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Stockman: A (Bad) Tale Of Two Inflations

Stockman: A (Bad) Tale Of Two Inflations

Authored by David Stockman via Contra Corner blog,

Our paint by the numbers central bankers have…

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This article was originally published by Zero Hedge

Stockman: A (Bad) Tale Of Two Inflations

Authored by David Stockman via Contra Corner blog,

Our paint by the numbers central bankers have given the notion of being literalistic a bad name. For years they pumped money like mad all the while insisting that the bogus “lowflation” numbers were making them do it. Now with the lagging measures of inflation north of 5% and the leading edge above 10%, they have insisted loudly that it’s all “transitory”.

Well, until today when Powell pulled a U-turn that would have made even Tricky Dick envious. That is, he simply declared “transitory” to be “inoperative”.

Or in the context of the Watergate scandal of the time,

“This is the operative statement. The others are inoperative.” This 1973 announcement by Richard Nixon’s press secretary, Ron Ziegler, effectively admitted to the mendacity of all previous statements issued by the White House on the Watergate scandal.

Still, we won’t believe the Fed heads have given up their lying ways until we see the whites of their eyes. What Powell actually said is they might move forward their taper end from June by a few month, implying that interest rates might then be let up off the mat thereafter.

But in the meanwhile, there is at least six month for the Fed to come up with excuses to keep on pumping money at insane rates still longer, while defaulting to one of the stupidest rationalizations for inflation to ever come down the Keynesian pike: Namely, that since the American economy was purportedly harmed badly, and presumably consumers too, with the lowflation between 2012 and 2019, current elevated readings are perforce a “catch-up” boon. That is, more inflation is good for one and all out there on the highways and byways of main street America!

You literally can’t make up such rank humbug. Even then, what the hell are they talking about?

The shortest inflation measuring stick in town is the Fed’s (naturally) preferred PCE deflator, but here it is since the year 2000. The 21 years gain is 1.93% per annum; and the 9-year gain since inflation targeting became official in January 2012 is 1.73%. Given that the PCE deflator is not a true fixed basket inflation index and that these reading are close enough to target for government work anyway, even the “catch-up” canard fails. That’s especially true because given the virtual certainty of another year or two of 4-6% CPI inflation, even the cumulative measures of inflation will register well above the Fed’s sacrosanct 2.00% target.

Moreover, importantly, pray tell what did this really accomplish for the main street economy?

On the one hand, savers and fixed income retirees have seen their purchasing power drop by 39% since 2000 and 18% since 2012. At the same time, wage workers in the tradable goods and services sectors got modest wage gains with uniformly bad spill-over effects. To wit, millions lost their jobs to China, India and Mexico etc. because their nominal wages were no longer competitive in the global supply base, while those that hung on to their domestic jobs often lost purchasing ground to domestic inflation.

Consequently, the chart below is an unequivocal bad. It is the smoking gun that proves the Fed’s pro-inflation policies and idiotic 2.00% target is wreaking havoc on the main street economy and middle class living standards.

Loss of Consumer Purchasing Power, 2000-2021

In short. the group-think intoxicated Fed heads, and their Wall Street and Washington acolytes, are hair-splitting inherently unreliable and misleading numbers as if the BLS inflation data was handed down on stone tablets from financial heaven itself. At the same time, the rampant speculative manias in the financial markets that their oceans of liquidity have actually generated is assiduously ignored or denied.

We call this a tale of two inflations because the disaster of today’s rampant financial asset bubbles is rooted in pro-inflation monetary policies which are belied by both theoretical and empirical realities, which we address below.

First, however, consider still another aspect of the inflationary asset bubble which is utterly ignored by the Fed. In this case, the group think scribes of the Wall Street Journal inadvertently hit the nail on the head, albeit without the slightest recognition of the financial metastasis they have exposed.

We are referring to a recent piece heralding that private-equity firms have announced a record $944.4 billion worth of buyouts in the U.S. so far this year. That 250% of last year’s volume and more than double that of the previous peak in 2007, according to Dealogic.

As the WSJ further observed,

Driving the urge to go big are the billions of dollars flowing into private-equity coffers as institutions such as pension funds seek higher returns in an era of low interest rates. Buyout firms have raised $314.8 billion in capital to invest in North America so far in 2021, pushing available cash earmarked for the region to a record $755.6 billion, according to data from Preqin.

As the end of the year approaches, big buyouts are coming fast and furious. A week ago , private-equity firms Bain Capital and Hellman & Friedman LLC agreed to buy healthcare-technology company Athenahealth Inc. for $17 billion including debt. A week earlier, KKR and Global Infrastructure Partners LLC said they would buy data-center operator CyrusOne Inc. for nearly $12 billion. And the week before that, Advent International Corp. and Permira signed an $11.8 billion deal for cybersecurity-software firm McAfee Corp.

The recent string of big LBOs followed the $30 billion-plus deal for medicalsupply company Medline Industries Inc. that H&F, Blackstone Inc. and Carlyle struck in June in the largest buyout since the 2007-08 financial crisis.

Needless to say, these LBOs were not done on the cheap, as was the case, oh, 40 years ago. In the case of AthenaHealth, in fact, you have a typical instance of over-the-top “sloppy seconds”. That is, it was taken private by Veritas Capital and Elliott Management three years ago at a fulsome price of $5.7 billion, which is now being topped way up by Bain Capital and Hellman & Friedman LLC in the form of an LBO of an LBO.

According to Fitch, AthenaHealth had EBITDA of about $800 million in 2020, which was offset by about $200 million of CapEx or more.That means that at the $17 billion deal value (total enterprise value or TEV), the transaction was being priced at 28X free cash flow to TEV.

That’s insane under any circumstances, but when more than half of the purchase price consists of junk debt ($10 billion out of $17 billion), it’s flat out absurd. The reason it is happening is the Fed’s massive financial market distortion: Bain Capital and Hellman & Friedman are so flush with capital that it is burning a hole in their pocket, while the junk debt is notionally so “cheap” that it makes a Hail Mary plausible.

But here’s the thing.

This is a generic case: the Fed’s radical low interest rate policy is systematically driving the allocation of capital to less and less productive uses. And clearly private equity sponsored LBOs are the poster boy, owing to the inherent double whammy of misallocation described by the WSJ above.

On the one hand, capital that should be going to corporate blue chip bonds is ending up on the margin in private equity pools as pension funds, insurance companies and other asset managers struggle to boost returns toward exaggerated benchmarks inherent in their liabilities.

At the same time, private equity operators are engaged primarily in the systematic swap of equity for debt in LBO capital structures, such debt taking the form of soaring amounts of junk bonds and loans.

The higher coupons on junk debt, in turn, attract more misallocation of capital in the debt markets, while at the same time grinding down the productivity and efficiency of the LBO issuers. That because the hidden truth of LBOs is that on the margin they are nothing more than a financial engineering device that strip-mines cash flows that would ordinarily go into CapEx, R&D, work-force training, marketing, customer development and operational efficiency investments and reallocates these flows to interest payments on onerous levels of the junk debt, instead.

That’s the essence of private equity. The underlying false proposition is that 29-year old spread-sheet jockeys at private equity shops tweaking budgets downward for all of these “reinvestment” items—whether on the CapEx or OpEx side of the ledger—know more about these matters than the industry lifetime veterans who typically man either public companies, divested divisions or pre-buyout private companies—before they are treated to the alleged magic of being “LBO’d.”

In fact, there is no magic to it, notwithstanding that some LBO’s generate fulsome returns to their private equity owners. But more often than not that’s a function of:

  • Short-term EBITDA gains that are hiding severe underling competitive erosion owing to systematic under-investment;

  • The steady rise of market PE multiples fueled by Fed policies, which policies have drastically inflated LBO “exit” values in the SPAC and IPO markets.

So at the end of the day, the Fed’s egregious money-pumping is fueling a massively bloated LBO/junk bond complex that is systematically curtailing productive main street investment and therefore longer-term productivity and economic growth.

And, of course, the proceeds of buyouts and junk bonds end up inflating the risk assets, which are mostly held at the tippy top of the economic ladder. And that’s a condition which has gotten far worse since the on-set of Greenspanian “wealth effects” policy in the late 1980s. As shown below, between Q4 1989 and Q2 2021:

  • Top 1%: Share of financial assets rose from 21.0% to 29.2%;

  • Bottom 50%: Share of financial assets fell from 7.2% to 5.6%

Meanwhile, the good folks are WSJ saw fit to provide a parallel analysis that further knocks the Fed’s lowflation thesis into a cocked hat. In this case, the authors looked at the average domestic airline ticket price and found that it is about the same today as 25 years ago, $260 today versus $284 in 1996.

And that’s before adjusting for cost inflation. So the question recurs: How is it possible that the airline industry hasn’t increased ticket prices in over two decades while its fuel and labor costs, among others, have been marching steadily higher?

As the WSJ noted,

It isn’t possible really. Most of us are paying a lot more to fly today, thanks to a combination of three covert price increases.

First, airlines have unbundled services so that fliers pay extra for checking luggage, boarding early, selecting a seat, having a meal and so on. The charges for these services don’t show up on the ticket price, but they are substantial.

Second, the airplane seat’s quality, as measured by its pitch, width, seat material and heft, has declined considerably, meaning customers are getting far less value for the ticket price.

And third, many airlines have steadily eroded the value of frequentflier miles, increasing costs for today’s heavy fliers relative to those in 1996.

Now, did the hedonics mavens at the BLS capture all these negative quality adjustment in airline ticket prices?

They most decidedly did not. As shown below, the BLS says ticket prices have only risen by 5.6% during the same 24 year period or 0.23% per annum. But you wonder with jet fuel costs up by 294% during that period and airline wages higher by 75%—why aren’t they all bankrupt and liquidated?

The answer, of course, is that the BLS numbers are a bunch of tommy rot. Adjusted for all the qualitative factors listed above, airline tickets are up by a hell of a lot more than 0.23% per year. Yet the fools in the Eccles Building keep pumping pro-inflation money— so that the private equity game of scalping main street cash flows thrives and middle class living standards continue to fall.

CPI for Airline Fares, 1996-2021

Moreover, the backdoor prices increase embedded in airline fares are not unique. These practices are also common in other industries, whether it’s resort fees in hotels, cheaper raw materials in garments and appliances, or more-stringent restaurant and credit-card rewards programs. As the WSJ further queried,

Consider the following comparison: Which one is cheaper, a 64-ounce container of mayonnaise at a warehouse club that costs $7.99, or a 48-ounce bottle of the same brand at a supermarket for $5.94?

Most people will guess the warehouse club because of its low-price image. If you do the math, the price per ounce is roughly the same. But if you consider that the warehouse club requires a separate mandatory membership fee, the customer is actually paying more per ounce at the warehouse club.

Known as two-part pricing, the membership fee camouflages the actual price paid by customers—and is behind the success of Costco,Amazon and likely your neighborhood gym. (A gym’s initiation fee, a landlord’s application or administrative fee, and an online ticket seller’s per-transaction processing fee all serve the same purpose.)

Yet this is just a tiny sampling of the complexity of providing apples-to-apples pricing trends at the item level over time—to saying nothing of proper weighting of all the items that go into the index market basket.

The implication is crystal clear. As per Powell’s belated recant on the “transitory” matter, the Fed doesn’t know where true inflation has been or have the slightest idea of where it is going.

So the idea of inflation targeting against an arbitrary basket of goods and services embodied in the PCE deflator, much of which consists of “imputations” and wildly arbitrary hedonic adjustments, is just plan nuts.

They only “inflation” measure that is in the proper remit of the Fed is monetary inflation—-something at least crudely measured by its own balance sheet.

On that score the Fed is a infernal inflation machine like no other.

And for want of doubt that the resulting massive asset inflation and rampant financial engineering on Wall Street that flows from Fed policies is wreaking havoc on the main street economy, note this insight from the always perceptive Bill Cohan:

AT&T bought TimeWarner for a total of $108 billion, including debt assumed, and three years later agreed to spin it off it to Discovery for—what?— $43 billion in stock, cash and assumed debt. By my calculation, that’s a $65 billion destruction of value in three years. That’s not easy to do.

He got that right. At the end of the day these massive accounting write-offs are just a proxy for the underlying economic destruction.

As we said, a tale of two inflations. And neither of them imply anything good.

Tyler Durden
Fri, 12/03/2021 – 14:00








Author: Tyler Durden

Economics

If You Want a 30% Return This Year, Look to Amazon

If you found a stock with a strong growth history that is expected to gain 30% this year, you’d be interested, right? Then maybe you should check out…

If you found a stock with a strong growth history that is expected to gain 30% this year, you’d be interested, right? Then maybe you should check out Amazon (NASDAQ:AMZN) stock.

An image of an Amazon logo on a buildingSource: Jonathan Weiss / Shutterstock.com

Amazon has been through the ringer as of late. It’s down 23% since July and 14% over the last month. After reaching $3,700 per share just six months ago, you can buy AMZN stock for just south of $2,900 now.

The biggest problems facing Amazon last year was that it was going up against huge comparable quarters from 2020. Amazon had a huge 2020 as the Covid-19 pandemic shut down brick-and-mortar retailers. Shoppers turned to e-commerce in record numbers to spend those government stimulus payment checks.

Amazon was a huge disappointment. AMZN stock only returned 2% for all of 2021 while the S&P 500 gained 29.6%. The Dow Jones Industrial Average rose 18.7%, and the Nasdaq composite jumped 21.4% in 2021.

Now that founder Jeff Bezos is gone, having turned over the reins at Amazon to new CEO Andy Jassy, it’s a new day at Amazon, and perhaps investors have a right to be a little skeptical.

But there are plenty of analysts who have a strong belief that Amazon will have a strong year. They still have faith in AMZN stock. Maybe you should, too.

AMZN Stock at a Glance

In late October, Amazon reported third-quarter earnings that were a disappointment.

Revenue was $110.81 billion, versus analysts’ expectations of $111.6 billion. Earnings of $6.12 per share were much lower than analysts’ expectations of $8.92 per share.

On top of that, CFO Brian Olsavsky cautioned investors that the company will take a $4 billion charge in the fourth quarter from increased labor costs, productivity losses and inflation. The company planned to hire 150,000 seasonal workers just to get through the holiday season.

Amazon is expecting operating profit between zero to $3 billion in the fourth quarter. A year ago, Amazon posted a profit of $6.9 billion in Q4.

But there are some reasons for optimism. By several accounts, Amazon had a decent holiday season with its biggest-ever sales over the Thanksgiving weekend.

And it’s important to remember that Amazon just isn’t a retail company. The third quarter was the first time in Amazon’s history that its Amazon services division posted more revenue that its retail division.

The retail side made $54.9 billion in the third quarter. But revenue from Amazon Prime subscriptions, advertising and its cloud component Amazon Web Services made $55.9 billion.

In fact, if it wasn’t for Amazon Web Services’ $4.88 billion in revenue for the quarter, the company would have lost money in the period. AWS revenue rose 39% in the quarter.

The Analyst Sentiment

At this writing, Amazon stock is hovering around $2,900. That means it needs to gain about 38% to hit the $4,000 mark.

Is that a pipe dream? Not at all, according to analyst sentiment.

For instance, Morgan Stanley’s Brian Nowak just raised his firm’s price target from $4,000 to $4,200. He has an interesting take: He notes that Amazon is badly lagging behind the other top tech stocks like Alphabet (NASDAQ:GOOG, GOOGL), Meta (NASDAQ:FB), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT).

Nowak said there’s a correlation between companies that improve their disclosure practices and the price that investors are willing to pay for stock. Amazon needs to give investors more insight about how it spends its money, he wrote in a note to clients.

“Better visibility into Amazon’s estimated ~$19 billion spent on engineers per year (excluding AWS) and emerging ‘other bets’ projects could help investors better understand the health of its core retail business.”

At JPMorgan, analyst Doug Anmuth said investors expect U.S. internet stocks to outperform the market this year. And Amazon is by far the “strong favorite as best performing FANG” stock for 2022, he says. Anmuth has a price target of $4,350 for AMZN stock.

The Bottom Line on AMZN Stock

Fifty analysts currently cover AMZN stock, and 49 of them rank it as a “buy” or a “strong buy.”

Despite coming off a rough 2021 – and a rough start to this year – Amazon can’t be ignored. It’s the unquestioned leader in e-commerce stocks. And with its Amazon Web Services, Amazon is a growing power in cloud services. It’s that division that will give Amazon its greatest profits in 2022.

If you want a 30% return in 2020, Amazon seems to be a great place to find it.

On the date of publication, Patrick Sanders did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders.

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Author: Patrick Sanders

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Economics

Visualizing the Evolution of the Global Meat Market

The global meat market will be worth $1.8 trillion by 2040, but how much of that will plant-based alternatives and cultured meat command?
The post Visualizing…

The Evolution of the Global Meat Market

In the last decade, there has been an undeniable shift in consumers’ preferences when it comes to eating meat.

This is partly due to the wide availability of meat replacement options combined with growing awareness of their health benefits and lower impact on the environment compared to conventional meat.

In this infographic from CULT Food Science (CSE: CULT), we examine how meat consumption is expected to evolve over the next two decades. Let’s dive in.

Taking a Bite out of Meat’s Market Share

The COVID-19 pandemic triggered a massive turning point for the meat industry, and it will continue to evolve dramatically over the next 20 years. Taking inflation into account, the global meat market is expected to grow overall by roughly 3% by 2040 as a result of population growth.

However, as consumption shifts, conventional meat supply is expected to decline by more than 33% according to Kearney. These products will be replaced by innovative meat alternatives, some of which have yet to hit the mass market.

  • Novel vegan meat replacement: These are meat alternatives products made from plants that resemble the taste and texture of meat.
  • Cultured meat: Also referred to as clean, cultivated, or lab grown meats, cultured meat is a genuine meat product that is produced by cultivating animal cells in a controlled environment without the need to harm animals.

Aside from new meat replacements, biotech will also transform adjacent industries like dairy, eggs, and fish.

The Future of Food?

Meat replacements and cultured meat could overtake the conventional meat market, with cultured meats reigning supreme overall with a 41% annual growth rate (CAGR) between 2025 and 2040.

New technologies for cultivating non-animal based protein will provide one-third of the global meat supply due to an increase in commercial competitiveness and consumers becoming more accepting of these kinds of products.

Meanwhile, conventional meat will make up just 40% of all global meat supply by 2040, compared to 90% in 2025. For this very reason, conventional meat producers are investing a significant amount of capital in meat alternative companies so they can avoid disruption.

Invest in the Revolution

The changing tides in the industry have sparked a variety of undeniable opportunities:

  • Regulatory approvals: Singapore is the first country to legalize cultured meat for consumers, and many more will no doubt follow behind in the coming years.
  • Lower production costs: Cultured meat and dairy have made quantum leaps in reducing production costs.
  • Changing consumer ethics: Consumers are demanding a more ethical approach to factory farming and cultured and plant-based alternative products are becoming a more accepted solution.

CULT Food Science (CSE: CULT) is a cutting edge investment platform advancing the future of food. The first-of-its-kind in North America, CULT aims to provide unprecedented exposure to the most innovative start-up, private or early stage lab grown food companies around the world.

Will you be part of the revolution?

The post Visualizing the Evolution of the Global Meat Market appeared first on Visual Capitalist.

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JPMorgan Models War Between Russia And Ukraine: Sees Oil Soaring To $150, Global Growth Crashing

JPMorgan Models War Between Russia And Ukraine: Sees Oil Soaring To $150, Global Growth Crashing

With Morgan Stanley joining Goldman and calling…

JPMorgan Models War Between Russia And Ukraine: Sees Oil Soaring To $150, Global Growth Crashing

With Morgan Stanley joining Goldman and calling for $100 oil, and Bank of America’s commodity strategist Francisco Blanch one-upping both, and today laying out the case for $120 oil…

… on Friday afternoon JPMorgan trumped all of its banking peers with a report that is especially troubling if not so much for the implications from its “theoretical” modeling, but for the fact that Wall Street is now actively assessing what may be the start of World War 3.

In a note from the bank’s economists Joseph Lupton and Bruce Kasman (available to pro subs) which picks up where our article “Shades Of 2008 As Oil Decouples From Everything” left off, JPM writes that oil shocks have a long history of driving cyclical downturns, with US recessions often associated with oil price spikes…

… most recently of course the surge in oil to all time highs in 2008, which some say sealed the fate of the global financial crisis.

So looking at the latest geopolitical tensions between Russia and Ukraine, JPM warns that “these raise the risk of a material spike this quarter.” That this comes on the back of already elevated inflation and a global economy that is being buffeted by yet another wave of the COVID-19 pandemic, JPMorgan sees the risk of a kinetic war breaking out as adding “to the near-term fragility of what is otherwise a fundamentally strong recovery.”

Drilling down, JPM considers a scenario in which an adverse geopolitical event between Russia and Ukraine materially disrupts the oil supply. This scenario envisions a sharp 2.3 million b/d contraction in oil output that boosts the oil price quickly to $150/bbl—a 100% rise from the average price in 4Q21.

Given that this would be solely a negative supply shock, the impact on output is to reduce global GDP by 1.6% the bank calculates based on its general equilibrium model. And with global GDP projected to expand at a robust 4.1%ar in 1H22, the economist due project that “this shock would damp annualized growth to 0.9% assuming the adjustment takes place over two quarters. Inflation would also spike
to 7.2%ar, an upward revision of 4%-pts annualized.”

It gets worse: in addition to the drag from a sharp contraction in oil supply our models estimate, there are two other channels through which this shock could damage global growth.

  • The first relates to the repercussions of a Russian intervention in Ukraine. The US, coordinating with allies, would likely impose sanctions on Russia. While the possibilities vary widely in scope, they will likely impact negatively on sentiment and global financial conditions.
  • Second, JPM estimates incorporate the realized behavior of major central banks over the past two decades whereby oil price shocks associated with geopolitical turmoil have been perceived to pose a greater threat to growth than inflation.

Against the backdrop of a year of already elevated inflation and extremely accommodative policies, JPM warns that central banks may display less patience than normal—particularly in the EM, where rising global risk aversion may also place downward pressure on currency values.

To be sure, as with any Wall Street analysis that models war, JPM is quick to caveat its findings, noting that “it is important to recognize that the scenario of a jump in the oil price to $150/bbl is premised on a sharp and substantial shock to the oil supply. History has proven that such large and adverse shocks do material damage to the macroeconomy. In this regard, the results reported here should not be a surprise but seen as useful for quantifying the damage based on a carefully specified general equilibrium model using generally accepted elasticities.”

Boilerplate language aside, what is notable is that for months we have been wondering what “latest and greatest” crisis will replace covid as the Greenlight that central banks and governments need to perpetuate not only QE and NIRP, but also the all important helicopter money. Now we know.

 

Tyler Durden
Fri, 01/21/2022 – 15:27

Author: Tyler Durden

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