#CKStrong   Bullish on CK,  ANC > 1100!

Can anyone spot which Age was transitory?

Woke Central Bankers 

“We have a generation of central bankers who are defining themselves by their wokeness,” Summers, who is now a professor at Harvard University, said on Wednesday. “They’re defining themselves by how socially concerned they are.”

“We’re in more danger than we’ve been during my career of losing control of inflation in the U.S.,” the 66-year-old Summers, a paid contributor to Bloomberg, said. “We’ve gone even further towards losing it in Britain and I think we’re at some risk in Europe.”  – Bloomberg

I have worked with — not as an employee but more an investor/informal advisor, and, at times, in an adversarial role — with many central banks during my career, including several that were in the beginning, middle, end, and post hyperinflation (see charts below).   

Of course, none, x/ the Fed, had the privilège exorbitant of controlling the world’s dominant reserve currency but all had to navigate an environment with heavy political and social pressures.

Most of the high inflation central banks, engaged in non-transitory deficit monetization and money printing until all street cred was lost and the economy broke. Demand for the currency collapsed and hyperinflation ensued.

In most cases, hyperinflation begins when demand for the local currency collapses.

We doubt that will be the case in the U.S. but if the Fed doesn’t get it right, and its a rapidly closing and small window –there will be pain. If the U.S. central bank caves again to political and social pressure when asset prices get rocked as they begin to reverse monetary policy next month, add the the “Age of High Inflation” to the above timeline.

Today’s “woke” market action priced that New Age.

We are looking at Israel’s hyperinflation as a model for our high inflation case (but not even close to Israel’s peak print) in the U.S. x/ the worries over default. 

Wait…hold that thought. 

In 1984, the Israeli economy was in dire straits: it had an annualized inflation of about 400 percent (and even 1,000 percent in the second half of 1984); a budget deficit of about 17 percent of the gross domestic product; and a current account deficit—driven by massive capital outflows—which drove down foreign reserves, and with it reducing the likelihood that Israel would be able to service its external debt obligations. – Brookings

We think a U.S. default, that is a blanket moratorium on Treasury debt payments, is a complete but useful delusion for the politicians.  A selective default, maybe, but doubtful, where the Treasury skips a payment on, say, debt held by the Fed.  Not sure about the legality, however.     

Which Period Of High Inflation Was Transitory?

Biggest Constraint On “Normalizing” Monetary Policy

It’s not rocket science but valuations, folks.

The U.S. stock market is now valued at over 200 percent of GDP versus the average valuation of 106 percent from 1996-2020 and over 40 percent above the extreme valuation of the Dot.com bubble.

Three Steps And A Stumble

A rule of thumb stating that the prices of stocks fall significantly after the Federal Reserve raises interest rates three times in a row.  –  Free Dictionary 

We doubt they will be able to raise three times, and thus the end game will be inflation but not before a few deflation scares.  

We do get it’s all about the trade, “riding the gravy train as long as it lasts” as CK has done and is much wealthier than I for it, but come on, man, lets call the useful delusionary narratives for what they are, and we suspect they are gonna rock the wealth of the people, who not prepared and can at least afford it.   

What’s The Matter With The Supply Chain?

The fundamental problem in the supply chain is that it is both still reeling from the volatile shock to final or downstream demand — the “Bullwhip Effect“- and policymakers continue to over stimulate the global economy.  Moreover, the spike in the demand for transport services, both over sea and land, is now starting to cause micro supply shocks.

We will get the data on retail sales tomorrow, which we use as a proxy for global demand.  We suspect a miss as the current level of monthly sales is way over its skis.   

As the chart below illustrates, after the massive and unprecedented volatility in Q2 2020,  the level of retail sales in the U.S. is running 51 months ahead and 11.2 percent above its pre-COVID trend.

We’ll concede that some of the overshoot may just be catch-up from Q2 2020 collapse. We shall see.

Protect your blind side, folks. 

As always, we reserve the right to be wrong, and often are, but, do please, at least contemplate we could be right.  After all, we were laughed at when we posted in early February that a 4 percent CPI was coming by mid-year and we wouldn’t be surprised to see a 5 percent print by year-end.