Juggling Dynamite

Inflation has always been a lagging economic indicator and as transitory as financial bubbles.

In the last forty years, the National Bureau of Economic Research (NBER) reports that the low in inflation readings occurred an average of 15 quarters (3.75 years) after the end of each recession. The average number of years from the beginning of the recession to the low in bond yields has been four.

The most extended lag followed the recession of 1991 when inflation bottomed 29 quarters (7.25 years) after the economy. The shortest lag was six quarters after the recession ended in June 2009 when inflation bottomed in the last quarter of 2010. (Hoisington Management).

The start and end dates for recessions are officially proclaimed many months post in retrospect. But even if the 2020 economic contraction optimistically ended in April 2020, it would be typical to not see an inflation low this cycle for several months and possibly years yet to come.

In the latest US CPI estimate for July 2021 (here), BLS reported that non-seasonally adjusted consumer prices increased 5.4% year-over-year, down slightly from June. US CPI peaked at similar levels in June, July, and August 2008 before slowing to 4.94% in September 2008 as asset prices began to tank.

Over the last 12 months, most notable was a 41.8% rebound in gasoline prices, 19% for natural gas, a supply-constrained 41.7% rise in used vehicle prices, 6.4% for new, and 2.8% for the shelter index.  Apart from these extreme and passing price pressures induced by the pandemic, the underlying inflation trend appears to have peaked in April (as charted on the left) just as Treasury prices predicted.   See Jeff Snyder’s latest Inflation More Than Hints ‘Transitory’:

“…should inflation rates continue to play out as they have, each simply the predictable results of, yes, transitory factors having their day and then fading away into ugly history. From supply problems to base effects and mostly Uncle Sam, these aren’t permanent changes to the situation no matter how many times the last of those is called “stimulus.”

Instead, easily foreseeable, once those recede sufficiently what’s left is what was there underneath the entire time – and, as we keep finding in global evidence, the basis and basics behind the US economic rebound may not have been nearly as awesomely robust as (inflationary) advertised. On the contrary, all of that fluff (Warren Buffett’s second shot at “red hot”) mainly the product of those, yes, transitory artificial factors.”

The consensus seems to have sensed this shift and moved on to new worries.

Full round trip in @GoogleTrends searches for #inflation @FT pic.twitter.com/olqbGI6kvB

— Liz Ann Sonders (@LizAnnSonders) August 12, 2021

Public and private employers planning to significantly cut employees’ pay who work remotely full-time seems likely to be the next wake-up call.  After the last year’s debt-fuelled goods and housing frenzy, less consumption was inevitable.  Pay cuts will surely depress it even more.

At the highest valuations in human history, asset markets have vastly overestimated the rates of growth and inflation possible for the next couple of years, at least.  As shown in the S&P 500 real price index below since 1870, such periods of extreme delirium have never gone unpunished.

Another worthwhile update on present conditions and what to prepare for next.

Merryn talks to Jeremy Grantham of GMO about the current state of the markets and where investors can “hide” from all the craziness, plus inequality, inflation, and why you should rush out and get the longest fixed-rate mortgage you can. Here is a direct audio link.

A new analysis by the Economic Policy Institute finds that CEOs of publicly traded companies in the United States saw their compensation rise by 1,322% between 1978 and 2020—while the pay increase of the typical worker was just 18% during that same period.  See Since 1978 CEO pay has risen 1,322%.

As shown below, in 2020, executives at the largest public firms were paid 351 times as much as the typical worker from 21 times in 1965 and 61 times in 1989.  During the first year of the pandemic and the worst recession since the 1930s, CEOs saw their compensation increase by 18.9% while typical workers—those who could hold on to their jobs amid mass layoffs—rose just 3.9% over that time, EPI shows. 

In addition to salary, CEO pay includes stock-linked bonuses, incentive payouts, and exercised stock options.

As in 2000 and 2008, the stock market bubble is driving destabilizing income discrepancy and political purchase at the expense of democracy along with a perverse and myopic fixation on keeping stock prices elevated rather than longer-term, productive investment, responsibility and risk-mitigation decisions.

When the asset bubble bursts again, some of this will correct as it did in 2001-03 and 2008-09. Still, new policies restricting share buybacks and linking executive pay to longer-term producer responsibility and balance sheet management are much needed.