I have written about this a lot over the last year, but I wanted to have a more concise and direct – yet shorter – post many can see as my point of view. I share a lot of the views that a melt up can occur, as well as a great deflationary event can occur. But WHY??????
First, I want to review yesterday. 5.4% again. This is year over year (YoY). The same as last month. But this time last year is when a lot of this “free money” started hitting the streets. We saw housing prices up 20% in a year, as of last month. We have seen the DJIA up about 33% YoY. Check out the rents map – and how these prices have gone up. Yet the CPI mentions this at 2%? It does reflect car prices coming down a little – but in all of these price hikes, you have to realize almost all of these prices are going to REMAIN high. You have lumber as an outlier, but the RATE of inflation may decrease, with a disinflation, but it’s STILL higher than 2%, by a lot, and most people cannot wrap their minds around the math going on here.
Why a great deflationary event, if we are seeing inflation?
I have opined that in order to fix this “deflation”, you must fix the inflation first. I have coined the phrase “transitory deflation”. I have shown that hidden inflation has made our country sick and obese.
I want root cause analysis, and I believe I provided it in several posts.
The root cause – to me – is under-reporting of inflation for 40 years – AND REACTIONS TO UNDERSTANDING THIS BY THE MASSES WILL TAKE DOWN THE WHOLE SYSTEM. Right now, we have an acute inflation scenario which we are more or less seeing 15-18 months after money printing started – this is getting people to understanding what inflation is and how it’s being measured. You have the talking heads coming out saying words like “transitory” and “temporary” and pointing to lumber as their main fall guy in the transitory narrative.
If you ask just about any gold or silver bug about the prices of metals, you will get talks of not only short term manipulation from the usual players, but you get talk of long term price control going back to a cable that Henry Kissinger sent to create the futures market in 1974 to suppress the price of gold.
Now, faced with mountains of evidence of banks getting busted for manipulation, you now hear:
- It’s only a few players. It’s not the banks. It’s lone wolves
- It can only be done short term. Since gold went from $250 to $2075 last year, this is evidence that they suck at manipulation and in the long term, the short term manipulations don’t work
- Ohh…yeah..all markets are manipulated. Stop crying.
See, I’m newer to this than most of you reading. I was still stuck in my macro and micro-economics books where you learn about the free market and are naive to actual manipulation. There are a lot of motives as to why….
- Short term riches. Traders and banks can push price down, consistently, to knock people out of their positions (called “running the stops”) and then come in and buy back what they just sold and buy what Fred just sold after he was wiped out at a big discount. This should literally scare the shit out of any futures trader that would go long the metals…and I now see why more don’t pile in long on the futures markets. It’s a disgrace. It’s a national disgrace.
- Political motives. I’m not going Dr. Evil on this one. I think many get to Washington naive and want to make a difference, but there’s so much money coming in, but more pigs feeding at the trough than money coming in. If you can make money cheaper to lend, you can get many of those people fed and inflate items to then tax them higher. Big picture is we “won” the cold war with the USSR because our financial system was able to print up $5 trillion to arm us better. Their system could not compete with ours. We won that based on out-spending. And that has been the model ever since.
- World superpower – while we were mesmerized by the psy ops of what we did in Desert Storm and Desert Shield, part of me feels there are constant psy ops run on the population. Gold and silver are in the Constitution as money, and have been money for 5,000 years. Yet we are now 50 years removed from the gold standard and our politicians try and act like gold is a pet rock. If we have control of the printing press, with no tether, this allows for unlimited economic power. US gold and silver bugs thus become an accidental enemy of the state – without even knowing it. Where we are patriotic and want our government restricted in size and power, the way our founders wanted, we are seeing an ever increase in size and power….this is somewhat terrifying. What you now find is the numbers on our balance sheet are so far gone, neither party in our system can ever talk about budget cuts again and get elected. Therefore, the elevator is a one way up. This means there needs to be a constant severe from anything that controls the rate at which the dollar is printed.
But I digress. These are big picture motives. Some noble, some not so noble.
All of this is permitted by being able to borrow money cheaply. If there was a high interest rate, none of this could be possible. This is the 10 year interest rate over the last 50 years.
What you can really see is the last 35 years there has been a consistent down trend. Magically, the CPI formula in 1991 changed now 30 years ago and we can see the results of this. For those of you who cannot read the chart, here’s a few highlights
- 1970s drove inflation up, and interest rates lagged to try and cool down economy. All attempts failed until interest rates were set higher than rate of inflation. This is not possible today, at all.
- CPI formula changed in 1980. You then see 4 decades of lower inflation, and thus lower rates.
- Cheaper money allowed us to continue to spend more by borrowing more at lower rates. This helped us win the “cold war”. We outspent them.
- In 1991, another change to the CPI was made, and this then created this channel down you see. In this period of the 1990s, there were great expansions of the economy which led to the dotcom bust in 2001. This also then led to the housing crisis in 2008.
- This led to QE programs and deficit spending through the 2010s. Constantly lowering rates to refinance.
Many critics of mine, or would be critics (as many of them don’t read my blogs, or care about my opinion), would like to tell me we are in a deflationary trend. That’s what this tells you. Computers have come in and done the jobs of 10 people, so the productivity is higher.
I grew up in the 1980s and 1990s. I lived in a lower to lower middle class family in a small town 1 hour west of Philadelphia. The “big city” near us, Reading, PA, had little employment opportunities. My dad was a steel worker in the 1980s when all of the steel was being outsourced to Japan, for cheaper, and he was unemployed a lot. My mom was a realtor in 1980 when the rates were 20% and had trouble selling houses. She later was a bookeeper for $5 an hour before finishing college and getting her CPA license in 1987. Things were tight growing up.
What I can tell you growing up in that environment was constant stress of where you next meal was coming from. Parents fighting all the time. Kids in my class had nicer stuff than me, so my parents were then under pressure to use debt to buy us stuff – and this just ensured we didn’t have holes in our no-brand name clothing. They tried. Christmas presents on credit cards. School clothing from KMart bought on “layaway”. We never took a dime of public money, but we knew what it was like to do without. Vats of cheap pasta eaten over many days. $7 carton of cigarettes. Low quality food to get calories. Both parents thus died early of cancer. Looks like that is one way to prevent them collecting from the social security pool they paid into their whole lives.
I bring this up because many lived a vastly different life from me in the 1980s and 1990s. They could look at the CPI and this chart and SEE the lower inflation, and thus a macro deflationary event. These people afforded Yale and UPenn. But that’s not the reality of most Americans at this time. Most people saw “dinner table inflation” that was NOT reflected in the CPI which has eroded our middle class for 40 years. This is the psy ops I’m telling you about. We SAW inflationary prices, but wages stagnant for blue collar workers. All of us reading this saw for the last 20 years our medical costs go up 5-15% per year, higher co-pays, but wages don’t keep up.
I am telling you this.
Either shadowstats.com is right OR CPI is right.
There’s a boolean expression for you.
Choose which one is right.
The one that uses the original formulas or the one that “adjusted” and thus not capturing all of the inflation the public SEES with their own two eyes every day.
My contention is this….
The COVID money print is revealing the manipulation in the inflation numbers for the last 40 years. People like me saw prices going up faster than wages. I didn’t ever hear of the CPI, nor did I understand how it was calculated. Nor did I know they re-adjusted in 1980 and 1991. This is what John Williams has as inflation. This is the great awakening that people like me have that then share with 100 friends. And they share with 100 friends. And so on. And so on – through social media, lightning fast. What took years in the 1970s for people to understand can now be fully deployed in 24 hours through memes on social media.
Now I ask you this….This is where logic takes with you with IF/THEN statements as an IT guy.
IF our interest rates are reliant on inflation numbers….
- what instrument has been used to base interest rates on. CPI? Have you considered the possibility this is incorrect? If so, what implications does this have to interest rates?
- If CPI was incorrect, and shown to be inaccurate, would there potentially be a “re-rate” with interest rates using a different tool? Meaning, we would not see a move out of these low interest vehicles once it is revealed their loss yearly is much more than was advertised?
- IF this other inflation measuring tool was more accurate and showed higher inflation than has been reported, would it not potentially cause a “gap up” in interest rates, perhaps significantly, to chase the higher-adjusted inflation rate?
- If debt instruments are valued inversely to interest rates, would this not mean the VALUE of these bonds/debt instruments could drop off of a cliff?
- Would that not mean that any industry relying on cheap credit would overnight stop or slow their borrowing based on a higher cost of capital?
- IF the big players in this are industry to expand factories and buy shares back (thus inflating asset prices), real estate to buy houses at high prices, auto industry to sell cars at high prices – wouldn’t it stand to reason that a much higher interest rate overnight could wipe out most of the weaker players in these industries and it would be in the puppeteers’ interest to keep these rates low? Would there NOT be a valid reason to then mislead the buyers of these instruments using fake inflation numbers?
- IF these industries collapse, it may also mean significantly less revenue in the form of income taxes, as many layoffs would occur. Less houses would be bought because higher interest rates would push the prices of houses down and less inventory would be available. Lower property values is then less local taxes. Less sales taxes on buying. Deficits grow, and rapidly. More political justification to mislead buyers of debt.
- Higher interest rates also means higher interest payments on that debt. To avoid default, higher taxes are mandated, along with suspension or “temporary” contraction in entitlements like social security, medicare, medicaid. By misleading the public, you are able to adjust the increases of these programs far slower than the actual rate of inflation, thus avoiding massive costs.
It would stand to reason that as the number (n) of people understood the above, this number could potentially have a parabolic curve up of knowledge – and with this, you would see mass exodus from these instruments. Below is what a parabolic curve up looks like. Interestingly enough, it is the Dow Jones and this is what a blow off top looks like. Tells me a day of reckoning is coming and to me, that day is interest rates gapping up and the fed not able to backstop low rates anymore.
Body of evidence
All of that evidence suggests that higher inflation leads to higher interest rates and forcibly collapsing the size and power of our federal government. Therefore, to me, it is in their best interests to continue a narrative that inflation is temporary. Nothing to see here.
But we now have social media and with that, I’m seeing tons of people sharing things with shrinkflation and costs going up. On top of that, it’s plainly clear to see to anyone that our social media is now censoring opinion on a variety of subjects that do not fit a “factual” narrative. Meaning, you are no longer permitted to publicly debate topics. Private industry now appears to be an arm of government thought. And, if you disagree, you get put in timeout or permanently banished from that platform.
I don’t care what lever you pull. I don’t go into politics anymore. I just think that the topic of inflation can then be subjected to the same rules we now have in attempts to discuss our election fidelity, COVID, and vaccines. Over the next few years, one topic after another can get put on a naughty list until we are in a de-facto censorship state.
You see, if the inflation narrative grows, it is a self-fulfilling prophecy that cannot be stopped. Think about it. If you hear 6% inflation and hear that inflation is growing, what do you do? Buy all you can today at today’s prices for things you need today, but ALSO order things at today’s prices that you need for the future to avoid that future inflation. The act of ANTICIPATING inflation in the future puts gasoline on the fire and creates further inflation.
My concern here is that most of our financial mechanics, today, are based on cheap lending. How are these rates determined? Risk? Does inflation have a say in these rates? I would think so. Why the hell would you give someone your money for 30 years at 2% if there’s ACTUALLY 10% per year inflation.
You would not.
And when that conversation is had, all hell breaks loose. Right now, you have some tinfoil hat people like me point to the shadowstats and others pointing at CPI and hedonistic adjustments.
When you see this, daily, that narrative starts to change. Imagine how your facebook or Twitter feed then starts to get clogged with pictures of this day in and day out?
I think there’s a great deflation coming. And yes, I agree with Hunter it’s caused by deflation. He also talks about how inflation sends the rates higher. But how will that happen when Fed constantly talks about transitory? Is the hope that the market can be fooled for years? Could they, in the darkness of night, change the CPI formula again like they did several times before to then say…”see, no inflation!!”
My concern is that the short term manipulation we can SEE in metals is NOTHING compared to the long term manipulation of interest rates by using tools that are dishonest to then base those rates off of them.
I got into this in late 2019. I read about the repo market problems. Essentially, big banks would not lend to each other in the overnight market for short durations at low rates. The rates climbed, signaling that big banks did not trust each others’ collateral.
Please, for the love of god, let that sink in. Big banks are not trusting each others’ collateral for EXTREMELY short duration loans, at LOW interest rates. This is due to potential risk of default?
This led our government to then step in and do this lending. Meaning, the FREE MARKET said rates need to go up on these loans. IF that were the case, again, cost of capital goes up, lending cheap money goes down. The whole circus stops.
We are broken at the discovery of interest rates. This has blown up ALL of the balloons. Manufacturing, energy, debt, housing, defense, autos – name an industry, and I can tell you how a significantly higher cost of capital can decimate it.
I’m telling you. This shit will go viral and loss of confidence in CPI will re-rate our entire debt market to higher rates, overnight. Those who own the debt will sell to get as much as they can because they know no one wants to hold 2% yielding assets at a cost of 10% depreciation in spending power. Wait until pension funds have to pull the rip cord due to solvency. All of this can happen 2H 2021 into 2022.
Hell on earth is coming to those who have taken our economy for granted.
Why do I care so much about the root cause? Simple. If they don’t address the root cause with any form of “fix”, you can bet that any fix will just either delay the problem or make it worse. Also, if we don’t learn from this, we are doomed to repeat it.
One aspect of my career is metrics. I report on performance of my teams. With this, absolute trust is paramount. If you have a bad month, you need to show it. You evaluate your problems under a microscope to fix them at the root to prevent them again. Therefore, when you show your numbers, your customer has faith in your abilities. If you erode the trust of the people by manipulating the tools, you lose faith in those tools and thus the markets may then use other measures to re-price.
Meaning, the root issue is not reporting inflation accurately. This has led to a Krakatoa of 40 years of artificially higher priced debt and entire industries that can collapse overnight when these interest rates are re-priced by the market.
August 14, 2021 at 4:36 pm
“We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball… What bothers me int’t that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did.” – Mark Baum, The Big Short
August 14, 2021 at 11:45 pm
Funny you should mention him. When I first read about the repo issue in 2019 it was like a few weeks after. My grad school finance class talked about repo one day for maybe 30 mins. I understood what it was from a 50,000 ft view. When I read about it, I’m thinking ‘we’re doomed if banks are not trusting each others’ collateral.’ Then i immediately put on the big short for some inspiration. By playing gold and silver, it’s a way to short the dollar. Not a lot of people get that. They think gold may be $10,000 but don’t understand how little a dollar buys in that scenario – but you can inflate away fixed cost loans you have now.
Just like in the big short, everything is screaming we are right. Just have to visit the Christian bale moment where he talks about how the banks had to get on the right side of the trade before they let it run.
August 15, 2021 at 7:01 pm
“Truth is like poetry. And most people fucking hate poetry.”