Why American Consumers are About to be Blindsided by a Deflationary Shockwave

by John Galt
November 2, 2018 23:55 ET

Last night in response to an article posted by Tyler Durden at ZeroHedge titled “Why American Consumers Are About To Be Blindsided By An Inflationary Shockwave” I posted a somewhat short, terse, and crude response:

The “money line” as I like to refer to it from the ZH posting was this:

While inflation still technically remains near the Fed’s 2% target, if you believe the CPI number, which as we have discussed previously woefully undercounts true inflation which is as much as three times higher than the Fed’s hedonically adjusted, politically motivated number, prices are set to move higher as a result of labor shortages, while headwinds for prices include the recent strength of the dollar, making imports cheaper. And then there are tariffs.

It’s obvious that higher prices will “work” alongside the Fed’s rate hikes to help dampen the United States economy further. Not only that, but higher prices could cause even more damage if the Fed sees raising rates as the main solution to inflation exceeding its expectations.

Diane Swonk, Grant Thornton’s chief economist, previewed what will happen next best: “We might see a pop of inflation in the first quarter.”

Once that happens in what is already a rising rate environment in which the President has made it clear he is solidly against any more Fed tightening, we wonder just what Powell’s next move will be when even higher prices force his bluff?

The problem? That dog left the kennel in 2010. When The Bernank and the Fed elected to pump trillions of dollars, not billions, into an insolvent system some degree of consumer inflation was doomed to impact the average citizen. However, the problem is that very little of the “new money” has reached Main Street, thus violating the premise of the Fed’s mandate and instead basically attach rubber ducky floaties around the Titanic to prevent it from sinking right away.

(insert hot chick on floaty device here)

And just like the politically derived revisions to every BEA and Fed data issuance in the past 20 years, the hot chick in the bikini on the rubber ducky provided a nice distraction but failed to provide an accurate portrayal of how bad this ship is sinking.

So why did I call Tyler’s posting bullshit?

Let us partake in two charts. The first one reflects the attempts to put a holy freaking duck under this nightmare:

M2 Money Stock has almost doubled. Gas is still well under $5 per gallon, milk on average under $3 per gallon, and everything else not based on quantifiable sold size but on per unit cost relatively in the same position as it was in 2006-2007. Gold reflects no panic via an inflationary spike, nor does silver, copper, zinc, etc. Industrial and precious metals actually signal a deflationary threat as does the cost of international shipping (no, I’m not going Baltic on you).

Despite almost doubling the monetary base, inflation has been muted which means the money has basically been shoveled into a furnace. Thus why I tend to agree with Gary Schilling and other economists that despite the interim spike in Treasury yields, we will see sub 2.50% yields long before we see 4 or 5% yields.

Why is this?

A chart of course:

Without bombarding my readers with T&A and charts, let’s sum this up:

M2 Monetary Velocity, aka, credit creation, is at the lowest point since records have been kept. Despite all of the efforts of a primitive and antiquated central bank structure, the desire to infuse and create inflation has failed. Just like 2006-2007, the over-inflation of asset prices will cause a deflationary crash and return to the norm. So while the American consumer might pay $3 for a 10.5 oz. can of baked beans which cost $0.75 for 16 oz. in 2006, their home will collapse by 30, 40, heck probably 60% in value; again. Hard assets which are tangible will survive fine, but those assets once considered “liquid” will become illiquid as the phrase “no bid” becomes fashionable again.

Hence prepare for a price acceleration in everything, albeit very, very brief, followed by another historic implosion which will hopefully finally purge the system of excesses gathered since the 1990’s.

The key question, a major political economic one, is will President Trump morph into Coolidge and wisely bail before the collapse, or act on his ego and become Hoover redux.

Time will soon tell.

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