Investors naively cheered an inflation rate of 3%, and the stock market rallying hundreds of points, propelling everything from bank stocks to oil futures higher.
Clearly, the Fed’s brilliant plan is working.
Unemployment remains low… Corporate earnings are expected to bottom this quarter… and inflation is almost down to the target 2% rate.
So, why are we writing every inch of this e-letter with dripping sarcasm?
Because it’s all a flaming mound of poppycock!
Apologies for the vulgarity. But everyone seems to be overlooking the obvious:
- The Fed achieved a soft landing just ONCE in history — during the ‘90s.
- Core inflation (excluding food and energy) was still up 3.8% year over year.
- Inflation drops when either demand drops or supply increases.
Current equity prices suggest we’ll somehow achieve the soft landing — where inflation backs down below 2%, yet the economy continues to blossom.
If that doesn’t happen… well, the last stock market swoon will seem like a brief misstep.
Today, we plan to provide you with the hard evidence to support our claims and explain how Mark Skousen’s Latest Report perfectly positions folks for the fallout.
Sticky Icky Inflation
Economists talk about two types of inflation: overall and core.
Overall inflation includes food and energy. These are two items that are price inelastic, meaning you don’t stop fueling your car or eating food based on the change in price.
We know energy prices skyrocketed and then fell, holding at some middle ground about 50% higher than before the pandemic. Still, they were down 1.15% compared to a year ago.
But if you think we’ll see those low pre-pandemic prices, then you haven’t been paying attention to the news.
That’s unlikely to change, given the Russian war with Ukraine and crude oil cuts pushed by OPEC+.
Plus, everyone seems to forget that Europe hasn’t weaned itself off Russian natural gas. A mild winter saved them this year. We’re just one bad winter away from energy prices jumping another 33%.
Food inflation has been largely tied to labor shortages. That’s one area we do expect to improve and stay under control in the coming months. In fact, food inflation was just 0.77% last month.
So, let’s turn our attention to core inflation.
First, we faced automobile sticker shock, whether buying new or used cars. That appears to have abated. But semiconductor shortages could easily create supply chain chaos in the blink of an eye.
But the real problem is construction.
Housing supply remains constrained, while downtown commercial properties sit vacant.
Although more homes have hit the market, what’s really put a crimp in demand is the 7% rise in 30-year mortgage rates.
But that doesn’t change the need. People have to live somewhere. If it’s not housing, it’s apartments. Multi-family real estate isn’t doing any better.
In fact, housing costs are so bad, they accounted for 3.4% of overall inflation. Yes, everything else was deflationary enough to soften that to 3%. Which do you think is going to give up first?
But let’s say that the Fed finally gets its way and demand drops off.
What does that mean?
Recession Round Two
The price a good has drops when either supply increases, which we know hasn’t happened, or demand drops.
So, we can assume that the demand for goods has dropped as prices got out of control.
Well, if that’s true, and housing is the last domino to fall before inflation comes in-line, then why does everyone expect earnings to bottom this quarter?
People can only keep spending on cruise and plane tickets for so long. Eventually, they either need to stop or get a raise.
And if they get a raise, you get wage inflation, which pinches corporate margins, creates more demand and round and round we go.
In all likelihood, we’re in for a protracted stagnation unlike anything we’ve ever experienced.
We’re talking about a fully employed society that can’t afford anything, that doesn’t grow, that looks at its future and goes, “Meh…”
Just Fix It
Did you know there is a simple solution to this entire problem?
Just stop spending money! Not us, but our lovely politicians.
Less spending by government lowers demand, helping balance the economic equation.
Plus, we get to keep our money and spend it on things we ACTUALLY need. Imagine that!
Will they finally come to terms with reality?
Only when they have to… but that day is coming.
That may be sooner than you probably realize.
Reckless government spending is creating an interest expense burden that will carry forward beyond our children’s generation.
It’s unsustainable, and Dr. Mark Skousen explains exactly why that is. More importantly, the steps you can take RIGHT NOW to prepare for the inevitable.
