Wednesday, February 17, 2021

The Fake Inflation Supernova

The consensus view is inflation, which is why they are about to get trucked by extreme deflation. All too often, conventional wisdom is the former and not the latter...

For some reason I personally can't explain, today's pundits are constantly expecting inflation, when the predominant paradigm for 40 years straight has been deflation. Not since the late '70s and early '80s has the U.S. experienced anything close to sustained inflation. Of course those who claim otherwise will always say that the price of this or that has risen far faster than the overall economy - primarily healthcare and tuition. Nevertheless, the true definition of inflation is a general increase in prices. In a wage constrained environment, price increases in one area of consumption must be offset by reduced demand in other areas. Whereas inflation is too much money chasing too few goods, deflation is too little money chasing too many goods. The one thing they have in common is that under both scenarios the middle class is falling behind. 

In the U.S. per the Future Shock prediction, workers have been increasingly marginalized by corporations seeking to increase profit margins after every major downturn, by downsizing their workforce. Most apologists for corporate profit maximization are obligated to blame the Federal Reserve and low interest rate policy, however low interest rates are the result of corporate rationalization, not the cause. Anyone who has actually worked in a major company in the past thirty years knows this to be true. In the absence of real growth and demand, cost cutting is the only way to increase profit. What broke the back of inflation in the early 1980s was supply side economics and the dismantling of labor protections. Free trade made it extremely profitable to outsource to countries having no labor or environmental standards. The result in the U.S. was increasing under-employment, which first primarily affected working class men, however in the past two decades the trend towards marginalization has moved up the chain to include technical professionals, increasingly obsoleted by H1B visas:

"People of post-industrial society change their profession and their workplace often. People have to change professions because professions quickly become outdated. People of post-industrial society thus have many careers in a lifetime. The knowledge of an engineer becomes outdated in ten years. People look more and more for temporary jobs."

Corporations don't want to retrain people, they find it far more profitable to layoff one obsolete skillset through one door and hire another more up-to-date skillset through another. Today's resume specifications are so narrow that those who do not have the exact qualifications are never considered. Ironically companies constantly complain of a skills shortage. These same companies are the ones that were laying off workers at the end of the previous cycle. Churn the workforce often enough and soon long term under-employment becomes endemic. And with that persistently falling demand comes deflation and low interest rates. Debt soon becomes the "economy". 

This phenomenon is well known and well ignored. Therefore it's only fitting that at the end of the longest cycle in U.S. history, the main reason these people don't see it ending, is because of their own studied ignorance of the true economic problem in America. Per Econ 101, at the end of the cycle cost pressures build on constrained resources. However, under the deflationary paradigm I just described, labor is not a constrained resource, it's in mass surplus, so wage pressures are not causing this transient blip in inflation. What is causing this short-term burst of inflation is central bank liquidity bidding up commodity prices. Oil futures speculation is feeding back into the CPI and PPI, causing the usual dunces to assume that it's 1979 all over again. You can fool these people over and over again an unlimited number of times. They don't get it.

Note that producer prices are NOT at the highest level since 2009, they are rising at the fastest rate since 2009. Big difference. However, most people are easily fooled by catchy headlines. Here we see the PPI is lower than 2009, 2011, and most recently 2018. And prices are tracking oil.

Of course they got fooled in 2008 as well:

This is oil demand going back three decades. This bounce off the 1993 bottom gets us back to the 2011 level - meaning a cool decade of demand has been lost and is not coming back any time soon. 

I could show myriad charts depicting the devastation to the Energy sector, but suffice to say this past year has been a paradigm shift for Big Oil. As I write, Tesla has a larger market cap than the entire Energy sector, yes you read that right. In 2020, Exxon was replaced in the Dow after 100 years, by The amount of capital that flowed into green energy in the past year through direct and indirect investment is incalculable. 2020 was the year of Electric Vehicles and green energy. Nevertheless, as it is with all early stage industries, most investors will soon get obliterated. Speculation has taken over the market and valuations are ludicrous. When the smoke clears, the real winners will eventually emerge. However, some of them will have to be restructured first, meaning the stockholders get wiped out.

Here we see that Tesla is carving out a topping pattern very similar to last year. It peaked in early February and then sold off towards the end of the month:

Cyclicals are a consensus trade on Wall Street, which is where they will get obliterated, same as last time.

Except this time sans bailout.

What about all this stimmy money? Where is it going?

It's going to credit card payments, overdue rent, food, and Robinhood accounts where it has been bidding up Bitcoins on the assumption of imminent inflation.

No discussion of inflation would be complete without a discussion of Bitcoin which is now officially the biggest bubble outside of the Dow.

Bitcoin is now equal to Tesla in value. What do I mean, market cap? No, I mean one virtual currency unit will now buy a Tesla Model 3 with all the bells and whistles. How anyone thinks that a single currency unit should be equal to the value of a luxury car is asinine on the face of it. One year ago it was a used Honda Civic ($5); this past November it was a new Camry (~$20k), and now it's a decked out Tesla or BMW. Today's crypto "experts" are predicting soon you can buy a used condo with one Bitcoin aka. $100k. 

Bitcoin perfectly embodies all of the deceptions of this era - it's a Ponzi scheme, it has zero value, it's bid up under the deluded pretense of imminent inflation, and it's going to wipe out latecomer speculators on a trillion dollar scale.

In summary, the entire "system" is now just one big fucking con job. There is now an entire generation of Bernie Madoffs running amok, while regulators focus on ensuring everyone has equal access to pump and dump schemes. 
For those of us realists, it has never been more important to be mindful of the words of Warren Buffett - what the wise man does at the beginning, the fool does at the end. 

And realize that the true believers in exploitation were never going to see this coming.