Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 

MATA: FUNDAMENTALS

EARNINGS

 

WHAT EVERYONE HAS SERIOUSLY WRONG ABOUT INFLATION!

Let me start by saying that the only thing that was “Transitory” about Inflation was Phase I – soon to be followed by Phase II and Phase III! Subscribers will recall we spelled that out two years ago [Video] before Inflation even arrived and the Federal Reserve started its flawed narrative about it being “Transitory”!
 
The fact is the US is entering its third modern era of a multi-wave, protracted inflation era, once again sustained by Stagflation.
 
To us at MATASII.com the old adage has never been clearer: “those who don’t heed history are doomed to repeat it!”. Let us reiterate why we believe this.
 
=========
 
WHAT YOU NEED TO KNOW
 
  • INFLATION/DEFLATION COMES IN WAVES
    • Inflation is now occurring in parallel with Deflation and BOTH are Coming In Waves.
  • VIOLATED INFLATION BARRIER LEVELS
    • Today there are increasingly tighter barriers to containing Inflation that if violated have serious consequences.
  • A NEW “INFLATOR” REPLACES GLOBAL DEFLATOR
    • The 25 year Globalization & Supply Chain Deflator has shifted to an “Inflator”.
  • THE STAGFLATION KILLER
    • The US is entering the Third Modern Era of a Multi-Wave, Protracted Inflation Era once again driven by Stagflation.
 
=========
 
 
INFLATION PLUS DEFLATION
 
In 2020 we wrote extensively that Inflation would soon become a major problem. We felt Covid-19 and global lock-downs would be disruptive to Global Supply Chains which would lead to rising import cost. You would see we got it generally right if you were to review the October 2020 UnderTheLens video entitled “Inflation PLUS Deflation“.
 
We primarily argued that we would continue to have Inflation PLUS Deflation occurring in ever increasing concurrent waves, but in differing areas. We have most recently been experiencing Deflation in Asset values, while experiencing inflation in energy, food, services and almost any areas not financed, but paid directly from real disposable income.
 
Regarding Inflation, we believe we are now completing Phase I of an expected three phases to unfold over the course of the final Inflation Shock Wave during the next 4-6 years. We are now entering the initial Deflation Shock wave that will see an unfolding US Recession with layoffs and corporate cutbacks. Wage and Benefit cuts and an unprecedented reduced demand shock to global supply chains will soon follow as we feel the impact of a Global Recession. (See Chart below: “We are Here”).
 
 
 
 
 
 
UnderTheLens – 09-23-20 – OCTOBER – Inflation PLUS Deflation?
 
UnderTheLens - 09-23-20 - OCTOBER - Inflation PLUS Deflation?
 
 
Inflation, labeled in red, has continued to rise but has had differing impacts as developed economies become more credit and consumption driven versus savings and productive investment driven. 
 
 
Deflation, shown in blue, has more recently made increasingly stronger impacts due to the globalization of trade and labor arbitrage.
 
THE THREE INFLATION STAGES THAT STAGFLATION WILL DELIVER
 
We didn’t describe our expected three phases of Inflation in our 2020 discussion videos and papers, but instead just represented them as one large “Tsunami” Wave! Now however, we need more granularity as that massive wave is quickly approaching.
 
As I already mentioned we are completing Phase I of the Tsunami wave with CPI and PPI numbers now at 40 year highs and not seen since the 1970s. Y-o-Y comparison numbers will soon start to show improvement and “lame-stream” media attention can be expected to shift to mounting Deflationary pressures. However, Inflation has not even been close to effectively being addressed and in fact will be left to burn with increasing force that Monetary Policy will no longer be able to adequately handle.
 
This happened in the 1970s as shown in the highlighted box below and labeled with the three phases that were experienced then due to ineffective policy actions and only resolved in Phase III by unprecedented actions by then Fed Chairman Paul Volcker. Volcker’s bold actions could not be taken today because of levels of leverage, debt, zombie corporations and financial rehypothecation.
 
THE 70’S WASN’T THE FIRST TIME FOR UNCONTROLLED INFLATION!
 
We also experienced multi phases of growing Inflation as highlighted by the white box below. It rose out of the solutions to end the Great Depression, Roosevelt’s broadened scope of the role of central government fiscal spending and the cost of WWII. The advent of macro-prudential policies of Financial and Negative Real Rates solved that problem in the post world war era through to the early 1960s. The Negative Real Rates required to solve today’s problem are also no longer plausible.
 

 

 
INFLATION OVER 6.5% HISTORICALLY BECOMES A LONGER TERM PROBLEM!
 
As shown to the right (red bar), anytime we have experienced sustained inflation over 6.5%, it has resulted in multi-phased attempts at resolving inflation and getting ‘the genie back in the bottle”.
 
NOTE: The chart above going back even further into the 30s 40s and 50s shows the same 6.5% inflation threshold problem.
 
AN INSURMOUNTABLE PROBLEM
 
Our sense is that current thinking holds that the coming recession will bring inflation down to manageable levels. That thinking is false!
 
Prior episodes where inflation was above 6.5% were not solved by recessions. The only proven solution has been to take US Treasury Yields higher than or equal to the inflation rate. The chart below shows to have been the case in the 1970s and the gap (on the right) is not even close to being achieved.
 
 
THE NEW BARRIERS
 
THE TRAP: IT IS A MUCH LOWER RECESSION BARRIER TODAY
 
The problem today is we can no longer take Treasury Yield rates to levels above ~4% without steeping a recession into something even much worse!
 
Fed Funds Rates even close to a 4% level (see Orange Fed Funds Rate below) historically can be expected to cause something to break somewhere in the financial system which would trigger broad based unintended consequences and third party collateral damage.
 
 
 
CONCLUSION
 
GLOBAL STAGFLATION (Slow Growth with High Inflation) HAS SEVERE CONSEQUENCES
 
What is going in America is about a planned reduction in the US Standard of Living. This is a flawed attempt as part of the “Great Reset” to re-balance the global financial system. The simple truth is the US can no longer consume more than it produces to the point of consuming the world’s depleting and much needed financial resources.
 
WHAT WE WILL EXPERIENCE:
 
  1. Asset Devaluation (Chart Right)
  2. Household Net Worth as a % of Disposable Personal Income (Chart Below)
 
 
 
 
 
MATASII’S EXPECTED LONGER TERM S&P 500 OUTLOOK
 
 

FOLLOWING DETAILED ANALYSIS IS SUBSCRIBER CONTENT ONLY

Subscribe to view full post content with supporting live charts
SUBSCRIBE
 

FAIR USE NOTICE  This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a ‘fair use’ of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.  If you wish to use copyrighted material from this site for purposes of your own that go beyond ‘fair use’, you must obtain permission from the copyright owner.

NOTICE  Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. MATASII.com does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.