“Inflation is a form of tax, a tax that we all collectively must pay.”
-Henry Hazlitt
For those of you who aren’t willing to take the government’s word for it on “inflation” and want to brush up on how to explain inflation to normal human beings, read Economics In One Lesson, by Henry Hazlitt.
Hazlitt wrote the book in 1946 but his most basic lessons about real-world inflation are timeless. When someone at the Fed or Whitehouse says “believe me, there’s no inflation”, you probably shouldn’t believe them. The data doesn’t lie, politicians do.
Our proprietary real-time nowcast (that called the peak in inflation) for US headline INFLATION (CPI) ticking higher for the coming quarters is the most important driver of our call that the US economy is going to be in Quad 3 for the next 3 quarters
Back to the Global Macro Grind…
What is Quad 3? A: economic stagflation.
What has a central tendency to perpetuate stagflation (i.e. the reflation of asset prices, cost of living, etc. and commensurate #deceleration in REAL economic growth)? A: The Fed.
A common kind of stagflation is that born out of an economy that moves swiftly into Quad 4. To review, that’s what just happened to the US economy in Q4 of 2018 and Q1 of 2019:
- The US economic GROWTH Cycle peaked in Q3 of 2018
- The US INFLATION Cycle peaked in Q3 of 2018
- The US PROFIT Cycle peaked in Q3 of 2018
Peak, peak, peak = #TriplePeak. And what was the Fed’s response? A: Triple Dovish.
I define “peak” in terms of the year-over-year ROC (rate of change) of GROWTH, INFLATION, and PROFITS. In the USA, they all started #slowing in Q4 of 2018 and continued to #slow in Q1 of 2019. Even the Fed figured that out on a 3-4 month lag.
In response to 2 straight quarters of Quad 4, Triple Dovish Fed gave you:
- Collapsing interest rates
- An arrest of US Dollar appreciation
- Asset price reflation
*see “stocks”, bonds, and the +40% YTD move in WTI Crude Oil for details
“So…” our model is calling for headline US inflation to firm by mid-2019 and re-accelerate at a faster rate by Q4 of 2019, slowing REAL US growth to its lowest year-over-year GROWTH rate of the year by Q4 of 2019 in kind.
What will cause US INFLATION to #accelerate?
- Oil’s reflation (via lower interest rates, weaker Dollar, more Fed Cowbell, etc.)
- Easier Comps (Base Effects) across key consumer cost centers (see Chart of The Day)
- Ongoing underlying inflationary pressures in the US Labor Market (wages)
Away from Energy (and Oil prices), this is already happening btw:
- US Wage Inflation (year-over-year) is already TRENDING at a 9-year high
- Median headline CPI just hit its highest 3-month rolling average since the last time Bernanke said there was “no inflation”
Remember that? Remember The Bernank? Lol
Lol doesn’t give the proper credit to a government guy telling you there’s no inflation when Oil was at $150/barrel in 2008 and again in 2011 when the CRB Commodities Index (19 commodities) hit an ALL-TIME HIGH.
That was, of course, because both the Fed and the White House would be held responsible for perpetuating economic stagflation, inequality gaps widening, etc.
That’s the other thing about people running either other people’s money or their own. If your job is to make money in markets, maybe you should spend less time complaining about the politics of it and more time front-running it (i.e. making money on it).
Yes, bipartisan support to inflate market prices at the expense of The People is both sad and pathetic…
But I’m not your President. I’m your Risk Manager of probable economic outcomes. So I’ll stay long Oil, Energy Stocks, REITS, etc. while The People foot the real-life bills associated with my market returns.
When normal human beings ask me about the economic truth of it all, I’ll stick with telling them about that too.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.38-2.55% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
REITS (VNQ) 85.83-88.21 (bullish)
Energy (XLE) 65.49-68.26 (bullish)
VIX 12.61-16.20 (bearish)
USD 95.74-97.20 (neutral)
Oil (WTI) 60.28-65.58 (bullish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
