Denial … Anger …

Not to be outdone by Tuesday’s CPI surprise, this morning brought an equally hot PPI release. But these days the market media zeitgeist is better understood through the models of drama and psychology than finance and economics. It wants, seeks, craves, inflation. But only so long as it’s asset prices doing the inflating. Once consumer prices inevitably join in, the public grows restless and policy threatens to derail the gravy train.

The Federal Reserve plays an integral role in this tragicomedy, alternately and at once hero and villain. It opened its latest act by donning its white shining armor and riding to the rescue in the wake of the deflationary crash of 2020. It wielded an epic inflation bazooka, defeating the deflation dragon in a matter of weeks. But instead of sheathing its weapons and declaring victory, it kept on shooting, pumping round after round of monetary bullets into deflation’s motionless corpse.

Financial media celebrated as the dollar plunged and asset prices soared. Then a funny thing happened. As 2021 wore on, consumer prices began to join the party.

The first reaction was denial. The belatedly recognized inflation was “transitory”, they said. The inflation bazooka continued to fire. Denial gave way to anger, depression and bargaining as first the bond market began to hike rates, and the Fed was finally forced to follow.

And … scene. Asset price inflation reversed in 2022. This led to declines in the rate of consumer price inflation in 2023. This in turn led to breathless anticipation that the policy bogeyman would wither. Unable to resist, the Fed capitulated, and adopted the Wall Street narrative as its own, reinforcing speculation it would soon return to its normal inflationary ways. The bond market cut rates, and another round of asset price inflation took flight, pumping another impulse into the consumer price inflation pipeline.

The first tentative signs of its emergence had already begun to appear at the second derivative level in 2023. The rate of consumer price disinflation began to slow. This second derivative message being unsupportive of its beloved easy money, Wall Street media kept its focus firmly on the first.

That was the first indication of emerging denial as well. But far from the last. On Tuesday the January 2024 CPI release showed inflation picking up at … ouch … the first derivative level. On Friday the PPI reinforced this message.

But media are digging in on denial, unprepared to move forward. The rate cut narrative has only grudgingly shifted its timeline even as the facts shifted in direction. Even with money supply having also resumed inflating anew, the price data are said to represent a “bump in the road” on an otherwise smooth glide path to a 2% utopia where asset prices can gallop ahead at 20% per annum rates while consumer prices creep at a quiescent, decimated pace.

But isn’t “bump in the road” just another way of saying “transitory”?

In which case history repeats but does not rhyme.

It doesn’t have to be inevitable. But for this story to have a happy ending, one more cathartic sequence of dismay, depression and dealing has to happen first.

No cycle ever ends with denial.

Asset prices must disinflate again for consumer prices to do likewise. For the analytical groundwork, see CPI – A Lagging Indicator Of Inflation.

It’s always easier to say what won’t happen than what will. What won’t happen is the S&P merrily continues on its way to 6000 while CPI, PPI, PCE etcetera soft land in 2% heaven. My best guess as to what will happen is stocks take another 10%-20% or so leg down this spring or fall or both, and only then does consumer price inflation yield.

Then rates fall, asset price inflation resumes, consumer price inflation follows suit … rinse … repeat …

The next shoe to drop? The shorter term is always the longer crap shoot, but the odds are markets take a dip over the next few days and weeks as the Federal Open Mouth Committee tosses meager droplets of cool water on the inflationary fires it so imprudently restoked with gallons of gasoline mere months earlier.

7 thoughts on “Denial … Anger …

  1. Finster says:

    Just saw this on Steve Blumenthal’s On My Radar. Apparently I’m not the only one complaining about financial media spin:

    We Are Being Played

    See the section “The Washington Pravda and the Wall Street Izvestia by Ben Hunt”.

    Hunt calls attention to the media’s Ministry Of Plenty spin on inflation statistics. This post picks up where it leaves off with the media’s relentless focus on speculation about future Fed policy.

    I maintain it’s a ploy to draw the despised “retail investor” into buying stocks at premium prices … “pssst … hurry up and buy now, ‘cause the Fed’s gonna cut rates (and then stocks will really take off!)”.

    Never mind that the Fed cut rates all the way through the last two major bear markets in 2000-2002 & 2007-2009, when stock prices were cut in half. Or that investors can just watch the bond market and get hard facts about what rates are actually doing (rising!).

    The bond market is not so easily played.

  2. Mega says:

    EVERYTHING is focus on the polls………….after 2024 the inflation will come on strong

    1. Finster says:

      The budget disaster almost assures it, no matter how the election turns out. Federal debt is near a runaway level and few candidates are even talking about it. So either interest rates soar or the dollar sinks. Or both.

  3. jk says:

    imho the fed will taper qt as needed to cap long rates. eventually they’ll return to qe. given that the rest of world is already in recession, the dollar will hold or even rise relative to other currencies. otoh of course it will lose purchasing power, perhaps at an ever faster rate.

  4. jk says:

    ps the goalposts will be moved on the [fake] inflation pce target. 3-4% will be deemed not so bad after all.

    1. Finster says:

      That would be very costly to a Fed that needs every shred of credibility it can get. A higher stated target would mean tighter actual policy to get the same rate of inflation. But by no means does it mean it wouldn’t happen. Cries from Wall Street inflatophiles are probably calculated to soften up the ground for just such cynical developments.

      Then once it’s 3%, what’s to stop it from going to 4% … 5% … 6% … ♾️ … ?

      There’s also probably some room left for arguments the CPI overstates inflation and for “fixing” this “defect”. This would provide a technocratic path to reducing outlays indexed to the CPI (SS, TIPS, etc) with a minimum of political sunlight.

  5. Finster says:

    January PCE was released this morning, touted as “in line” with market expectations. The absence of nasty upside surprises is in turn spun as bullish. Media are not so quick to point out however that this is for the same month as the earlier CPI and PPI releases, which did contain nasty surprises (for Wall Street) and which provided ample opportunity to adjust expectations for this PPI release.

    They apparently prefer to leave the subtle impression that the lack of nasty surprise in the PCE somehow cancels out rather than confirms the earlier CPI & PPI nasty surprises, leaving the path clear for early rate cuts and unbridled market gains.

    Watch the data; resist the media expectations gaslighting game.