Ever since last summer Zero Hedge has been pounding the “Fed pivot” fantasy as if it is going to happen — almost as if they want to entice the stupid stock market to keep chasing the fantasy. When it became obvious the Fed was steaming ahead with its inflation battle as the Fed kept insisting it would do, ZH backed off a little. Now they are back at it and are giving falling inflation as one of the key reasons the Fed will pivot:
The labor market, the yield curve, inflation and a stock-market selloff are poised to force the Federal Reserve into a rate cut sooner than the market is currently pricing.
Zero Hedge via OilPrice.com
First, I’d say, “Who cares what the market is currently pricing? The market has been wrong about the Fed pivot as long as ZH has. ZH also said last summer inflation was likely to falter because stores had overstocked in attempting to make up for Covid shortages so they had to sell off that overstock at huge discounts that would create a whiplash effect on prices. While stores did have overstock to sell off and did cut prices, we certainly didn’t see it take any noticeable bite out of inflation. I think they are as wrong about inflation now as they were back then.
I am saying neither the significant drop in inflation nor the Fed pivot are likely to happen in June. Of course — full disclosure — challenging Zero Hedge’s view on a number of things has now gotten me banned, of all things, by the very publisher that complained when Twitter banned them for challenging the established Twitter view of the world.
If you’re going to counter their views, I guess you, at least, have to be nice about it, which I admit I was not, even though I have found a lot of value in their publication. That countercurrent to the mainstream is why I also felt betrayed by their switch to such complete mainstream nonsense at the time about inflation fading due to the whiplash effect (akin to the earlier “transitory” talk) and the Fed-pivot fantasy that kept driving market mania and that ZH kept pushing.
I don’t like seeing them go back to those arguments now any better than I did then, so here I am speaking out on the matter here since I can’t there. You see, ZH likes to claim they are the Fight Club, and ZH isn’t usually all that nice about its criticism either, so I thought they could take the direct battle. Tyler Durden, not withstanding, they apparently didn’t like taking the heat. (So, I’ll give them the same grief about their banning that they gave Twitter, which, at least, eventually reversed its ban, but I’ll also still quote from the good articles they have and post those in The Daily Doom from time to time because I won’t be small-minded about the ban, but I will continue to challenge these two views that I have challenged all along — and rightly so as it turned out.)
I disagreed strongly with both their whiplash view on inflation and their pivot view all of last year because it was frustrating to hear an alternative publication I have gotten a lot out of over the years go so fully along with the diminishing inflation fantasy and the pivot mania of the mainstream financial world. I figured they were the “Fight Club,” so they could take the heat in the ring. They, of all parties, should have known the Fed’s inflation battle was far from over and, so the market’s fantasy of a Fed pivot was purely delusional.
Why the family disagreement?
Here is why neither of those is likely to happen this June anymore than they did last year, though the days when the Fed will stop raising rates are near now that they’re breaking banks; and, if they totally wipe out the economy by June with more than just the start of a recession (and that is possible), then they could go beyond stopping their rate increases and back to cutting rates. I’ve always said they won’t pivot until they break things, and they’ve certainly done that; but inflation isn’t going to let the Fed off that easily for reasons I’ll give, and the Fed isn’t likely to let it off either.
So, as one who doesn’t stop the good fight just because someone kicked him out of their club, I’ll fight in a ring of my own by saying inflation, at least, will not be so easily won. ZH lists the following reasons for inflation to start melting away by June:
In markets, it pays to remember that things take longer to happen than you think they will, and then they happen much faster than you thought they ever could. It was only two weeks ago that the market was expecting up to another four rate hikes. Now it’s effectively pricing the end of the rate-hike cycle, and the first cut by the end of the third quarter.
Fair enough on how suddenly things can change; but, again, who cares about how quickly the market’s predictions in interest hikes and cuts swung around. The market was wrong all of last year. It’s flooded with lunatics who believe what they want to believe because of testosterone-driven sentiment. So, it is getting whipsawed by reality broadsiding its delusions.
But there are several reasons why there could be another abrupt alteration in the state-of-play, with the first cut coming as early as June:
- Signs of deterioration in the job market that gain momentum very quickly;
- A recession that now looks unavoidable and could begin as early as June;
- Inflation that is long past its cycle peak; and
- A rapid fall in velocity leading to a stock-market selloff
The job market, as I’ve pointed out many times, has been tricking the Fed for months. It is not strong. It is broken. (See: “Everyone Sings the “Strong Labor Market” Tune in Unison as the Band Plays on, and They’re All DEAD Wrong!” and “Powell’s Peril Lies in Lanquishing Labor Market.”) The Fed doesn’t see this. So many millions of workers have died or are chronically ill due to Covid or Covid vaccines that it has created a shortage of labor supply, which is why, even as layoffs are happening, unemployment has not been rising.
Still, the numbers will, at some point, rapidly turn because, at some point, layoffs will have eaten up all the unfilled jobs to where there will be few options for those who are laid to turn to for work. Could that happen by June? Sure. Now that banks are going bust, we could easily see more major breakage by June that results in much deeper layoffs. Then the Fed will be freed by the late arrival on the scene of its second mandate — the mandate that says it must maintain a strong labor market. It will, in other words, finally have a mandate in play that gives it cause to go in another direction than inflation legally forces upon it at present.
As for ZH’s other key factors: A recession for half of last year didn’t change the Fed’s course in the slightest. The Fed ignored falling GDP. It has always known and said a recession is possible. It just hopes for a soft one. And a stock-market selloff certainly didn’t stop them all of last year. The Fed doesn’t care about the stock market either. It did when it was trying to create the “wealth effect,” but that need for the market is out the window. The Fed, in fact, is trying to reverse the “wealth effect” to take inflation down. (You can be sure the Fed members all sold their stocks in time to protect themselves.)
However, it will not be freed by its inflation mandate so easily because of the trap it has laid in for itself. The Fed hates soaring inflation worse than it hates slack in the labor market because inflation cuts straight to the heart of its one cherished product — money — while keeping the job market strong was a Johnny-come-lately add-on to its mandates. So, the Fed will be loathe to turn back to rate cuts with inflation still hot just because labor turns unless the breakage in the economy is severe by June, which it could be.
The Fed will have a rough time making the decision to go from a mere stop in rate hikes to a full return to rate cuts because that will really pump inflation hard and could cause hyperinflation if the job cuts are severe enough to reduce production even more and the new money is directed stimulus-style by the Biden government (a reasonable likelihood from the Welfare-focused Democrats) to the proletariat who are newly unemployed so they continue to have cash in a country with even lower production than present.
This was an ironic scenario I warned about as a possibility in my predictions near the start of the year, which I think no one else has picked up on. (See: “2023 Prediction: The Fed’s Inflation Fight is FAR from over!“) It’s not my base case for what will happen, just a possibility, so I don’t fault ZH for not seeing the possibility when no one else does, and even I am far from certain it will happen.
However, I laid it out as a reasonable possibility that no one is expecting: Inflation could actually scream higher if the Fed keeps the pinch on to the point of creating so much breakage that it causes significant production decreases in a nation already riddled with shortages and the Fed then does pivot to cutting rates and pumps money with the government’s help into the hands of the unemployed as it did during Covid. That is the kind of thing that got us this inflation in the first place.
The Fed could easily over-tighten that much since the main gauge it is looking at to know when to stop is the broken unemployment gauge. And the fact that creating money in that environment of even worse shortages could create hyperinflation — the Fed’s worst enemy — doesn’t mean they will see that possibility and so not do it. They have proven amazingly resilient at not seeing the problems they are going to cause.
So, ZH could be right: the Fed could flip as soon as unemployment turns up. If they do, however, they finally have a good chance of creating hyperinflation. Will they see that? I think they would see would, at least as soon as inflation started to rise, and would flip right back if it happened because hyperinflation is, by far, the Fed’s worst nightmare. My base case here, though is that those wild gyrations are probably not as likely as the continuance of the Fed’s present inflation battle; so, a turn moderately higher in inflation was my base case in my prediction for inflation this year (with hyperinflation just a possibility to watch for), and here is the evidence stacking up for that, as exemplified in today’s Daily Doom:
Kroger Becomes King of Konglomeration
One of the United States’ largest grocers, Kroger, is shutting down potentially 400 grocery stores. Why would it do that? Inflation in labor and other costs is pressuring retailers to streamline while higher prices are starting to cut into customer demand. Over time that declining demand will tend to self-correct inflation as will layoffs. However, right now inflation is still the driver, leading to those layoffs; but there is much more to it than that.
The following dramatic video explains it, but I’ll lay out the main points for you as well in case you don’t have time for the interesting video:
While loss of stores adds to unemployment, which tends in to erode inflation, it can also make goods more difficult for consumers to find and reduce competition, thereby pressuring prices upward. The change in prices affects many more in each community than the loss of store jobs, and the rise in prices is likely the main goal here, as the video lays out. In fact, that is the goal!
You see, the closures come at the same time Kroger is merging with Albertsons, and may be related to that merger, which reduces competition, especially since Albertsons already owns Safeway and Haggens and several other brands, and Kroger already owns QFC and Fred Meyer and some other brands. America is all about such conglomeration all the time, and that level of conglomeration is NOT good for consumers. It is not intended to be good for consumers. It is good only for retailers to stack prices higher as stores that once competed, essentially collude on price, but by becoming the same store so you can’t call it “price fixing,” which is against the law.
“There is no reason to allow two of the largest food chains in America to merge — especially with food prices already soaring,” says Sarah Miller, executive director of the American Economic Liberties Project.
“With 60% of grocery sales concentrated among just five national chains, a Kroger-Albertsons deal would squeeze consumers already struggling to afford food, crush workers fighting for fair wages, and destroy independent community stores…. This merger is a cut-and-dry case of monopoly power….”
(From the Kroger video above)
America loves its massive conglomerations! At least, the big retailers’ pocket politicians do. So, you can be certain Republicans (and probably a few store-bought Democrats) will push to allow this industrial conglomeration because it is very good for the mega-wealthy stock investors, helping them keep a grip on rising labor costs while pushing up prices at the same time in order to capitalize on the inflation expectations that are now fully built into the US economy.
Remember the talk early in this inflation cycle about “inflation expectations” or “inflation bias” being the kind of mindset that, should it form, could make inflation extremely sticky? This is that. Workers expect inflation, so they demand more money. Employers seek ways to shut down labor’s power to do that, such as conglomeration, which allows them to actually lay off more workers, pressing workers to shut up, lest they be the first to be laid off or because they doubt they’ll find a job elsewhere.
The employers then use their conglomeration to raise their prices by reducing price competition in the marketplace, even if they have managed to shut down worker wage increases. The expectations for inflation now built into the economy give them more latitude with consumers to raise prices because consumers just expect that inflation is now coming everywhere and because, with competition being shut down, consumers have fewer options to turn to in order to avoid inflation.
Too much money chasing too few goods is the recipe for consumer price inflation. For years we had only too much money in the economy, but that surplus of money circulated almost exclusively in financial circles. Since monetary expansion only causes inflation where the money circulates, that expansion only inflated asset prices. We had plenty of goods, and the money was not going out to consumers anyway, so the Fed’s extreme money printing did not cause consumer price inflation.
That dynamic changed, as I started warning in early 2020, when Covid lockdowns massively shut down the production of goods and services while the Fed and the federal government teamed up to pump a flood of new money into consumer hands through business payroll grants and loans, expanded unemployment benefits, and stimulus checks. With a lot fewer people working (by government mandate) and, therefore, lower production of goods and services, while more money was circulating to most of those same people, the match was struck for the fire of scorching consumer price inflation. Once lit, it’s hard to put out because of those expectations that become built in. Those are now fully in place. I think ZH is underestimating the power of that inferno.
Now, Kroger and Albertsons may never be allowed to go through with this merger, and a single merger is not enough to make general consumer inflation even stickier for an entire nation since there are many industries and products outside the grocery world. However, I am giving this as an example of how the turn toward really sticky inflation is happening, which means the Fed is not likely to find inflation turning downward as the excuse it needs to start pumping jobs back up in June with new rate cuts when its current rates are lower than current inflation.
In short, the idea ZH states that inflation is well past is cycle duration is far from accurate. Inflation is just entering the stickiest part of the vicious vortex where it drives the efforts of labor to get higher labor prices and that drives the efforts of businesses to conglomerate as a way of fighting those rising costs and of setting their own higher product prices. It becomes that self-perpetuating inflation tornado that I describe early on. Like a major fire, it creates its own weather.
Plenty of other highly sticky factors still fuel the vortex
As the sticky factors of labor prices and business efforts to make room for wage hikes or to fight them with conglomeration stack up, the shortages from the Covid lockdown period still continue — not as much as they once did, of course, but still trickling through because broken supply lines have not been fully repaired.
Major manufacturers in particular are complaining about it being hard to get steel and aluminum and microchips (still). The global drought last year continues in some areas of the world as well, reducing, not just food, but the production of aluminum in China because aluminum smelting is highly dependent on cheap hydropower. (Today’s Daily Doom reported, “Power Shortages Due to Drought Disrupt Chinese Aluminum Production.”)
The Ukraine war is also continuing to where the demand for more weapons is starting to compete with demand for the materials in consumer products because weapon stock is down, forcing new production in order to get more. (Another article in The Daily Doom was “Ongoing Supply Shortages Threaten U.S. Infrastructure and War Efforts.”)
The shortages don’t just threaten weapon production as consumer items compete for limited weapon-making materials and chipmaking capacity. The dynamic works the other way around as well. The weapon production competes against consumer products. So, you pay for war through your taxes that buy the weapons, but then pay again through higher prices in many of the things you buy. In the words, the war is creating its own general price-driving forces. If you want an example of how much war competes with consumer products, think back to all the rations you may have read about (or experienced) during WWII.
On top of that, the sanctions of war are still limiting some material shipments, too, exacerbating the problem; and those certainly aren’t going away soon, even if the war ended by June, which is highly unlikely.
So, the present inflation is a many-fanged beast that is not likely to go down as easily as Zero Hedge’s article on Oilprice.com claims. The Fed cannot fight those forces, but it cannot just fold on inflation in the face of those forces either. So, it is more likely to stop its rate hikes and hold, hoping that it has done enough, hoping these forces cut it a break; but inflation is going to keep burning up the Fed’s backside. And, as I say, inflation could even go astronomically higher if the economy stalls enough to cut production more and make these shortages worse and especially if the Fed does cut rates for what would be a short time, given the hyper-inflationary result.
On top of all of that, to the extent that Biden’s ill-advised, ill-timed infrastructure projects get started in a pool of scarce labor and already short supplies of materials and products, those projects are certain to jack prices up even more by adding high demand in the face of growing scarcity and taking labor away from producing basic materials to building highways and bridges and using materials.
My hot conclusion
Whether inflation takes even a temporary drop depends on the timing of all those other things; but it is far from being near the end of its cycle and maybe not even past the peak of its cycle.
The Fed will probably stop raising rates by June, but it is going to be very reluctant to pivot to cutting rates in the face of inflation that will likely return to climbing, rather than close out its cycle. The Fed will be reluctant to jump so immediately back to cutting — even if it does see inflation fall and even if it does not foresee the possible pathway to hyperinflation — because it can certainly already see there are plenty of forces that make any drop in inflation likely to be more transitory than inflation ever was if the Fed gives up the fight too soon.
I don’t think the decline of the economy BACK into recession by June, which I agree is likely, is going to cut the Fed much inflation slack any more than the bullwhip or whiplash effect did. I have always said this is more likely to be a stagflationary recession, which is what we actually saw through the first half of last year; and, because those are odd recessions, that is why the powers that be had a hard time believing — in the face of labor shortages, rising labor costs, and all the hot consumer inflation — that we were in a recession, even though GDP clearly said we were.
The possibility that the Fed will have burned down the entire world as early as June, however, is always open, though that schedule seems a little ambitious for the collapse to reach such a point that the Fed gives up its inflation fight. If total economic collapse does happen by then, however, all bets are off because, once the Fed has burned the house down entirely by fighting the inflation it has already created, plenty more liquidity is coming; but it will be about as helpful to markets as this:
Speaking of a good rinse-down, let’s get back to why we keep doing these rinse-and-repeat, boom-bust economic cycles:
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