“Base effect” my eye!
When you calculate the inflation increase on a two-year stacked basis you simply leap over the chasm of last spring’s Lockdown plunge and compute the gain over two years’ time from the pre-Covid level. That is, the computation tells you where you are, even after the “base effect” plunge is accounted for.
Producer Price Index Annual Change, Two Year Stacked Basis:
- November 2020: -0.17;
- December 2020: +0.44%;
- January 2021: +1.45%;
- February 2021: +1.95%;
- March 2021: +2.05%;
- April 2021: +1.84%;
- May 2021: +2.51%.
So what we got in the May PPI was another unmistakable acceleration of the running inflation trend. This month’s reading represented a nearly 270 basis swing on the two-year stacked PPI from the negative trend that existed as recently as November 2020.
We’d call that a damn obvious acceleration, not a base effect, and also an indication that the Fed’s sacred 2.00% inflation target is being surpassed and then some in the upstream wholesale pipeline.
Then again, the bean counters in the Eccles Building are saying: Not so fast—we haven’t hit our long-term inflation average yet and thereby attained the economic goodness that will flow from MOAAR inflation and from the reinforcement of central bank credibility in the markets.
As to the “averaged over time” part, we can well and truly say it’s a pick your period scam, pure and simple. The PPI numbers demonstrate that in spades.
After all, if you calculated the PPI gain from January 2012 thru this month’s hot number, the CAGR for the past nine years of formal inflation targeting is just 1.25% per annum. No sweat.
But the CAGR is 2.25% per annum for the 21 year period since January 2000, and for the five-year period since May 2016 the gain has been 2.59% per annum.
So when they say they are looking for 2.00% “averaged over time”, it is evident why they are not saying exactly what time period and why they choose it.
As to the Fed credibility predicate, these clowns are giving chutzpah an altogether new definition. Why is actually achieving and sustaining the Fed’s 2.00% inflation goal so crucial that they will damn near melt down their printing presses to achieve it, come hell our high waters?
Simple. They have invested it with nearly sacred monetary properties based on nothing more than ritual incantation, and like fanatical rulers from the beginning of time, they damn well mean to achieve it.
Of course, what that fanaticism is also doing is making a mockery of the laws of finance. After decades of unhinged money-pumping, they have driven real interest rates so low as to be farcical.
For example, here is the inflation-adjusted yield on the #1, all-powerful fulcrum bond in the entire financial system—the 10-year UST (US Treasury Note). It drives all other financial asset pricing, and during the last 40-years the real yield has relentlessly migrated southward from +500 basis points or better to nearly -200 basis points at present.
Contrary to all the mendacious palaver from Wall Street economists, the complete historical aberration depicted below is not owing to investor pessimism about the future nor is it a premonition of deflationary gales ahead.
The fact is, there are no bond investors–just traders and suckers. The former have driven the 10-year yield in recent days to just 150 basis points in nominal terms and deeply into the red in real terms in the face of surging monthly inflation numbers because they are “pricing-in” one thing and one thing only.
To wit, they have done so not owing to a dark alternative view of the universe from their fellow stock market speculators who are off to the moon, but owing simply to supreme confidence that the spineless fanatics who occupy the Eccles Building will keep buying $120 billion of government and quasi-government debt per month, world without end.
Indeed, these are no longer even “markets” by any historical sense of the term. The bond markets and the stock exchanges are just mindless gambling casinos, every bit as unhinged as the current speculation in meme stocks, cryptos and NFTs.
Real Yield on 10-Year UST, 1985-2021
Needless to say, this radical and willful falsification of the carry cost of debt has its consequences and they are not benign. Instead, they are a signal to public and private borrowers alike to throw the distant future under the bus in order to live high on the hog today.
A Federal government that collected $2.5 trillion of revenues during the first eight months of the fiscal year (FY 2021) but spent $4.6 trillion and borrowed the rest, even as it dickers over another $1-$2 trillion infrastructure boondoggle, is an obvious case in point. Yet a Wall Street Journal survey of recent corporate borrowing makes clear that the C-suites have become even more reckless than the Washington pols.
After a brief spike, interest rates on corporate debt plummeted to their lowest level on record, bringing a surge in new bonds. Nonfinancial companies issued $1.7 trillion of bonds in the U.S. last year, nearly $600 billion more than the previous high, according to Dealogic. By the end of March, their total debt stood at $11.2 trillion, according to the Federal Reserve, about half the size of the U.S. economy.
By the end of last year, investors had worked up such an appetite for corporate bonds that they were willing to lend large sums to companies with near rock-bottom triple-C credit ratings. This year, triple-C bond issuance is running 35% above the previous record, according to LCD, a unit of S&P Global Market Intelligence.
The WSJ got that right. The long-term average realized loss on bottom-of-the-barrel triple hooks ( viz. CCC debt) is upwards of 10%, explaining why inflation-adjusted yields have meandered around the 10%+ level for several decades.
No more. The real yield is currently 2.5%, verifying that yield starved fund managers are throwing caution to the wind and setting themselves up for massive future losses.
That’s not honest price discovery, obviously. It’s just the crazed trading that has been fostered by fanatical central bankers who have literally lost touch with history, reality and every cannon of sound finance.
Real Yield Of CCC Junk Bonds, 2010-2021
Overall, there is now $84.5 trillion of public and private debt outstanding. That’s nearly $7 trillion more than a year ago at the end of Q1 2020 and it amounts to a staggering 383% of GDP.
For want of doubt, here is the total debt to GDP ratio for the last 73 years. Until 1970, it rarely exceeded 150% of GDP. At that leverage ratio, it was in effect a golden constant that actually went back with little variation to 1870.
Total Leverage Ratio for the US Economy: Debt-to-GDP, 1947-2020
Of course, an economy freighted down with nearly 4X more debt than national income can possibly stand a number of stresses, but minimally honest interest rates is surely not one of them.
In a word, the mad money-printers in the Eccles Building have taken themselves hostage to the falsified interest rates they have foisted on financial markets out of the arrogant presumption that they can make the US economy march to their fickle goals.
That is, 2.00% inflation, which self-evidently can’t be reliably measured nor remotely commanded to happen; and full-employment, whatever that means in an open economy facing the gale force of lower wage production all around the planet, and which metric, in any event, amounts to statistical noise.
At the end of March 2021, for example, there were 247.3 billion labor hours being employed by the nonfarm economy, yet there were in theory 425 billion hours available (212.5 million adults 20 years to 70 years who could work 2,000 hours per year). So the true unemployed hours rate is about 42% if you really want to paint by the numbers.
Of course, there are myriad reasons why those 178 billion hours are not deployed in the monetized economy or show-up in the BLS employment counts. There are 60 billion hours attributable to social security disability and higher education and another 70 billion or more hours devoted to non-monetized housekeeping, among numerous others.
But these reasons for staying outside the monetized economy and BLS employment counts constantly change owing to welfare state policies, cultural norms and, at the present moment, an incredible amount of idleness owing to the tsunami of stimmies that have been pumped into the household sector during the past 15 months.
So the question recurs. Do the fanatics in the Eccles Building have any clue about the fact that their policies amount to a massive signal flood to the US economy to bury itself in debt?
Self-evidently, they don’t. But with each passing month of negative real yields and $120 billion of freshly minted fiat credit the US economy slouches in exactly that direction.
Per the WSJ article cited above, here is the full picture for business borrowing. During 2020—the year of the sweeping Covid-Lockdown—conventional economics would suggest a liquidation of business debt, especially when business leverage levels have previously reached dangerous, all-time highs.
But not in the Fed’s hothouse financial markets. To the contrary, business debt soared by $1.5 trillion in 2020 or by 50% more than the peak borrowing year of 2007, when the C-suites were off on a borrowing binge predicated on a “Goldilocks” economy that would never end.
Annual Increase in Nonfinancial Business Debt, 2000-2020
This is truly aberrational, as shown by the business leverage ratio chart below. This ratio compares total business debt outstanding, which now totals $17.4 trillion ( versus $9.7 billion on the eve of the financial crisis in 2007) with gross value-added generated by the business sector.
Back in the day, the business leverage ratio stood at 35% of value added in 1947 and had plateaued at about 60% by the 1970s. But once the Fed got into the financial repression business big time after Greenspan took the helm in 1987, the ratio was off to the races. The staggering amount of business debt now amounts to an off-the-charts 111% of gross value added.
US Nonfinancial Business Leverage Ratio, 1947-2020
In a word, can the clowns perched in the Eccles Building explain how the US economy can grow in the future when it is submerged in so much debt and leverage against income?
Can they also explain how interest rates can ever be normalized in real terms without blowing up the entire financial edifice?
And do they have a clue as to what will happen if they continue to signal private and public parties to borrow like there is no tomorrow by keeping real interest rates submerged in negative territory?
The answers, of course, are: No. No. And Hell No!