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Is Inflation Still Transitory? New Data Raise More Questions

The inflation-is-transitory narrative took a beating in yesterday’s hotter-than-expected report for US consumer prices in May. Even after accounting…

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This article was originally published by The Capital Spectator

The inflation-is-transitory narrative took a beating in yesterday’s hotter-than-expected report for US consumer prices in May. Even after accounting for so-called base effects (temporary pandemic-related factors driving inflation higher), pricing pressure has accelerated.

It’s tempting to declare that the debate about the inflation trend is dead after reviewing the latest numbers on the consumer price index (CPI). But it’s still premature to conclude that a hotter inflation regime that persists is now an enduring feature of the US economy. Granted, that risk is higher than it has been in recent years. But it’s unclear how tenacious the ramp-up in pricing will be as the country continues to transition from a pandemic shutdown to something approximating “normal” conditions.

Taking the numbers at face value, however, certainly looks worrisome. Consider the surge in the rolling 12-month change in core CPI, which strips out food and energy prices. (Core CPI has proven to be a more reliable measure of the inflation trend vs. headline CPI, which includes food and energy, and so we’ll focus on it here.) In May, this gauge of inflation shot up to 3.8%, a 29-year high.

By some accounts, the latest report is the smoking gun that confirms the worst fear: inflation has ramped up and will remain so for the foreseeable future, perhaps rising further. The counterargument is that pandemic effects are still in play and so the recent upside volatility in CPI data may be misleading. That’s the view of the Federal Reserve and, for the moment, some degree of private economists.

“A lot of the surge in prices are for things that are just normalizing,” says Mark Zandi, chief economist at Moody’s Analytics. As examples, he points to prices for “hotels and rental cars and used vehicles, sporting events, restaurants. Everyone is just getting back to normal, so pricing is just returning to what it was pre-pandemic.”

Perhaps, but there are more than base effects at play in the recent rise in inflation. Nonetheless, it’s still unclear how strong and persistent economic activity will be once the macro trend fully normalizes. In turn, getting a clear read on inflationary pressure will remain unusually challenging for several months at the least.

As a thought experiment, let’s imagine that last year’s pandemic-triggered deflation never happened and consider how core CPI’s one-year trend would have evolved in that alternative scenario. There are several possibilities for estimating such a scenario and so a high degree of subjectivity risk lurks. But let’s throw caution to the wind and assume that the monthly deflation episodes in April and May 2020 never happened. Instead, we’ll use the previous six-month average of monthly inflation (based on Oct. 2019-Mar. 2020) to replace the two deflationary months. Not surprisingly, calculating the 12-month rolling percentage change for core CPI with the adjusted numbers reflects a softer increase through last month: 2.8% vs. 3.8% that was reported.

Even with this adjustment, however, inflation picked up substantially. The question is whether the acceleration – even after accounting for base effects – is related to the economy’s reopening or effects that’s longer-lasting?

Although some analysts insist that they know the answer with certainty, reality still leaves room for debate. For example, will faster economic growth fade as government stimulus recedes? What happens to growth and inflation if the Federal Reserve decides to start tightening monetary policy? Is the economy strong enough to sustain higher rates? If not, could the Fed trigger a recession by raising rates? Meantime, will coronavirus variants create a new wave of infections and fatalities in the fall and winter?

There are many unknowns lurking in the months ahead. The first order of business is comparing the May data with inflation numbers published over the summer with an eye on deciding if the recent surge is peaking.

Revised data for the Inflation Trend Index, a seven-factor benchmark that’s designed to provide a degree of forward guidance on the directional bias of pricing activity, continues to suggest that June will mark the high point for the current run of accelerating inflation.

Nonetheless, the US economy remains in an unusually volatile and fluid period, with no clear precedent in modern history. Accordingly, there’s more guesswork involved than usual for peering into the future. That opens the door to seeing whatever you want to see. The good news: there’s only one set of incoming numbers. Unfortunately, the results will still trickle in slowly, one report at a time. It’s going to be a long, data-dependent summer.


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Economics

How Science Becomes Religion

How Science Becomes Religion

Authored by Sheldon Richman via The Libertarian Insititute, 

The popular slogan today is "Believe in science."…

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How Science Becomes Religion

Authored by Sheldon Richman via The Libertarian Insititute, 

The popular slogan today is "Believe in science." It’s often used as a weapon against people who reject not science in principle but rather one or another prominent scientific proposition, whether it be about the COVID-19 vaccine, climate change, nutrition (low-fat versus low-carb eating), to mention a few. My purpose here is not to defend or deny any particular scientific position but to question the model of science that the loudest self-declared believers in science seem to work from. Their model makes science seem almost identical to what they mean by, and attack as, religion. If that’s the case, we ought not to listen to them when they lecture the rest of us about heeding science.

The clearest problem with the admonition to "believe in science" is that it is of no help whatsoever when well-credentialed scientists–that is, bona fide experts–are found on both (or all) sides of a given empirical question. Dominant parts of the intelligentsia may prefer we not know this, but dissenting experts exist on many scientific questions that some blithely pronounce as "settled" by a "consensus," that is, beyond debate. This is true regarding the precise nature and likely consequences of climate change and aspects of the coronavirus and its vaccine. Without real evidence, credentialed mavericks are often maligned as having been corrupted by industry, with the tacit faith that scientists who voice the established position are pure and incorruptible. It’s as though the quest for government money could not in themselves bias scientific research. Moreover, no one, not even scientists, are immune from group-think and confirmation bias.

So the "believe the science" chorus gives the credentialed mavericks no notice unless it’s to defame them. Apparently, under the believers' model of science, truth comes down from a secular Mount Sinai (Mount Science?) thanks to a set of anointed scientists, and those declarations are not to be questioned. The dissenters can be ignored because they are outside the elect. How did the elect achieve its exalted station? Often, but not always, it was through the political process: for example, appointment to a government agency or the awarding of prestigious grants. It may be that a scientist simply has won the adoration of the progressive intelligentsia because his or her views align easily with a particular policy agenda.

But that’s not science; it’s religion, or at least it’s the stereotype of religion that the "science believers" oppose in the name of enlightenment. What it yields is dogma and, in effect, accusations of heresy.

In real science no elect and no Mount Science exists. Real science is a rough-and-tumble process of hypothesizing, public testing, attempted replication, theory formation, dissent and rebuttal, refutation (perhaps), revision (perhaps), and confirmation (perhaps). It’s an unending process, as it obviously must be. Who knows what’s around the next corner? No empirical question can be declared settled by consensus once and for all, even if with time a theory has withstood enough competent challenges to warrant a high degree of confidence. (In a world of scarce resources, including time, not all questions can be pursued, so choices must be made.) The institutional power to declare matters settled by consensus opens the door to all kinds of mischief that violate the spirit of science and potentially harm the public financially and otherwise.

The weird thing is that "believers in science" sometimes show that they understand science correctly. Some celebrity atheists, for example, use a correct model of science when they insist to religious people that we can never achieve "absolute truth," by which they mean infallibility is beyond reach. But they soon forget this principle when it comes to their pet scientific propositions. Then suddenly they sound like the people they were attacking in the previous hour.

Another problem with the dogmatic "believers in science" is that they assume that proper government policy, which is a normative matter, flows seamlessly from "the science," which is a positive matter. If one knows the science, then one knows what everyone ought to do–or so the scientific dogmatists think. It’s as though scientists were uniquely qualified by virtue of their expertise to prescribe the best public-policy response.

But that is utterly false. Public policy is about moral judgment, trade-offs, and the justifiable use of coercion. Natural scientists are neither uniquely knowledgeable about those matters nor uniquely capable of making the right decisions for everyone. When medical scientists advised a lockdown of economic activity because of the pandemic, they were not speaking as scientists but as moralists (in scientists’ clothing). What are their special qualifications for that role? How could those scientists possibly have taken into account all of the serious consequences of a lockdown–psychological, domestic, social, economic, etc.–for the diverse individual human beings who would be subject to the policy? What qualifies natural scientists to decide that people who need screening for cancer or heart disease must wait indefinitely while people with an officially designated disease need not? (Politicians issue the formal prohibitions, but their scientific advisers provide apparent credibility.)

Here’s the relevant distinction: while we ought to favor science, we ought to reject scientism, the mistaken belief that the only questions worth asking are those amenable to the methods of the natural sciences and therefore all questions must either be recast appropriately or dismissed as gibberish. F. A. Hayek, in The Counter-Revolution of Science, defined scientism as the "slavish imitation of the method and language of Science."

I like how the philosopher Gilbert Ryle put it in The Concept of Mind: "Physicists may one day have found the answers to all physical questions, but not all questions are physical questions. The laws they have found and will find may, in one sense of the metaphorical verb, govern everything that happens, but they do not ordain everything that happens. Indeed they do not ordain anything that happens. Laws of nature are not fiats."

"How should we live?" is not one of those questions which natural scientists are specially qualified to answer, but it is certainly worth asking. Likewise, "What risks should you or I take or avoid?" There is a world of difference between a medical expert’s saying, "Vaccine X is generally safe and effective" and "Vaccination should be mandatory." (One of the great critics of scientism was Thomas Szasz, M.D., who devoted his life to battling the medical profession’s, and especially psychiatry’s, crusade to recast moral issues as medical issues and thereby control people in the name of disinterested science.)

Most people are unqualified to judge most scientific conclusions, but they are qualified to live their lives reasonably. I’m highly confident the earth is a sphere and that a water molecule is two parts hydrogen and one part oxygen. But I do not know how to confirm those propositions. So we all need to rely on scientific and medical authorities–not in the sense of power but in the sense of expertise and reputation. (Even authorities in one area rely on authorities in others.)

But we must also remember that those authorities’ empirical claims are defeasible; that is, they are in principle open to rebuttal and perhaps refutation, that is, the scientific process. Aside from the indispensable and self-validating axioms of logic, all claims are open in this sense. That process is what gets us to the truth. As John Stuart Mill pointed out in On Liberty, even a dissenter who holds a demonstrably wrong view on a question might know something important on that very question that has been overlooked. To our peril do we shut people up or shout them down as heretics. That’s dogma, not science.

Tyler Durden Sat, 07/31/2021 - 13:00
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Precious Metals

Constant Inflation Doubletalk from Fed Erodes Confidence

The summer doldrums in precious metals markets have tested the patience of bulls. The silver market has been hit especially hard…

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

The summer doldrums in precious metals markets have tested the patience of bulls. The silver market has been hit especially hard in recent weeks, but price stayed above the $24 level and avoided dipping to new lows for the year.

Nervous and frustrated investors who bailed out this summer may have made a huge mistake. Gold and silver markets appear to now be catching a break on the upside.

On Thursday, gold gained 2% to record its best close since mid-June. As of this Friday recording, the monetary metal trades at $1,830 an ounce and is up 1.1% for the week.

Turning to silver, prices are advancing by 1.4% this week to check in at $25.62 per ounce. Platinum, which was basically flat through Thursday, now shows a weekly loss of 1.8% to trade at $1,056. And finally, palladium is drifting slightly lower by 0.9% to come in at $2,682 per ounce.

Metals markets stand to benefit from renewed weakness in the dollar.

Since late May, U.S. dollar strength versus foreign currencies had put downward pressure on hard assets. The U.S. Dollar Index rallied from about 89.50 to just over 93 before momentum waned in recent days.

The Index failed to make a new high for the year on its summer rally, setting the stage for a potential bearish reversal. That reversal appears to have taken place this week, with the Dollar Index breaking down below 92 yesterday.

Currency traders were unimpressed by the Federal Reserve’s latest policy briefing. On Wednesday, the Fed announced it would leave its benchmark Funds rate unchanged and continue its $120 billion in monthly asset purchases.

No tapering was on the table, though there was some taper talk. It amounted to vague indications of future tightening after the U.S. economy attains "substantial further progress."

Fed Chairman Jerome Powell tried to quell inflation concerns. He reverted again to his “transitory” claims, but in remarks to the media he seemed confused about what his own definition of transitory inflation means.

Jerome Powell: The increases will happen. We're not saying they will reverse. That's not what transitory means. It means that the increases in prices will happen. So, there will be inflation, but that the process of inflation will stop, so that there won't be ...

When we think of inflation, we really think of inflation going up year, upon year, upon year, upon year. That's inflation. When you have inflation for 12 months, or whatever it might be, I'm just taking an example, I'm not making an estimate, then you have a price increase but you don't have an inflation process. And so, part of that just is that if it doesn't affect longer term inflation expectations, then it's very likely not to affect the process of inflation going forward.

So, what I mean by transitory is just something that doesn't leave a permanent mark on the inflation process. Again, I don't mean that producers are going to take those price increases back; that's not the idea. It's just that they won't go on indefinitely. We have two mandates, maximum employment and price stability. Price stability for us means inflation average of 2% over time. And so, we've got to be very careful about that, but I think it's a good point that it's a term, what it really means is "temporary." But then you've got to understand that it doesn't mean that the increases will be taken back. Some of them will be, but that's not really what it means.

Well, anyone wants to make sense out of all that would need a degree in Fedspeak. We are supposed to believe that stable prices actually means prices rising at a 2% average rate – except when the Fed wants inflation to run higher. But when it does, it’s only transitory – except when it affects the inflation process, which happens when long-term inflation expectations rise, which the Fed says won’t happen but at the same time doesn’t really know what will happen in the future.

Maybe what the Fed says matters less than what economic realities say. Investors would be better served focusing on fundamentals than trying to decipher central bankers’ forecasts.

Unfortunately, investors can’t ignore the Fed entirely. Since its monetary policy decisions can and do drive financial markets, it is necessary to pay attention to what the Fed is actually doing.

Right now it is still stimulating rather than fighting inflation, still holding interest rates artificially low, and still offloading negative real yields upon savers and investors.

That puts both the bond and stock markets in precarious positions. If inflation expectations were to shift to rising prices being a long-term rather than a transitory problem, a dramatic downside readjustment in interest-rate sensitive financial assets would commence.

There would also likely be a dramatic upside revaluation of hard assets including precious metals.

Whether investor psychology shifts suddenly or gradually toward an inflation-protection mindset remains to be seen. Metals markets tend to move slowly at the beginning of bull markets, then rapidly and even violently toward the end.

Market timing is an impossible task given the unpredictable nature of people and circumstances. What is possible is to capitalize on opportunities when markets are over-pricing financial assets and under-pricing hard assets.

The opportunity exists now, but it won’t last forever. There may even come a day when the opposite is true – hard assets are overpriced with inflation expectations running way ahead of actual inflation realities and financial assets offering tremendous value as a result.

Yes, that could happen. It did in the early 1980s.

But the early 2020s look more like the start of a new inflationary cycle rather than the unwinding of one.

Well, that will do it for this week. Be sure to check back next week for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a weekend everybody.

      

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Economics

Michael “Big Short” Burry: This Is The Greatest Bubble Of All Time In All Things “By Two Orders Of Magnitude”

Michael "Big Short" Burry: This Is The Greatest Bubble Of All Time In All Things "By Two Orders Of Magnitude"

Earlier this year, none other…

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Michael "Big Short" Burry: This Is The Greatest Bubble Of All Time In All Things "By Two Orders Of Magnitude"

Earlier this year, none other than Michael 'Big Short' Burry confirmed BofA's greatest fears, as he picked up on the theme of Weimar Germany and specifically its hyperinflation, as the blueprint for what comes next in a lengthy tweetstorm cribbing generously from Parsson's seminal work, warning that:

"The US government is inviting inflation with its MMT-tinged policies. Brisk Debt/GDP, M2 increases while retail sales, PMI stage V recovery. Trillions more stimulus & re-opening to boost demand as employee and supply chain costs skyrocket."

#ParadigmShift

 "The life of the inflation in its ripening stage was a paradox which had its own unmistakable characteristics. One was the great wealth, at least of those favored by the boom..Many great fortunes sprang up overnight...The cities, had an aimless and wanton youth"

"Prices in Germany were steady, and both business and the stock market were booming. The exchange rate of the mark against the dollar and other currencies actually rose for a time, and the mark was momentarily the strongest currency in the world" on inflation's eve.

"Side by side with the wealth were the pockets of poverty. Greater numbers of people remained on the outside of the easy money, looking in but not able to enter. The crime rate soared."

"Accounts of the time tell of a progressive demoralization which crept over the common people, compounded of their weariness with the breakneck pace, to no visible purpose, and their fears from watching their own precarious positions slip while others grew so conspicuously rich."

"Almost any kind of business could make money. Business failures and bankruptcies became few. The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out."

"Speculation alone, while adding nothing to Germany's wealth, became one of its largest activities. The fever to join in turning a quick mark infected nearly all classes..Everyone from the elevator operator up was playing the market."

"The volumes of turnover in securities on the Berlin Bourse became so high that the financial industry could not keep up with the paperwork...and the Bourse was obliged to close several days a week to work off the backlog" #robinhooddown

"all the marks that existed in the world in the summer of 1922 were not worth enough, by November of 1923, to buy a single  newspaper or a tram ticket. That was the spectacular part of the collapse, but most of the real loss in money wealth had been suffered much earlier."

 "Throughout these years the structure was quietly building itself up for the blow. Germany's #inflationcycle ran not for a year but for nine years, representing eight years of gestation and only one year of #collapse."

His punchline: the above was "written in 1974 re: 1914-1923" and then makes the ominous extrapolation that "2010-2021: Gestation" adding that "when dollars might as well be falling from the sky...management teams get creative and ultimately take more risk.. paying out debt-financed dividends to investors or investing in risky growth opportunities has beaten a frugal mentality hands down."

And, as if reading from the same playbook, Paul Tudor Jones warned yesterday that things are "bat shit crazy" and if Jay Powell

“The idea that inflation is transitory, to me ... that one just doesn’t work the way I see the world."

All of which led to Burry's latest tweet warning this morning...

"People always ask me what is going on in the markets. It is simple. Greatest Speculative Bubble of All Time in All Things. By two orders of magnitude. #FlyingPigs360"

In other words: "Brace!"

So what are you going to do about it?

Tudor Jones had some simple advice: "buy commodities, buy crypto, buy gold."

Tyler Durden Tue, 06/15/2021 - 11:10

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