Hard Landing Ahead
The rocky road to Argentina, the most important decision in 40 years and the price of escaping hyperinflation...
Bill Bonner, reckoning today from Dublin, Ireland...
Coming up for US deciders is their most important decision in at least 40 years. It can be reduced to a simple question: are we headed down the Argentine path, or not? The Argentines are champions of the world at soccer. What they don’t know about kicking cans down the road isn’t worth knowing.
But what about the US? Where are we headed? That is not just a question for the authorities; it’s a question for you. If we’re bound for the pampas, better pack light…and bring lots of real money; you’re going to be glad you did.
That’s the ‘inflation route.’ “Print” money….and pay the costs later. And we warn you: the roads are rough…and dangerous.
The deflation trip is no picnic either. But those are the two choices. When you deflate, you take the pain now. When you inflate, you take the pain, more of it, later.
And by all means, don’t get on the wrong bus.
This Raggedy Plane
Here’s the situation now. Prices are falling (deflation). Commentators are joyful. ‘Inflation is beaten,’ they say. ‘A soft landing, after all.’
Charlie Bilello:
US Producer Prices (PPI) increased 2.75% over the last year, the 9th consecutive decline in the YoY rate-of-change and the lowest print since January 2021. PPI peaked at 11.7% in March 2022.
Year-ahead business inflation expectations continue to fall, down to 2.8% in the latest Atlanta Fed survey. That’s the lowest we’ve seen since July 2021.
Global Container Freight Rates (cost of 40′ Containers) are now lower than they were in February 2020 (pre-covid), down 87% from their peak.
US Import Prices fell 4.6% over the last year, the largest YoY decline since May 2020.
U.S. Asking Rents are lower than they were a year ago, the first YoY decline since March 2020.
But this raggedy plane has barely begun its descent. While some prices are falling, others are still rising. Shelter, for example, rose 8.2% in the latest reading – the biggest increase in housing since 1982. And transportation. Bilello:
The average monthly payment for a new car has skyrocketed to $777, which is nearly double the average payment in late 2019 (Kelley Blue Book data). Nearly 17% of consumers who financed a new car in the first quarter of 2023 had a monthly payment of $1,000 or more (a record high), up from just 6% in the first quarter of 2021 (Edmunds data).
Taking the most common measure – the ‘sticky’ CPI, less food and energy – price inflation is actually going up, not down. It was mostly the falling price of oil that brought the overall measure down last month. But wait, oil may be going back up.
Inflation Volatility
What these numbers – some up, some down – are showing us is that inflation is far from beaten. It’s what happens when the feds spend more than they can afford year after year. And now the federal government is facing trillion-dollar deficits ‘as far as the eye can see.’
Yes, dear reader….inflation is always and everywhere a political phenomenon. And stopping it involves pain…political as well as economic. Push hasn’t yet come to shove, yet, but when it does the pain will come with it.
Greed & Fear reports:
…a little noticed working paper by the Federal Reserve Bank of Cleveland, published in January (“PostCOVID Inflation Dynamics: Higher for Longer” by Randal J. Verbrugge and Saeed Zaman, 13 January 2023). This paper found that if the Fed really tried to reduce inflation to 2%, it would cause the unemployment rate to rise to 7.4%.
And here, David Stockman reminds us of the pain inflicted by the Fed in 1982:
Volcker pushed the real yield on the 10-year UST [Treasury bond]… from -3% in late 1979 to a peak of +9.3% in August 1983, sustaining that purgative real rate at +5% through early 1986. In the process, everything else fell into place:
Unemployment… soared to 10.8% in Q4 1982, a victim of depriving the economy of unsustainable activity fueled by a decade of easy money.
Real GDP …took a deep dive to -6.2% in Q1 1982, but with the fall of inflation came bounding back to +7.9% in Q3 1983 ;
CPI inflation…which had stood at 14.6% on a Y/Y basis in late 1979, plummeted to 2.5% by Q2 1983.
And now, Stockman makes our point:
Accordingly, reversing bad policies inherently involves purging their macroeconomic effects. The estimable phrase “no pain, no gain” is rooted in the fundamentals of sound economics.
So today, we end up where we left off yesterday, with a question:
In today’s US, can policy-makers really stand the pain of a genuine fight against inflation? Or will they cave in under pressure from the rich – whose assets are collapsing in value ... and the poor – whose transfer payments are threatened by tightened federal budgets?
The answer – if Argentina is anything to go by: the pain of inflation may be much greater, over the long run….but the pain of deflation is more immediate. Push comes to shove, they’ll push and shove for inflation.
More to come…
Regards,
Bill Bonner
Joel’s Note: As noted this week, Argentina provides a kind of “look around the corner” for America’s potential inflationary future. After a particularly nasty inflation print last Friday, which showed the Fin del Mundo registering triple digit inflation for the first time since 1991, the parallel rate for the local peso shot off like a rocket.
From 400:1 on Friday… to 410:1 by Tuesday…to 430:1 as of this morning, the peso is disappearing before savers’ watery eyes.
Yesterday, at our local butcher, we overheard the woman in line before us inquiring about the price of her regular cut. After some lamenting and head-shaking, she left the store… with a half-kilo of ground beef.
“Food or medicine?” read one somber headline in the Associated Press.
“Peso slumps in parallel market as inflation soars” chorused the Buenos Aires Times.
Meanwhile, there’s growing talk on the street and the local news about “el hambre” (the hunger). For many, including the ~85% of retirees… who rely on paltry government pensions… the situation is getting desperate.
Locals looking to flee their rapidly depreciating fiat pay enormous premiums to convert their meager savings into gold, greenbacks, crypto, etc. Even so, their purchases are strictly limited… and closely monitored…
Of course, Argentina is a long way further down the road than most other countries, but the roadsigns are there just the same. Mercifully, the Argentine peso is also not the world’s de facto reserve currency.
But it begs the question: what would Americans do if the dollar goes “full peso,” as Dan Denning described it in a recent correspondence?
How many people have a Plan B… some gold under the floorboards… some silver coins… a crypto wallet… a foreign bank account… anything outside the State’s strangulating system?
According to BPR investment director, Tom Dyson, the “days of free money… are finished.”
“Our core hypothesis is simple,” wrote Tom in yesterday’s weekly market note to members. “They blew up a gigantic wealth bubble by suppressing interest rates, printing money, bailing out bad investments and encouraging speculation. Now that era is over. The days of free money and low consumer price inflation are finished. We’re in a new period of rising interest rates, falling valuations and inflation volatility. It’s just getting started.”
The obvious question, then… what to do about it? Tom, again…
Our strategy is also simple. We’re sitting on the sidelines, watching the spectacle from the bench. We’re holding cash and physical precious metals in equal amounts. The cash protects us from nominal price declines and will allow us to take advantage of any forced selling or liquidation. The precious metals protect us from currency debasement. I may adjust the weightings in the future, as circumstances change, but for now it’s essential to hold both in equal amounts.
Finally, we’re buying income stocks and trying to earn a little extra cash while we sit on the sidelines. We’re collecting dividends and option premiums from value stocks in the energy and shipping sectors. I’m hoping we’ll make between 20% and 30% – just in income – from these stocks this year.
As of Tom’s writing (yesterday’s close), there were 11 open positions in the Bonner Private Research Official Stock Watchlist, with an average gain of 20.64%. Seven positions are currently rated a “buy.”
If you’d like to join BPR and begin a Plan B strategy for yourself, do so by finding a plan that’s right for you, here…
Janet Yellen’s comment this week that “higher bank lending standards” may make further interest rate increases unnecessary(or less necessary) caught my attention. Are they pursuing an “Induced Recession” policy sans further interest rate increases? Just let a Demand Collapse take care of inflation, keep the government money flowing to the favoured sectors of the stock market(Tech and giant multinational corporations), and voila, the Elites are happy and the Prols.... well, who cares about the Prols. We know the main goal is to find a way to keep the stock market chugging along, as this preserves the billionaires wealth like nothing else, and the rest of us be damned.
It’s getting harder and harder to separate the fly sh!t from the pepper in this world.
I spent a fair amount of time in Buenos Aires 20 years ago, really at least two dozen trips there over 5 years. It was just the start of the train wreck. The Peso was 4:1 ion my first trip and, if memory serves, eventually went down to 2.5:1. Nestor Kirchner was president, enacting all sorts of policies to reward his tribe, fleece the public (particularly soy bean farmers), and entrench he and his wife in power.
But, there was good too. Real estate was still traded in dollars. Even though the Peso held up pretty well when Kirchner began office, the citizenry wasn't fooled. Most had seen this act before with Peron. They put their money in real estate because they wanted assets valued in dollars. There was residential housing construction everywhere -- not new housing starts but remodeling of existing housing. May as well increase the value of those dollar-based assets.
There was serious neighborhood revitalization outside downtown (mercocentro). All the Palermo neighborhoods were being rehabbed -- Palermo Nuevo, Palermo Verde, Palermo Chico, Palermo Viejo, and probably a few I'm forgetting. The restaurants still served the best steaks in the world. Some favored Cabana Las Lilas, but I was always partial to La Cabrera. Argentine cows graze on the Pampas, which (I understand) floods and recedes yielding grasses with high chlorophyl content. Makes the steaks that much more delicious.
It saddens me to see what the Argentine citizenry has had to endure through 20 years of Kirchner thievery and misguided policies. The IMF has also played its part, though not as much as the Kirchners alleged. Still, Argentina was once a rival to the United States in terms of its trajectory a couple centuries ago. Unfortunately, we may be on the same trajectory again soon.