A thought occurred to me yesterday when I was reading through Twitter and saw Happy Hawaiian’s post…
If you follow this trendline, you can sort of draw a line to doom.
You can see an analog here with the 2008 GFC in that there was an effort to raise rates, then they stopped – but not before wiping out a bunch of banks. You have that gray bar, which is the measure of a recession.
You then had tightening here which was unprecedented. Why? Because with COVID, we made all attempts to PREVENT deflation by printing from money bombers.
The chart I am using from BLS has food and energy, so it’s not the exact CPI you and I see month to month. However, look at the rate of change prior to the 2008 GFC and now. We had an even STEEPER move up. But, as many are tracking from Steve Hanke – there’s a 12-18 month “cook” happening when you make changes to rates. Meaning, any rate changes they made last year at this time, may JUST NOW be working their way through the system.
Let’s look at the Fed Funds rate. I added RSI in here, but only to show when things are running kind of hot and cold with rate of change.
Now – let’s take a look at those troughs. Each one corresponds to a recession.
Meaning – the economy is running hot, but they make the rates high enough to slow down economic activity to CAUSE the recession.
The underlying problem then is that the cost to borrow money becomes excessively high, and with this, economic growth is supposed to stop. But I ask you, if it takes 12-18 months for things to work through the system, and you make a policy change AFTER something breaks, it means then that your relief to the previous policy might take 12-18 months to work through the system.
That’s why with these charts you have to keep this in mind. Changing directions here is a low cruise liner.
This is what is happening, as we speak, with the economy.
This is where a lot of “momentum” analysis comes in. But right now, the signals are continuing to be to continue forward, even though a dock is seen up ahead. But the problem is, the ship is moving under its own momentum, and no engines fired at this point can slow it down enough.
This is where I feel deflation is about to happen.
Why? Because it’s hard not to miss the massive supplies and no one buying. Many want to spin and gaslight, as it seems my country stays upright like the Weekend At Bernie’s guy through nothing but deception and crafty wordsmithing.
Is it just a suspicion?
As many like to say, “the solution to high prices is high prices”. The concept here is – “something is worth what someone else is willing to pay”. As long as there was cash flowing through the system, Joe Sixpack was drunk on cash and buying everything they could – AND taking out 1% loans on everything. Now, the credit has stopped, and the cash has been depleted.
To me, we have been seeing evidence of “disinflation”, where prices are still rising, but at a lower rate. We are not at the point where prices are falling yet.
Yet.
But I feel that is coming. All of the cash that came into the system was eventually funneled to one of the big guys. You bought stuff on Amazon, which eventually went to Bezos. You bought new cars, and EV car money went to Musk. You bought new iPhones. That went to Apple. You bought. You bought. And the profits went to corporations, who then used the excess cash to do stock buybacks. Those rich enough to own a lot of stocks and had 401ks, made loot.
But the days of corporate profits are now behind us. No stock buy backs. Instead, what we have is inventory that is piling up, that can only be sold at high interest rates. You have cheeseburger value meals at $15. You have low unemployment – which drives up prices through wage inflation, which is passed on to the consumer.
Many of you see this, and think “wow, finally, they are getting good money!” However, you are missing how their rents went up, used car prices went to the moon, and they have consistently high food prices at the grocery store.
I believe we are now dealing with the cruise liner running into the dock. As corporate profits are evaporating, layoffs start. This crushes demand for goods and services, and reduces GDP. But we are dealing with inventory levels off the chart. Anecdotal stories can show you inventory is piling up at new and used car dealers. $70,000 for a pickup truck at 9% interest? GFY.
I had seen 6 months ago where there were tons of grills piling up at Home Depot. Now, suddenly, we see Home Depot missing on corporate earnings.
I am shorting the hell out of housing and some CRE at the moment, as you can see 31% YoY sales decline at BLDR, inventory piling up, and 7% mortgage rates at insane levels for the prices of these houses. Meaning, something has to give.
To me, we have SEEN a LOT of tech layoffs. However, the unemployment numbers seemed to somehow miss to the upside for 12 straight months? Seems to me, that these unemployment numbers aren’t quite accurate, at the moment.
For the first time, in my adult life, we are seeing M2 money contract as cash is fleeing banks paying .1% interest for CDs/treasuries paying 4-5%. The lack of cash can inhibit loans that banks give, further tightening the noose of credit. IF you are to buy a home or car today, you’d be buying damn near the peak at really high interest rates.
I feel the next logical step in this is stocks will rotate into treasuries. As much as I want them to rotate into gold, it stands to reason that the Fed is creating some dry powder here for treasury issuances. I had read that even if a debt ceiling deal gets done in the next few days, they need to issue like $1T in debt, and quickly. That can drive rates up really quickly – and with this, we may have the carrot to force a rotation from overstretched stocks into treasuries. I feel gold will catch some of this money, but what may drive gold here is currency concerns.
It stands to reason that inventory levels are here that require items to be priced to move. To me, this is where you see the DEFLATION coming. I believe that there will start to be a race to lower prices – they can’t lower the rates, so they have to reduce the sticker price. Imagine 2024 models coming out, and you still have an abundance of 2023s sitting on your lots? You need to move them. And, you are concerned the vast number of 2024s coming, which you then realize you have zero chance of moving.
I believe we are now, today, at the precipice of prices coming down.
I had read that the numbers yesterday showed new housing prices went down 4.1% month over month, and Zero Hedge had a 7%+ number. Meaning – housing may be the first to blink here, and NEW housing builders who had 30%+ cancellations in Q1, are showing far less cancellations now, but my reasoning here is less people are actually applying as they are priced out – or are WAITING for housing prices to come down more.
Above – you see the new housing starts, and how they are down from the peak in 2022. You can see how the trend up was going from 2009 to 2022. Or – 1991 to 2006. It stands to reason that we could be seeing the end of this housing boom for some time. In the chart, you could see this number crashing for 2+ years. We may be just starting that decline now.
You can also see how mortgage applications are down, and this is during the “house buying season”.
To me, it just seems like those who are facing high prices, have now said, “enough”. No house buying. No car buying. Stop eating out. The harbinger of death here will be seeing unemployment numbers steadily rise. However, we saw on the chart above, that it seems we continuously surprise to the upside? Could the data be manipulated, to ease Americans into thinking all is well? Could we have gone too far in gaslighting the people?
The question is, what happens when adjustments that are seasonal, or monthly, or whatever cannot hide the recession? Remember, high prices can be ok when everyone is flush with cash, but what about when the pockets are empty, the credit cards are rung up, and the expectation here is everyone is getting a cookie on bailouts?
We forget that the banking problems that have recently happened through the first 4 months of 2023, eclipsed the GFC bank issues in 2008 and 2009 combined? Have we already forgotten about that? If you add Credit Suisse, add another $1.4T or so.
To me, I feel like the credit card is now getting declined. Whether you identify as a republican, democrat, green, blue, red – I don’t care – we have a spending problem here. And, I doubt this charade in Washington at the time will do much more than kick things down the road.
I am short housing at the moment. Also short some auto lenders. Yes, I have a stake in things going down. However, I took these positions BECAUSE I saw things going down.
Be careful. Things might get dicey. Kevin Wadsworth posted this yesterday, and you can see how badly the 10/2 is inverted, and what events corresponded with when it was at these levels.
Those sharks are not dry powder to assist you. The dry powder on the sidelines is this…
Do we get to a point of deflation? My bet here is yes. The bullwhip effect here I believe will come back again with inflation, but right now I think we have massive inventories and a beaten-up consumer base.
I believe we are about to have shelves over packed with inventory, and if consumers just wait a bit, we can start to see prices roll back to get inventory off the shelves, off their books, or off the lot.
I would not be looking to buy a car, house, or any major purchase in the next 6 months. And I think many of you are starting to subconsciously feel the same. Don’t FOMO after housing.
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