the private non-farm payrolls sub-component adding 205,000 jobs while the civilian unemployment rate declined to 4.3% over the same period.

Net private sector jobs increased 0.17% since last month climbing 1.68% above the level seen a year ago and climbing 7.08% above the peak level of employment seen in December 2007 prior to the Great Recession.

Employment Situation: Unemployment Duration July 2017

The latest employment situation report showed that conditions for the long term unemployed generally worsened in July.

Workers unemployed 27 weeks or more increased to 1.785 million or 25.9% of all unemployed workers while the median term of unemployment increased to 10.6 weeks and the average stay on unemployment increased to 24.9 weeks.

Employment Situation: Total Unemployment July 2017

The latest Employment Situation report showed that in July “total unemployment” including all marginally attached workers went flat at 8.6% while the traditionally reported unemployment rate declined to 4.3%.

The traditional unemployment rate is calculated from the monthly household survey results using a fairly explicit definition of “unemployed” (essentially unemployed and currently looking for full time employment) leaving many workers to be considered effectively “on the margin” either employed in part time work when full time is preferred or simply unemployed and no longer looking for work.

The Bureau of Labor Statistics considers “marginally attached” workers (including discouraged workers) and persons who have settled for part time employment to be “underutilized” labor.

The broadest view of unemployment would include both traditionally unemployed workers and all other underutilized workers.

To calculate the “total” rate of unemployment we would simply use this larger group rather than the smaller and more restrictive “unemployed” group used in the traditional unemployment rate calculation.

The Chicago Fed National Activity Index: June 2017

The latest release of the Chicago Federal Reserve National Activity Index (CFNAI) indicated that national economic activity improved in June with the index rising to a level of 0.13 from a weak level of -0.30 a month earlier while the three month moving average rose to a level of 0.06.

The CFNAI is a weighted average of 85 indicators of national economic activity collected into four overall categories of “production and income”, “employment, unemployment and income”, “personal consumption and housing” and “sales, orders and inventories”.

The Chicago Fed regards a value of zero for the total index as indicating that the national economy is expanding at its historical trend rate while a negative value indicates below average growth.

A value at or below -0.70 for the three month moving average of the national activity index (CFNAI-MA3) indicates that the national economy has either just entered or continues in recession.

FHFA Monthly Home Prices: May 2017

Recently, the Federal Housing Finance Agency (FHFA) released the latest results of their monthly house price index (HPI) showing that in May, nationally, home prices increased 0.39% from April rising 6.86% above the level seen in May 2016.

The FHFA monthly HPI are formulated from home purchase information collected from mortgages that have been sold to or guaranteed by Fannie Mae and Freddie Mac.

S&P Core Logic Case-Shiller: May 2017

The latest release of the S&P Core Logic Case-Shiller (CSI) home price indices for May reported that the non-seasonally adjusted National index increased from April with prices rising 0.97% while the non-seasonally adjusted Composite-10 city index increased 0.70% and the Composite-20 city index increased 0.81% over the same period.

On an annual basis, the National index increased 5.58% above the level seen in May 2016 while the Composite-10 city index increased 4.94% and the Composite-20 city index increased 5.69% over the same period.

On a peak basis, the non-seasonally adjusted National index recently surpassed the record high level seen prior the onset of the Great Recession rising 3.24% above the level seen in 2006 while the Composite-10 index remained -6.19% below the peak level and the Composite-20 remained -3.66% below.

Existing Home Sales Report: June 2017

Recently, the National Association of Realtors (NAR) released their Existing Home Sales Report for June showing a decline with total home sales falling 1.8% since May but climbing 0.7% above the level seen a year earlier.

Single family home sales also declined with sales falling 2.0% from May but rising 0.6% above the level seen a year earlier while the median selling price increased 5.1% over the same period.

Inventory of single family homes went flat from May at 1.74 million units, falling 7.4% below the level seen in June 2016 which, along with the sales pace, resulted in a monthly supply of 4.3 months.

The following charts (click for full-screen dynamic version) shows national existing single family home sales, median home prices, inventory and months of supply.

Employment Situation: Nonfarm Payrolls and Civilian Unemployment May 2017

Today's Employment Situation Report indicated that in May, net non-farm payrolls increased by 138,000 jobs overall with the private non-farm payrolls sub-component adding 147,000 jobs while the civilian unemployment rate declined to 4.3% over the same period.

Net private sector jobs increased 0.12% since last month climbing 1.77% above the level seen a year ago and climbing 6.77% above the peak level of employment seen in December 2007 prior to the Great Recession.

Employment Situation: Unemployment Duration May 2017

Today's employment situation report showed that conditions for the long term unemployed generally worsened in May.

Workers unemployed 27 weeks or more increased to 1.663 million or 24.0% of all unemployed workers while the median term of unemployment declined to 10.4 weeks and the average stay on unemployment went flat at 24.7 weeks.

Employment Situation: Total Unemployment May 2017

Today's Employment Situation report showed that in May “total unemployment” including all marginally attached workers declined to 8.4% while the traditionally reported unemployment rate declined to 4.3%.

The traditional unemployment rate is calculated from the monthly household survey results using a fairly explicit definition of “unemployed” (essentially unemployed and currently looking for full time employment) leaving many workers to be considered effectively “on the margin” either employed in part time work when full time is preferred or simply unemployed and no longer looking for work.

The Bureau of Labor Statistics considers “marginally attached” workers (including discouraged workers) and persons who have settled for part time employment to be “underutilized” labor.

The broadest view of unemployment would include both traditionally unemployed workers and all other underutilized workers.

To calculate the “total” rate of unemployment we would simply use this larger group rather than the smaller and more restrictive “unemployed” group used in the traditional unemployment rate calculation.

S&P Core Logic Case-Shiller: March 2017

Today's release of the S&P Core Logic Case-Shiller (CSI) home price indices for March reported that the non-seasonally adjusted National index increased from February with prices rising 0.81% while the non-seasonally adjusted Composite-10 city index increased 0.91% and the Composite-20 city index increased 0.98% over the same period.

On an annual basis, the National index increased 5.75% above the level seen in March 2016 while the Composite-10 city index increased 5.22% and the Composite-20 city index increased 5.89% over the same period.

On a peak basis, the non-seasonally adjusted National index just surpassed the record high level seen prior the onset of the great recession rising 1.26% above the level seen in 2006 while the Composite-10 index remained -7.59% below the peak level and the Composite-20 remained -5.39% below.