Global Macro Monitor

More Sneakflation

We had dinner earlier this week in Marin County and noticed something new on our bill – a 4 percent living wage surcharge!   We seriously doubt the effective food price increase shows up in the “food away from home” component in the CPI inflation and/or average hourly earnings.  Isn’t transparency supposed to be a hallmark of a market economy?   

We have been all over “shrinkflation” and “sneakflation” for years. 

Pricing Inefficiencies 

After dropping off my youngest at the airport yesterday, we found one of the most blaring pricing anomalies we have seen in many years.   Check out the relative gas price between two stations within 300 yards of one another in Marin County.  I filled up at $3.59 with no lines, and a gas station just 300 yards away was busy (full of cars), charging $4.79 per gallon, or a price 33.5 percent higher.   These strange things are not supposed to happen in the classical economic model, where consumers are assumed rational.    

Marin County

But, hey, it’s Marin County, where the median household income is $120k plus, ranked 8th highest in the nation, and the home of horse astrologers, Chardonnay, hot tubs, and the American Taliban.  It’s not impossible to make a case where rationality is always positively correlated with income or where the classical model does not reflect economic reality.  Or you fill in the blanks. 

See “bounded rationality” here. 

Gas Prices —  Thursday, December 15,  Mill Valley, California

Upshot

Inflation is clearly embedded in the economy.

We suspect it will be much more difficult to wring out the inflation than the markets expect.  The fact restaurants have found ways to raise prices without raising prices, creating the sticker shock that induces demand destruction, and gas stations have such a wide price range to sell their product are indicators, at least to us, the stock of money is still way too high. 

We define money — not as the archaic monetary aggregates, such as M2, still cited by the Fred Flinstone economists — but any asset, including cash, that has the potential to increase purchasing power, such as increases in household wealth.  Levels (stocks) matter, not just changes (flows).  

The following chart illustrates an excellent heuristic and simple (if not too simplistic) illustration of longer-term stock market valuation moves.  Note how the stock market’s capitalization has significantly outpaced nominal GDP — never sustainable — since the nadir of the Great Financial Crisis (GFC). In contrast, the ex-post real 10-year Treasury yield has fallen from 4.76 percent at the end of Q1 2009 to -6.24 percent at the end of Q1 2022.   

Simple Upshot? 

Stocks love ex-post negative 10-year nominal yields, where the inflation expectation component misses realized inflation in a big way.  This model suggests if you’re betting on a new stock bull market beginning sometime soon, you’re also betting on the recent move in real yields to the upside to reverse and turn more negative.  That is a bet on several issues, including how distorted the bond markets are, the credibility of the Fed, the Treasury holdings of foreign central banks, and the path of inflation, among others. 

Good stuff, must view.

Global Economy Accelerating To The Downside

Logistics Costs Stabilizing 

U.S. Sector PMI

Battery Plants In Europe

Auto Retail Is The Largest Consumer Retail Vertical

Oh. My. Gawd!  This kid, Mr. Irrelevant, is Purdy good and is going to be something special!   What a story. 

“I am not an Athenian or a Greek, but a citizen of the world.” – Socrates

Yup, we are with Krugman on this one. Always have been. Now Saturday Night Live is mocking crypto.  

My hard working nurses were duped and sucked into the hype. Here’s to hoping people go to jail.  Doubtful. 

No doubt I’ll hear from many people still insisting that I don’t get it. But it really looks as if there never was an it to get. – Paul Krugman

It is difficult to free fools from the [block] chains they revere. — Voltaire

I am very into astrology and I know some are going to say it’s not real, but I say, how’s that crypto going? – Keke Palmer, SNL, Dec 3rd