This is the truth about what is really happening with inflation.
The Real Story On Inflation
February 26 (King World News) – This is a very important note from Bill Fleckenstein: Today I would like to tackle the topic of inflation, and by extension, the Fed, as the sheer volume of articles in business publications about the Fed shifting its target makes me feel like Powell et al. really want folks to accept this, or the papers themselves are lobbying for it, or some combination of the two.
Why Pay More? Because the Fed Says So
On Saturday, the Wall Street Journal ran a story on the second page headlined, “Fed Officials to Mull Inflation Target Shift,” in which it chronicled the potentially extraordinarily “dangerous” outcome of “too low” inflation. To wit, “Top Federal Reserve officials said the central bank would consider broad changes to its policy framework to encourage periods of modestly higher inflation, a response to the challenges the Fed has faced in driving inflation higher in recent years… ‘The persistent undershoot of the Fed’s target risks undermining the 2% inflation anchor'” (that quotation is from New York Fed president, John Williams).
Today, again on page two, the WSJ ran another story headlined, “Fed Considers More Flexibility in Inflation Target,” which was as extension of the prior day’s story that detailed how the Fed is looking into what it calls “price-level targeting,” whereby it lets the inflation rate run higher than 2% to make up for the all the times in the past where it was lower.
Also over the weekend, the Financial Times got into the act with an above-the-fold headline, “Weak inflation haunts Fed policy: price stagnation confounds economists; lack of wage growth fueling surge in populism.” The article began, “Risks posed by chronically low inflation rates…have dogged developed economies since the financial crisis…”
Let’s dispense with the “fake news” of these stories and cover some facts. First, there has been no price stagnation. Prices of various products continue to move higher in a sawtooth fashion. Sometimes prices are hiked, sometimes quantities are reduced, services are cut back, and the inflation measures used by the government and the Fed don’t capture inflation, thanks to hedonics, substitution, arbitrary exclusions, etc…
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As for wage growth and populism, that is complete garbage. The surge in populism is in large degree due to the massive bifurcation of wealth, which is predominantly a function of QE. The middle class has also been hurt by inflation, which supposedly doesn’t exist.
The fact that central banks have decided that we must have at least 2% inflation, and it is accepted universally by financial publications, is absolutely mind-boggling. It is yet another example that when something stupid is repeated often enough, it passes for fact or knowledge, such as when the financial media describes a bull market as a move of 20% and a correction as a decline of 10%. Those numbers mean nothing, they just made them up, just like the Fed is making up the notion that we don’t have enough inflation. For all the chatter about not hitting the target, I’d like to know if that is the perfect rate, how come Social Security set its COLA at 2.8% for 2019?
The real inflation rate is surely higher than 2%, but exactly what it is depends a bit on what your stage/status in life is and what things you are forced to buy. For people with a lot of money, inflation is not necessarily a problem. For people with only a little bit it is a huge problem already.
Something Fishy in the Eccles Building
This whole misguided notion goes back to the fact that the Fed has spun the story that falling stock prices equals deflation, and deflation equals a depression. Prices can deflate during boom times, and if anyone studies financial history you will see that price deflation and depressions have occurred, notably in the 1930s after a big stock bubble (although it was small by today’s standards), but deflation does not lead to, or equal a depression. I would like to know if there is one person in America who really wants the prices of things they need or want to buy to increase in price regularly. Two percent doesn’t sound like much, but it means that prices will double over 30 years or so. Think about that when you’re planning your retirement.
This “accepted wisdomis sheer madness, and of course it will continue until it doesn’t. But with the central banks of the world actively cheering for more inflation, and given that they are so poor at analyzing consequences, you can be sure that eventually we will have a whole lot more inflation than they bargained for. The one piece of good news is that they are giving you plenty of warning so folks can plan how to protect themselves. My view on how to do that should be well known, I would just note that price increases are already on the way, and maybe more aggressively than folks expect. I saved a copy of the Journal from Feb. 13 where it noted on the front page that prices at Whole Foods were climbing across a rather broad front. If anyone wants to track it down the headline was, “Prices at Whole Foods Climb as Suppliers Urge Increases.”
They’ll Gut You In the End
One of these days we are going to see a lot of price hikes stick and we are going to look back and say not only were the central bankers prone to blowing bubbles, not recognizing them, then blowing even bigger ones, they were actively promoting the very thing that has completely eviscerated the middle class, led to the instabilities caused by the massive wealth disparities, and the social consequences that has helped create, e.g., Trump and the radical, lunatic left, to name just two.
Turning to the market action, the market celebrated once again the fact that trade talks with China appear to be going OK and additional tariffs have been held in abeyance for now. The Nasdaq led the charge, gaining almost 1% in the first hour while the S&P and Dow were up about half as much. In the afternoon, the rally fizzled and the market gave back a big chunk of its gains, with the Nasdaq gaining less than 0.5%, while the other two major indices added about 0.2%.
Away from stocks, green paper was stronger, fixed income was weaker, and the metals were about flat. The miners were all over the place, as the food fight/takeover battle surrounding Barrick Gold, Newmont, and Goldcorp continues to escalate. I’m not exactly sure what Barrick’s endgame is, as I don’t think it can strongarm Newmont, especially because, as of this morning, the proposed deal that it announced would be at a discount to market prices, but I’m sure it will be clear soon enough.
King World News
For those who would like to listen, I recently discussed QE, QT, Charlie Munger’s views on those topics, and the consequences of them with Eric King.
KWN has now released one of the greatest audio interviews ever with Bill Fleckenstein and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***Also just released: James Turk – Expect Massive Gold & Silver Rocket Launch Off Huge Bases CLICK HERE TO READ.
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