IN-DEPTH: TRANSCRIPTION - LONGWave - 07-10-24 - JULY – An Inflationary Depression

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SLIDE 2

Thank you for joining me. I'm Gord Long.

A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.

Always consult a professional financial advisor before making any investment decisions.

SLIDE 3 – COVER

There is a strong possibility that official US reporting of both Inflation and Real Economic Growth has been hijacked!  If that is even remotely a possibility we could unwittingly be in the midst of an Inflationary Recession or worse, an Inflationary Depression that could take years to recover from.

Many of what we actually observe on a daily basis supports this but nothing from the government nor do mainstream media even suggest anything other than the economy is running like a well managed machine.

SLIDE 4 – AGENDA

Unfortunately, what you read is riddled full of political spin, misinformation and distortions.

In this session I want to address this possibility head on. As such I want to address the subjects outlined here.

SLIDE 5

So, what is AN INFLATIONARY DEPRESSION?

  • In a Sound Money Regime we can experience Depressions marked by:
  1. High Unemployment,
  2. Wide spread Bankruptcies,
  3. Falling consumer Prices
  4. Devaluing Asset Prices
  5. Deleveraging as Collateral Values Fall
  • In a Fiat Currency Regime we experience Inflationary Depressions differently:
  1. Lost Purchasing Power Devalues f Asset Prices - ie Real Estate falls in Price due to falling Real Disposable Income, Falling Savings and Rising Costs (Taxes, Maintenance)
  2. Rising Import costs often due to misguided Tariffs,
  3. Falling Wealth through rising Housing Prices  and falling Affordability,
  4. The standard impacts of Depression like Unemployment, Bankruptcies, Falling Prices, Devaluing Asset Prices but often masked by artificial interest rates, over-valued currencies, mispricing of risk and lack of price discovery due to wide spread use of derivatives.
  5. .. and of course Financial Deleveraging as Collateral Values Fall

SLIDE 6

  • Additionally we have "Inflationary Pressures effectively Regulated into Law" such as:
  1. Cost of Climate Change Programs and Initiatives
  2. Cost of Sustainability & Green Programs and Initiatives
  • Which can be expected to lead to an unfolding Inflationary Recession or Depressionary Process:
    1. Stagnation
    2. Stagflation
    3. Debt Crisis

SLIDE 7

Today we are supposed to trust and rely on data that few professionals anymore believe is real.  We increasingly have FALSE, MISLEADING & POLITICALLY SPUN ECONOMIC REPORTING

SLIDE 8

  • Consider that most economic models used through the 1970s, and still today, postulate that there is a forever tradeoff between output (with employment as a proxy) and inflation, such that when one is up, the other is down (Phillips Curve).
  • Now we face a situation where the jobs data are profoundly affected by bad surveys and labor dropouts. Output data is distorted by history-making levels of government spending and debt, and no one is even trying anymore to provide a realistic accounting of inflation.

I have been pounding on this subject for 2 years now in my weekly newsletters.

So here is how the political unbiased Epoch News' lead Economist Jeffrey Tucker and Peter St Onge (also a professional economist) and Fellow at the Mises Institute, recently frustratingly outlined the issue:

SLIDE 9

INFLATION

The Bureau of Labor Statistics simply cannot keep up, partially because the Consumer Price Index does not calculate the following: interest on anything, taxes, housing, health insurance (accurately), homeowners insurance, car insurance, government services like public schools, shrinkflation, quality declines, substitutions due to price, or additional service fees. 

That’s a major part of what has gone up, which is why data on particular industries shows a huge gap (groceries up 35% over four years), and why ShadowStats estimates inflation in double digits two years running, having peaked at 17%. Just adding in interest, a paper from NBER estimates, takes 2023 inflation to 19%.

Various studies have shown that since 2019 fast food prices — a gold standard in financial markets for measuring true inflation — have outpaced official CPI by between 25% and 50%.

SLIDE 10

2- RETAIL SALES

Getting the inflation data wrong is only the start of the problem. We are lucky if any government data even adjusts for the wrong numbers. Consider retail sales as just one example. Let’s say you bought a hamburger last year for $10 and you bought one this week for $15. Would you say that your retail spending is up 50%? No, you just spent more on the same thing. Well, guess what? All retail sales are calculated this way. 

 

3- FACTORY ORDERS

It’s the same with factory orders. You have to do the inflation adjustments yourself. Even using conventional data, which are wildly underestimated, wipes out all gains of the last several years. EJ Antoni is one of the few economists actually keeping up with this stuff, and he produces the following two charts. The first shown here.

As EJ writes:

“This is factory orders before and after adjusting for inflation: what looks like a 21.1% increase from Jan ’21 to Mar ’24 is only a 1.8% increase – the rest is just higher prices, not more physical stuff; worse yet, real orders are down 6.9% since their high water mark in June ’22.”

SLIDE 11

Imagine the same charts but with more realistic adjustments. Are you getting the picture? The mainstream data being dished out daily by the business press is fake. And imagine the same charts above redone with inflation in the double digits as it should be. We’ve got a serious problem!!

SLIDE 12

EMPLOYMENT REPORTING DATA

The problems with the employment data are getting to be more well-known. Essentially, the establishment data that is normally reported is double-counting or just plain inaccurate, and there is a huge divergence with the other method of counting jobs via household surveys. EJ again offers this look (Chart Right). 

In addition, neither worker/population ratios nor the labor participation rate are back to pre-lockdown levels. 

SLIDE 13

GROSS DOMESTIC PRODUCT (GDP)

Now consider GDP - In the old formula hammered out in the 1930s, government spending adds to the GDP while cuts subtract from it, just as exports add and imports subtract. Why? It’s an old theory rooted in a kind of Keynesian/mercantilism that no one seems ever to change. But the bias is profound these days with explosive government spending. 

To calculate whether and to what extent we are in recession, we look not at nominal GDP but real GDP; that is, adjusted for inflation. Two down quarters are considered recessionary. What if we adjust pathetic and seriously mis-estimated output numbers by a realistic understanding of inflation over the last few years? 

We don’t have the numbers, but a back-of-the-envelope suggests that we never left the recession of March 2020 and that everything has been getting gradually worse. 

SLIDE 14

That appears to fit with every single consumer sentiment survey. It seems likely that people themselves are better observers of reality than government data collectors and statisticians. 

SLIDE 15

So far, we’ve dealt briefly with inflation, output, sales and find that none of the official data is reliable. One mistake bleeds to others, such as adjusting output for inflation or adjusting sales for increased prices. The jobs data is particularly problematic because of the problem of double-counting. 

What to know about household finance? The flipping of savings rates and credit card debt tell the story. 

When you add it all up, you get a strange sense that nothing we are being told is real. According to official data, the dollar has lost about 23 cents in purchasing power over the last four years. Absolutely no one believes this. Depending on what you actually spend money on, the real answer is closer to 35 cents or 50 cents or even 75 cents…or more. We do not know what we cannot know. 

SLIDE 16

We are left to speculate. And this problem is combined with the reality that this is not just a US problem. The increase in inflation and the decline in output is truly global. We might call this an inflationary recession or high inflationary depression, all over the world.

SLIDE 17

Let’s talk about the …

FLAWED GROWTH IN A FIAT CURRENCY REGIME

The question we must answer is whether an Inflationary Recession or an even worse, an Inflationary Depression a real possibility going forward?

Let's start by considering the difference.

SLIDE 18

  • A Recession is thought of as Cyclical and a few Quarters of Negative Economic Growth.
  • A Depression is thought of as Secular and a few years of Negative Economic Growth.

Is there a possibility we might already be there? Like Inflation which we discussed in the latest UnderTheLens video (The Inflationary / Stagflationary Black Hole) we showed the inflationary element is well entrenched when sound measures of inflation are used. Bit what about Economic Growth?

SLIDE 19

There are two major problems with the current reporting of Economic Growth:

  1. The inflation "Deflator" used to report Real GDP,
  2. The GDP Formula itself in an era of Fiat Currencies, Creditism and exploding national debt where even the interest on the debt requires lending to be paid.

SLIDE 20

1- THE DEFLATOR PROBLEM - A Flawed PCE

The Fed's preferred measure of inflation, the Personal Consumption Expenditure (PCE) is used as the deflator in adjusting nominal GDP to the Real GDP. The problem is the PCE under-estimates Inflation significantly.

The PCE doesn't include key service which are presently major inflationary expenses of most American households. These Include:

  1. House Insurance
  2. Car Insurance
  3. Child Care

SLIDE 21

1- HOUSE INSURANCE

  • The inflation in house insurance premiums (mortgage insurance) is making it unaffordable for many people, with reports of doubling and tripling prices.
  • When you have a mortgage, you must carry insurance as a matter of contract, same as with car insurance.
  • If you can’t afford the insurance, you must sell to a cash buyer who doesn’t have to have it.
  • The culprit here is really the depreciation of the currency in terms of goods and services, plus the rising costs of all repairs of anything and everything.
  • Insurance premiums are upstream of all the costs associated with rebuilding, repair, cleanup, reconstruction, and all the materials associated with that. The companies aren’t being greedy; they are simply responding to the metrics reported by their own actuaries. They ask the question “What is the risk that this house could go up in flames or otherwise face weather-related damage relative to the expense associated with fixing it after?”
  • They are coming up with crazy figures on the cost side of some disaster, which is due to worker shortages, skills deprecation, and inflation of all materials.
  • In addition, with the increase in housing prices, replacement costs rise in tandem, so, of course, insurance prices go up, too.
  • In other words, the insurance premiums are merely reporting on the metrics downstream from events against which they are insuring. The numbers are shocking because all official data is massively underreporting inflation.
  • Insurance premiums are merely reflecting the inflationary reality under the surface of the media reports.

SLIDE 22

2- CAR INSURANCE

  • Something similar is happening to car insurance.
  • Car Insurance has surged anywhere from 15-25%.
  • Many cash strapped owners and fixed income seniors have been forced to increase deductibles to handle the increased rates.
  • It is even more severe for those owning Electric Vehicles (EVs) which are hugely expensive to repair. It’s the same with hybrids.
  • The entire market for car repairs faced a blow with lockdowns, from which it hasn’t recovered. Supply chains became a snarled-up mess with lots of bankruptcies and disruptions, and the labor market for repair experienced an exodus of workers who moved on to other industries or simply left town.

SLIDE 23

3- CHILD CARE

  • According to Bank of America internal data, the average childcare payment per household has risen over 30% since 2019.
  • The National Database of Childcare Prices, which reports child care costs in 2,360 U.S. counties, shows that child care expenses are untenable for families throughout the country and highlights the urgent need for greater federal investments, according to the U.S. Department of Labor.
  • A brief drawing of available data across 47 states show child care prices for a single child ranged from $4,810 a year for school-age home-based care in small counties to $15,417 for infant center-based care in very large counties.
  • When adjusted for inflation, this equals between $5,357 and $17,171 in 2022 dollars. These price ranges were equivalent to between 8% and 19.3% of median family income per child in paid care.

SLIDE 24

  • The Economic Policy Instituteranked the top 10 states or state equivalents with the highest child care expenses for preschool, infant care, and day care:
    • Washington, D.C. ($24,243)
    • Massachusetts ($20,913)
    • California ($16,945)
    • Minnesota ($16,087)
    • Connecticut ($15,501)
    • New York ($15,394)
    • Maryland ($15,335)
    • Colorado ($15,325)
    • Washington ($14,554)
    • Virginia ($14,063)
    • Given the rising cost of child care, many parents are looking for ways to make ends meet without leaving the workforce.

SLIDE 25

The average weekly cost of child care per child in the U.S. in 2023 is shown here.

  • For parents seeking an after-school babysitter, the weekly cost for one child is $292, up from $275 in 2022.
  • For two children, parents would need to pay $305 a week on average, compared with $289 per week the previous year.

SLIDE 26

When just MANDATED mortgage and car insurance are added to the PCE we immediately see that the US has had

No Positive Growth in the last 3 Years!

SLIDE 27

Let’s shift slightly and talk about why some of what is going on regarding purchasing power and fiat currency debasement is not being fully recognized.

The 2008 Financial Crisis was launched as part of the solution to the crisis. As the market bottom was put in place with the removal of “Mark-to-Market” accounting for bank Derivatives it was quickly followed with the never seen before use of “Quantitative Easing”. What was not fully appreciated was it was accompanied with Fed Chairman Ben Bernanke’s “Enrich-The-Neighbor” Doctrine.

In economics, a beggar-thy-neighbor policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries. The term comes from the policy's impact, as it makes a "beggar" out of neighboring countries. It is about the protection of the domestic economy by reducing imports and increasing exports.

That is usually achieved by encouraging consumption of domestic goods over imports using protectionist policies. Those policies are considered to come from two sets of policies:

SLIDE 28

  • TRADE POLICIES:A focus on IMPORTS through TARIFFS, QUOTAS or SANCTIONS, thereby making imported goods more expensive and less competitive with domestic offerings.
  • CURRENCY POLICIES: A focus on EXPORTS through CURRENCY DEVALUATION, thereby making exported goods cheaper and more competitive versus other countries' exports.

Joan Robinson, a distinguished Cambridge University economist and disciple of John Maynard Keynes, came up with the phrase "beggar-thy-neighbor" to describe these restrictive Trade and Currency practices, symbolized by the Hawley-Smoot tariff approved by Congress in 1930. That notorious measure raised tariffs on thousands of goods. The Mercantile success of Japan, China and the Asian Tigers can be argued that it was focused on Currency manipulation.

  • Beggar-thy-neighbor policies came about, originally, as a policy solution to domestic depression and high unemployment rates. The goal was to increase the demand for a nation's exports, while reducing reliance on imports.
  • A Currency Waris a prime example of beggar-thy-neighbor in action, since it amounts to a nation attempting to gain an economic advantage without consideration for the ill effects it may have on other countries. Also known as competitive devaluation, this is a specific pattern of tit-for-tat policies, in which one nation matches an abrupt national currency devaluation with another devaluation.

SLIDE 29

ENRICH-THY-NEIGHBOR

Federal Reserve Chairman Ben Bernanke argued with the introduction of Quantitative Easing (QE), that a supporting policy of Enrich-Thy-Neighbor would allow for a strong US Dollar and the avoidance of Tariffs thereby fostering international trade. The secret was a managed, coordinated, rotating weakening of G7 Fiat Currencies, which removed any currency advantage but allowed cheaper interest rates through QE to increase trade for all yet not be as visibly inflationary and economically destabilizing.

The policy worked extremely well with the critical assistance of a Bank of International Settlements (BIS) policing ~$700 TRILLION OTC Currency and Interest Swaps market (only reported and visible to the BIS). The G7 central banker met monthly / quarterly in Basel, Switzerland with the BIS to ensure ongoing coordination efforts worked.

SLIDE 30

REDUCED PURCHASING POWER IS INFLATION

This approach was highly successful during the era of QE in the area of Currency Exchanges. It's Achilles Heel is the difference between Purchasing Power (Domestic), Purchasing Power Parity (PPP) (International) and Currency Exchange. Mistakenly many think of all three measures as being the same. They are not and in fact are increasingly diverging.

  • Purchasing Power (Domestic): The actual value of the currency after being reduced by inflation.
  • Purchasing Power Parity (PPP) (International): The difference in the purchase of the exact same goods or services between different countries.
  • Currency Exchange: The value of two currencies as traded (exchanged) against each other

SLIDE 31

There has been an Increasing focus on Purchasing Power Parity v (Trade Weighted) Currency Exchange, but little media focus on shrinking domestic purchasing power of the currency. People see CPI and PCE as Inflation. They are measures of inflation.

INFLATION IS THE LOSS OF PURCHASING POWER.

To understand this is to better understand how the Time Usage of Money works in a Fiat Currency System.

SLIDE 32

EVOLUTION OF THE FIAT CURRENCY SYSTEM

Banks played a central role in the creation and adoption of the shift from Sound Money (backed by Gold) to Fiat Currencies.

Bank mentality at the time of adoption of Fiat Currencies was focused on the Time Value of Money. The "Float" was a critical element of banking and the importance of the time value of the money within the float.

It was a logical step to adopt the sister of this or the Time Value of the Usage of Money for Government financing.

SLIDE 33

The first user of the money (the government) has a higher purchasing power than the downstream users (you and I) as part of the flow and Velocity of Money.

This also results in higher term premiums and equity risk premiums as shown in the chart here.

SLIDE 34

Fundamentally, increases in money supply set in motion an exchange of nothing for something.

This diverts real savings from wealth generators to non-wealth generators.

Consequently, this weakens the wealth-generation process and in turn the pace of economic activity. Now, when money enters goods markets, it means that we have more money per good, that is the price of goods has risen.

Hence, what we have here is the increase in goods prices and a weakening in economic growth. This is what stagflation is all about. The outcome of the monetary pumping is always stagflation. It is not always visible, though. As the pool of real savings comes under pressure, the phenomenon of stagflation becomes more visible.

SLIDE 35

If we are in an Inflationary Recession or Depression, the question becomes how do we invest in one?

The solution is:  THE INDIRECT EXCHANGE

SLIDE 36

  • Exchanging NOTHING for SOMETHING.
  • "Something" is not Consumption nor the purchasing of non-Durable Goods.
  • "Something" is an Appreciating Asset (Collateral Wealth).
  • "Something" has the attributes of:
    1. Scarcity
    2. Sustainable Demand - Shelter, Food, Water, Energy, Security (Retirement, Healthcare)
    3. Cash Flows positive
  • "Nothing" is Present Value of a Currency Expected to Lose Purchasing Power.
  • You must exchange that (worthless) paper claim for "Something".

SLIDE 37

EXAMPLES

Ty Andros and I laid out how this is down in 2013 using Warren Buffet s a prime example of someone using the Indirect Exchange Strategy in:

WHY BUFFET BUYS INSURANCE COMPANIES

Today, that same strategy can be seen by Blackstone in their accumulation of Rental Housing and Apartments.

WHY BLACKSTONE (& PRIVATE EQUITY) IS BUYING RENTAL HOUSING

SLIDE 38

We also recently showed in the June LONGWave video, “The Great Debt for Equity Swap” how Shadow Banks and Private Equity players are using the Indirect Exchange today to play a parabolic harvesting of the Magnificent Seven stocks.

SLIDE 39

So what can we conclude?

SLIDE 40 – BLACK HOLES

Because of false and misleading economic reporting along with the  propensity by politicians for policies of “Kick-The-Can-Down-The-Road” and / or to solve all problems by spending more money,  we find ourselves in a situation where we are now confronted with the harsh reality of being below the “Event Horizon” in an inescapable Black Hole.

The Black Hole might possibly be escapable if it wasn’t for the collapsing system that has built the modern economic miracle over the last 250 years – Capitalism.

SLIDE 41

As Fiscal Policy moves towards increasing levels of what I have always referred to as “Helicopter Money”, potentially flowing directly to consumers, Velocity of Money will begin to turn up … and with it a broader based impact on Price Inflation.

During the initial waves of Price Inflation during the 70’s the economy was fundamentally more capitalist. That is more money was saved and reinvested into productive assets (labeled here in the GDP formula as “I”). Again, this has been steadily changing with advancing sequential waves of Inflation and Deflation.

“I” generated money for Consumption “C”, while net exports were positive adding more money to the economy. This resulted in Consumers getting more for less and Standards of Living continuing to rise even with Price inflation.

SLIDE 42

The developed economies’ GDP formula was forced during the 2008 Financial Crisis and then further during Covid into a Regime Change of massive and unprecedented Monetary and Fiscal Deficit Spending for bailouts and economic stimulus.

Monies flowing towards bailing out and the subsidization of failing Zombie corporations, the destruction of small business unable to survive pandemic lockdowns and industries such as transportation and hospitality were completely crippled during Covid lockdowns.

With inflation having increased prices (such as food by over 18% since Covid), Consumers are getting less and less for more and more while standards of living have stagnated or falling as the result of policies and spending that are further increasing Inequality to levels not seen since the “Gilded Era”.

SLIDE 43

What this means is that government can be expected to become increasingly more dominant via debt financed spending.

Consumers most likely will increasingly witness receiving what the Government determines, awards or rations

Standards of Living will likely become increasingly “Universal”, except of course for Government Officials and the Crony Capitalists  from BigTech,  Big Pharma, MSM to the new Billionaire class.

If we are not extremely careful WWII Italy’s Mussolini’s marriage of Government and Corporations which he then labeled Fascism may become an eventuality for many countries including the US.

Many believe that is already occurring and use different labels when talking about the far –left or far-right!

This sort of economic philosophy never survives as it inevitably leads to Currency debasement, economic stagnation, stagflation and eventually Hyperinflation.

SLIDE 44

As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.

That day is still in the future so take advantage of the opportunities as they currently exist.

Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.

The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.

SLIDE 45

I would like take a moment as a reminder

DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.

As negative as these comments often are, there has seldom been a better time for investing.  However, it requires careful analysis and not following what have traditionally been the true and tried approaches.

Do your reading and make sure you have a knowledgeable and well informed financial advisor.

So until we talk again, may 2024 turn out to be an outstanding investment year for you and your family?

I sincerely thank you for listening!