A Tsunami Warning Has Been Issued

A tsunami often takes its victims unawares… a liquid mountain rising sheer from a glass sea… suddenly… barreling ashore.

The coastal areas are promptly scenes of astonishing apocalypse.

In 2021… the skies have been azure, the breezes have been kind, the seas have dozed.

Investors have thronged the beaches, merry as grigs. Many have been reading thrilling fiction — primarily the financial press.

Yet an offshore quake has shaken the deeps… releasing horrendous energies.

A devil wave may be racing for the beaches; inaudibly, invisibly… like a murderous cat preparing a pounce.

The deluge may arrive before its victims can take to the higher elevations.

The Greatest Monthly Inflation Spike in 40 Years

The latest inflation data came issuing from the Bureau of Labor Statistics this morning. It reported that:

The April consumer price index (CPI) jumped 4.2% since April last — at the greatest rate since September 2008.

A Dow Jones survey of economists had divined a 3.6% pace.

Core inflation (food and energy subtracted) came in at 0.8% — far outracing the consensus 0.2%.

It is the highest monthly rattle since 1981… when inflation exceeded 10%… and the late Paul Volcker was shouldering interest rates to 20% to cage the menace.

Today’s report so flabbergasted Bank of America economist Alexander Lin, the poor fellow’s eyes jumped the sockets:

“Eye-popping”… a “massive surprise.”

But does today’s report underreport true inflation?

Is the True Inflation Rate Double?

Housing prices have jumped 18% these past twelve months. That too is a record leap.

Rents, meantime, have inched merely 2%.

The data-manglers who calculate CPI mix in rents — but pluck out housing prices.

They claim a house is an investment rather than an expense.

Now swap the arrangement. That is, mix in house prices and pluck out rents.

You would arrive at a year-over-year inflation rate double the reported 4.2% — 8.4%.

We await the ShadowStat dissection of today’s data. Its Mr. John Williams is on to the government card tricks that conceal inflation from public view.

We hazard the actual rate will be plenty handsome.

How did the stock market take today’s report? On the chin, squarely…

Panic on Wall Street

The Dow Jones took the count — down a dazed 681 points. The S&P and Nasdaq absorbed similar lacings, down 89 and 357 points… respectively.

The 10-year Treasury yield went galloping 4.37% today — to 1.69%.

In reminder: Rates jump when the bond market eyes inflation ahead.

Falling rates generally equal rising stocks. Rising rates generally equal falling stocks.

Today rising rates equaled falling stocks.

What about Mr. Powell and his mates of the Federal Reserve? Will today’s inflated inflationary numbers squeeze them into raising rates — and bursting the bubble?

Treasury Secretary Yellen recently raised the possibility. She beat a rapid retreat when the market yelled blue murder… and howled in protest.

Don’t Expect the Fed to Act

The Federal Reserve maintains that the present inflationary gurgles and bubblings are transient. For example:

Lumber prices have streaked 400% these past 12 months due heavily to lockdown-caused shortages.

Copper — Dr. Copper — is widely regarded as an economic physician. Higher prices suggest an economy rounding into health.

Copper prices have increased some 36% this year.

The Federal Reserve insists prices will return to a low, low simmer once supply imbalances clear.

Do not expect, therefore, today’s report to alarm the Federal Reserve. It will hold its course, argues Ian Shepherdson, chief economist of Pantheon Macroeconomics:

The Fed is not going to panic after one startling CPI report, so you can expect to hear even more about transitory bottleneck inflation pressures over the next few weeks.

Monetary Deluge

What if the Federal Reserve is incorrect? What if an inflationary tsunami is taking form… and bearing in?

The M1 money supply — the stock of cash, coins and checking account deposits — has ballooned from $4.5 trillion to $18.1 trillion within a year’s space.

That is a delirious 350% spree.

The M2 money supply — saving deposits, time deposits, certificates of deposit, and money market funds — has jumped 30% within this past year.

Not since the Federal Reserve began tracking it has money mushroomed at such ferocious rates.

All the monetary delirium since the Great Financial Crisis has worked little inflation. But is this time… different?

Inflationary Gale to Overwhelm the Fed

Art Cashin of UBS: “There are people who think the Fed is not just behind the curve, they’re maybe missing the point and by the time they start to play catch up, it’s too late.”

Mr. James Grant — of the esteemed Grant’s Interest Rate Observer — is among them.

He believes the Federal Reserve will be swamped by the very wave it fanned into being:

I think the Fed is under the misconception that it controls events. Sometimes, events control the Fed… The Fed thinks that not only can it control events, but it can measure them. It believes it can pinpoint the rate of inflation.

Alas, it cannot.

There’s a gale of inflation of all kinds in progress, [that will] overwhelm our monetary masters. [Inflation is a] clear and present and will manifest itself in our everyday lives…

I think the astounding complacency toward, or indifference of, the evident excesses in our monetary and fiscal affairs… I think the lack of concern about those things is perhaps the most striking inflationary augur I know of…

Never before have we had monetary peacetime growth this fast.

Disaster Often Strikes Without Warning

The Pollyannas among us argue that interest rates remain historically subdued, despite recent nudges.

Even if inflation menaces, the Federal Reserve will pour its oil on troubled waters… and hold it down.

But have another guess, argues economist John Cochrane:

They never do. Greek interest rates were low right up until they weren’t. Interest rates did not signal the inflation of the 1970s, or the disinflation of the 1980s. Lehman borrowed at low rates until it didn’t. Nobody expects a debt crisis, or it would have already happened.

Landfall

When might the tsunami make landfall? Johns Hopkins economist Steve Hanke gives the timeline:

The dramatic growth in the U.S. money supply… that began in March 2020 will do what increases in the money supply always do. Money growth will lead in the first instance (1–9 months) to asset-price inflation. Then, a second stage will set in. Over a 6–18-month period after a monetary injection occurs, economic activity will pick up. Ultimately, the prices of goods and services will increase. That usually takes between 12 and 24 months after the original monetary injection.

Assume price inflation emerges 12-24 months after the March 2020 unleashing.

The wave would inundate us between now and March 2022.

Will it? We do not know if the tsunami comes in sooner… later… or never at all.

But the seafloor has taken a good seismic shaking. The conditions are set.

Will You Be an Elephant?

A fantastic tsunami deluged Indonesia in 2004. No warnings went out. It murdered nearly 228,000.

Yet strangely… as if by extrasensory perception…. elephants relegated to tourist duty on the beaches sensed doom.

They took fright… and struck out for higher elevations before the water wall washed over.

The elephants knew. Thus they were spared. The humans did not know. They were not spared.

Do you own gold?

That is, are you the elephant sensing an approaching tsunami — or the human dallying upon the beach?

Regards,

Brian Maher

Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning

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