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All Throughout Last Year and During the Inflation/Deflation Camp Debates, I Warned of the Risks of Stagflation. Did I Have a Point?
Let’s make this quick and clean. Enter the first leg of the formula…
Wages Fail to Keep Pace with Inflation: WSJ
- Median weekly earnings rose 0.8% in the 2nd Quarter this year, against 1.8% CPI growth in the same period
- Excess supply in the labor market has kept wage inflation low
- On a year over year basis, wage growth based on occupation has been
barely positive, or in some cases wages are showing deflationary
pressures
Which leads to a hint of the Stagflationary conclusion…
Five months ago, I queried, “Is That Stagflation That I Hear Coming?“, and went in depth to answer my own question after CNBC reported “Jobless Claims, Inflation Jump as Economy Wobbles“
Both the number of workers
filing new applications for unemployment insurance and producer prices
unexpectedly surged, dealing a setback to hopes the economy was showing
a strong recovery.
Have you noticed that nothing else much has changed in those five months or so?
- Economic contractions AND rising prices, dare Reggie utter the “I” word – Enter a global phenomenon
- Reggie Middleton’s Take on Investing for Inflation, pt. 1
- Reggie Middleton’s Take on Investing for Inflation, pt. 2
- Reggie Middleton’s Take on Investing for Inflation, pt. 3
- Reggie Middleton’s Take on Investing for Inflation, pt. 4
- Reggie Middleton’s Take on Investing for Inflation, pt. 5
- More on my stagflation rant
- Deflation, Inflation or Stagflation – You Be the Judge!
- Is My Warning of the Risks of a Stagflationary Environment Coming to Fore?
- China’s Most Expensive Export: Price Inflation
But first we have to reinforce the (absence of) labor component of the thesis, ex. unemployment…
Bloomberg has an excellent interactive analysis
on the potential for a near one million count revision upwards of the
unemployment numbers. This combined with the work my team and I have put
together should lead subscribers to believe that medium term,
unemployment can exacerbate the global equity market decline. See “Are the Effects of Unemployment About To Shoot Through the Roof?” as excerpted below.
A recent zero-hedge article
rightly questioned the reliability of the reported unemployment
figures by comparing the reported increase in the unemployment benefits
paid with the reported increase in the number of insured unemployed.
According to the figures reported by Department of Labor (DOL), the
total number of insured unemployed in the US has risen by nearly 400%
since September 2007 and has reached nearly 10.5 million as of Dec 19,
2009. However, if we look at the monthly withdrawals on the
unemployment insurance account (according to the Daily Treasury
Statement prepared by the Financial Management Service), the expenditure has risen by nearly 550%.
The difference has been widening since April 2009 (coincidentally,
right about the time the S&P 500 rocketed skywards, and the housing
market made several month to month gains [see If Anybody Bothered to Take a Close Look at the Latest Housing Numbers..."]) and has increased substantially in Dec 2009.
With no reason to believe that the
average payouts increased dramatically (that could have otherwise
explained this variation), the article rightly points out the huge
discrepancy that is creeping in the reported figures. According to
Zero-hedge, the insured unemployed are understated by 32% and estimate
the insured unemployed at nearly 14 million. The Bureau of Labor
Statistics reported the total number of unemployed at 15.6 million and
the unemployment rate at 10% in Dec 2010. With serious doubts being
raised about the reported figures of the insured unemployed that forms
a substantial portion of total unemployed (nearly 69% in Dec 2010,
based on reported figures), the total unemployment figures reported by
the government is most likely severely understated.
The grave unemployment situation not
only undermines the economic health and recovery hopes, but is also
acting as a major source of financial strain on the Fed’s books. The
Fed has been spending huge amounts of money in the form of UI
(unemployment insurance) benefits. In 2009, the government paid about
$139 billion in UI benefits. Based on the figures for total unemployed
by Bureau of Labor statistics and total insured unemployed by DOL,
the total insured unemployed which are being supported by the
government under the various state and federal programs have risen to
69.0% of the total unemployed as of Dec 2009 from just 29.0% in Sep
2007. Further it is observed that the Fed has been taking in huge
deficits on its books because of UI programs. The total UI withdrawals
on Fed books in 2009 were $139 billion against deposits of just $31
billion received from states for unemployment. While the withdrawals
in 2009 have increased by 320% when compared with withdrawals in 2007,
the deposits have declined by 6.6%. The deficit has increased to
nearly $107 billion from nearly no deficit, two years ago.


Hey, if wages are rising as fast as inflation, and unemployment is
rampant, why in the hell did those retail stocks tear the way they did?
Well, obviously for absolutely stupid reasons, and reality will reassert
itself -
This is a repost of congrats that I got from a subscriber and intern a couple of weeks ago. It drive the conclusion home.
Reggie:
I took a screen shot of my play money account and the shorts
from the four part series on why the consumer isn’t coming back.
Consumer retail has been nailed since May and from the 4 stocks you
picked, here are two I chose to follow.
This is an example of exactly what we were talking about in our
subscription documents regarding the ridiculous run up in consumer
discretionary shares when taken in context of the American consumer
and the stress born from the Pan-European Sovereign Debt Crisis (click the link for our detailed analysis). You can find the earlier articles in this consumer mini-series as follows:
- What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
- What We’re Looking For To Go Splat! Part 2:
A list of 147 retail stocks with attributes that causes on to
question their gain in prices, with a shortlist of companies who may
very well go “splat”! - Is
the Consumer Really Back? Well, It Depends On If You Believe What
the Government Tells You or Whether You’re An Indendent Thinker – The American Recovery and the North American Economic Outlook. - The American Recovery and the North American Economic Outlook
Those looking to subscribe should click here.
- advertisements -





Yeah Reggie, but it's because they're the same thing, no other reason.
reggie, I didn't read post. But we have been in stagflation for a long while already. (by the way I define)
stagflation is (for me) asset prices that do not reflect economic findmentals. this refers to many asset classes.
I had this debate with an economist many months ago. He agreed with me when I defined it using my relative definitioned criteria. It is all about mismatch, not absolutes.
As more and more families service debt and actually start saving eventually we will see deflation. If you cannot afford to consume, even though you are willing to, prices must come down. And wages are never going to increase and credit will soon be nonexistent for those that actually need it.
Yes. In our fiat system, there are essentially two parties to money creation - the lender and the borrower. Our political system seems to think that the answer to all our problems is to prop up the lenders. But without borrowers, inflation is impossible. The Fed is a bank. All it can really do is offer credit. Even if QE2 is initiated and assets are bought, it doesn't add new credit to the system. It only stems the price contraction in a certain asset class. Say it steps up to the plate and buys more MBS. What then? A big fat nothing. There might be a short surge in the stock market but it will NOT rescue the housing market. Without additional borrowers to bid up assets, there will be no recovery.
Export the McMansions to India and Brazil -- two problems solved!
How much deflation in the future? LOTS!
http://www.lloydslistdcn.com.au/archive/2010/july/26/capesize-lay-ups-loom-as-zero-rate-fixtures-reappear
It's INFLATION - b/c the economy always has to go grow....and other fairy tales.
Deflation would seem to be the prevailing trend in my neighborhood, Beverly Hills CA. Lots of office space for lease/sale, lots of houses suddenly on the market and used Range Rovers for 10's of thousands less than a few years ago...
What if the fed printed a bunch of money and no one actually wanted anything new...b/c suddenly they didn't even want the stuff they already had, which they couldn't afford in the first place...which is why they took out the 2nd mortgage on their house (b/c housing prices always go up)
Suddenly things like extra cars, elective plastic surgery (@#$%&! especially), giant SUVs, extra houses, meals out...etc etc etc suddenly become less appetizing.
deflation...could be much more serious than inflation, and this is the first time in my life i've ever hear the word tossed about, like that other serious word...austerity.
http://www.lloydslistdcn.com.au/archive/2010/july/26/capesize-lay-ups-loom-as-zero-rate-fixtures-reappear
Deflation in Beverly Hills house prices for the best-off 1 or 2% of the population; while the price of bread for the proles approaches $5/loaf in the supermarket. That's stagflation.
you are overpaying for bread.
We have what resembles inflation due to the debt bubble being propped up by the gubbimint. Yes, Reggie you were right about the stagflation aspect to this point. I really don't see how the inflationary nature can continue when the bubble goes poof! If everyone is deep in debt any earned income will go directly to paying off their portion of debt. Robbing Peter to pay Paul. This has to be highly deflationary in nature no matter how much Helicopter Ben prints.
Geez.. I don't know. The United States during the 70's was a creditor nation with a healthy manufacturing base. Now, we are the world's biggest debtor nation in history and China now has most of our manufacturing.
We might have what would be considered to be stagflation for a little bit longer, but at some point in time it's gonna crash. Could be 5 years, could be 6 months. For some reason, I'm tending towards the latter.
I wonder where we would be out the military/industrial complex demand. That is a hungry beast.
Reggie,
Nice analysis. And Yes you were correct.
Is there anything at all in this planet that seems positive or good in your view? Or should we all get searching for the next available cave.
It is not as if there are no positives, it is that the negatives were never allowed to play out to their natural economic conclusion but were instead bubbled up in an attempt to preserve what should have been allowed to collapse. When the natural business and asset cycles are allowed to do their thing, then the positives will shine through. For instance, we are in the midst of another computing paradigm shift, the the 3rd in 30 years, and incredible pace by historial standards. The only problem is that this one will be mired in an attempt to reinflate old bubbles that just may protract the recession.
Government is committed to holding up the sky. God only knows what will happen when they are forced to give it up. Chicken Licken was right.
"When the natural business and asset cycles are allowed to do their thing, then the positives will shine through."
Wow, what planet are you living on. We were living in an oligopoly. Now we're living in a statist economy. Anyone who thinks in terms of "natural" has rocks in his head.
what's so unnatural about a statist economy, given history and human nature?
not saying its prefereable, just sayin.....
The discrepancy is not in your stars, but in yourself.
We live in a monopolistic economy. The thinking among the oligarchs is this: oh, people still have some money? Then keep prices high.
That thinking will keep up until the collapse of the supply chain takes over, and then that will be the reason prices are high, regardless of what happens to income.
In short, things will keep on the way they are going ($6.4 trillion Fed securities purchase coming about December), until college-educated unemployment reaches 60%. Then revolution. There's nothing anyone can do about this. It's simply going to happen, chatter all you want.
Why do you look to the 'College Educated' to lead your proposed counter revolution? They are soft & spoiled, have no military skills & most tellingly no cahunes. Are you thinking of the Russian Revolution? Those intellectuals were hard & street wise. The typical American college grad thinks 'street wise' means knowing which touts have the best drugs. These people will go with a whimper. If a revolution it will come from the smartest & best of the 'Joe Sixpacks'. The real ones, not the Teabagger fantasy ones.
People without college degrees get hungry and fearful too. They have fewer options and less to lose.
+200 million (give or take a few)
"until college-educated unemployment reaches 60%" Really? Seems to me this implies a) only "college-educated" people are relevant b) said "college-educated" aren't smart enough to be proactive c) 60% unemployment implies a high tolerance for pain and d) that @ 60% for the "college-educated", the proles haven't already started the purging of "intellectuals".
"until college-educated unemployment reaches 60%" Really? Seems to me this implies
a) only "college-educated" people are relevant
CORRECT. THE UNDERCLASS MAKES NO DIFFERENCE POLITICALLY. THEY'LL STARVE TO DEATH AND LIKE IT.
b) said "college-educated" aren't smart enough to be proactive
THEY'RE BEING REAL PROACTIVE NOW, AREN'T THEY? THEIR LIVES ARE BEING STOLEN FROM THEM AS I WRITE.
c) 60% unemployment implies a high tolerance for pain
THIS IS NEWS?
and d) that @ 60% for the "college-educated", the proles haven't already started the purging of "intellectuals".
THE PROLES CAN'T WALK DOWN A STREET WITHOUT STUMBLING. WHO SAID THE COLLEGE-EDUCATED WERE INTELLECTUALS. NO, WOULDN'T CALL OUR GROSSLY OVERPAID, STUPID SEMI-EDUCATED CLERKS "INTELLECTUALS," WITHOUT OR WITHOUT QUOTES.
It appears that all that work by ACORN and the battles over illegals must mean something to someone - politically speaking of course. And, since the "college-educated" are not being proactive now, as you state, then they will apparently "STARVE TO DEATH AND LIKE IT" with the underclass. Nice.
As far as high tolerance for pain not being news among the "college-educated", you may have a point. I mean, they suffer 4+ years of mind-numbing indoctrination, paid for by years of indebted servitude on the student loans and by virtue of the perceived value of said college-education, the opportunity for a much higher debt level to service.
And "intellectuals" in quotes implies the proles perspective.
http://dailyreckoning.com/soft-core-deflationism/
Soft-Core Deflationism07/26/10 Paris, France – There are two major schools of thought on what is coming next…and two renegade, home-schools too. There are those who believe we have a recovery…though weak…that will continue and eventually bring the economy back to health. This is the line of the Obama Administration and most mainstream economists.
Then, there are those who think the recovery will not come as planned…and that the feds’ efforts to spur a recovery – along with strong demand from Asia and the emerging markets – will lead to higher levels of inflation, destroying the dollar and bonds. This is what Marc Faber expects. He urges listeners to avoid going too heavily into cash, since it might be the number one victim of inflation. Instead, you’ll do better in stocks and real estate, he says.
A third line of thinking is what Faber calls “hard core deflationism” – typified by Robert Prechter and Gary Shilling. They think the de-leveraging trend will be catastrophic – leading to outright deflation, taking the Dow down below 1,000, for example.
Then, there’s The Daily Reckoning line. You can call it “soft-core deflationism”:
1) There is no recovery; there won’t ever be a recovery
2) The de-leveraging period will be longer and harder than people expect…leading to spells of deflation and double…triple…dipping
3) The feds will fight it with every weapon available
4) However, they will not push the ‘nuclear button’ – wanton, reckless money printing – until the bond market cracks
5) It will not crack soon, because the feds are incompetent; they will not succeed in getting higher rates of inflation; at least, not soon.
6) The dollar will remain strong. Bonds will go up…for now…
7) The Dow will fall…but not below 1,000…probably not below 5,000
http://theautomaticearth.blogspot.com/2010/07/july-22-2010-big-picture-a...
July 22 2010: The Big Picture According to TAE - An Updated Primer Guide When bubbles reach their maximum extent, they invariably deflate. Our explanation as to why this is inevitable can be found in Inflation Deflated, followed by, The Unbearable Mightiness of Deflation, a rebuttal to inflationist Gary North. An Interview with Stoneleigh provides a more recent and more comprehensive piece on deflation and its consequences.Not stagflation yet. I'm in the "the economy is bumping along the bottom crowd"--so I'm down with "stag." Not seeing the "flation."