Why Inflation Is Not Going To Give The Fed A Break

January 24, 2022

Forget bond pricing as a way of gauging what inflation is going to do. The Fed is still buying the lion’s share of the bond market. So, while bonds have begun pricing in inflation, they have a lot more to price in over the next couple of months as the Fed continues to relinquish control over the bond market, as I wrote about in “Stocks and Awe: The Federal Reserve Regime Change is Here!

My prediction that inflation will kill the stock market never relied on bond pricing as a measure of inflation expectations because it was so clear that bonds had no possibility of pricing in anything while the Fed was exercising covert yield-curve control; i.e., obvious yield-curve control while simply not calling it that … sort of like it was doing obvious QE at the end of 2019 while calling it “not QE.”

Because so many analysts and economists and even commenters on places like Zero Hedge still write as though they don’t understand this, I’ll say it again: When the Fed is buying more than 50% of all treasuries, it wholly owns and controls the treasury market. It IS the whale. BUT bonds will price all of this inflation in as quickly as the Fed steps out of the market, and that WILL will kill (and now IS killing) the stock market. This is “the big blind spot” I have been writing about now playing out as I expected.

The reason I am saying that again in this article is that it means the market’s demise is dependent upon inflation continuing to do the dirty work I said it would — of burning up the Fed’s backside so that it cannot retreat from its new financial tightening regime. If inflation backs off, the Fed can quickly reverse itself, losing face but possibly restoring market calm; however, if inflation stays hot, there is no way the Fed can easily back off as the Everything Bubble bursts, and this IS the bursting of the Everything Bubble now, spreading from bonds to stocks and real estate as the Fed relinquishes its death grip on bond pricing so that inflation starts pricing in.

So, I’m writing this article to demonstrate WHY inflation is not going to back off in time to ease its hot pressure on the Fed and, therefore, WILL kill the stock market. To show that, I go back to the kinds of measures by which I said inflation was going to become intense well before it was an established fact on the Consumer Price Index, well before the Fed admitted inflation was not transitory, and well before all the marketeers stopped parroting the Fed’s claim that inflation was transitory. I go back to that line of reasoning because it was dead-on about what actually proved to be true with inflation.

Too much money chasing too few goods

That the Fed has created too much money so that it now needs to reduce money supply (half the inflation equation) is already a done deal. It has to reduce money supply by taking back what it put in, which it cannot do without unwinding everything it accomplished (as we saw in 2018) and slow the flow of money (velocity) by raising the “price of money” — interest — but, as the article referenced above clearly lays out, the bond vigilantes are already starting to do that for the Fed so that, really, the Fed is just going to be running to catch up with its interest targets to where the market is already taking interest in order to preserve the illusion that the Fed has interest under control.

So, money supply is going to be tightening; but, if shortages of goods and services goes away, the inflation pressure on the Fed will start to ease off, too, because goods will be less scarce and won’t get bid up as much. Then the Fed won’t have to tighten money supply as much and can ease back into easing to calm markets. So, the focus now is on what is actually going to happen with the shortages of goods and services.

The supply chain chaos is not going away right off even if COVID ends today. The damage is already in, and it will take years to repair. As Jim Rickards explains,

Even if stores were fully staffed, there would still be shortages and delays due to everything from a shortage of truck drivers, late container cargo shipments from Asia, manufacturing delays due to lack of inputs, energy shortages and many other impediments. 

That’s the point. 

Commodity inputs are scarce, partly due to energy shortages at mines. Manufacturing is behind due to lack of commodity inputs. Deliveries are behind due to manufacturing delays. And finally, shelves are bare due to nondelivery of orders and a worker shortage. 

It’s all connected and it’s all collapsing at once. So don’t believe the happy talk about a “temporary” supply chain crisis….

Daily Reckoning

The China syndrome

China is in such a meltdown of its own and is such a critical player in the global economy that it gets a subheading of its own under the supply-chain/shortages category.

First off, we can clearly see how many of these product stoppages have happened due to factory and port closures in China. Last time we had a crisis, China’s growing economy helped pull the world out of it. Now China has had to revert to its own easing to try to keep its economy from completely crashing, BUT it is still locking down entire cities and ports. That problem will ease if COVID evaporates, but it would still take a few months to get things up to speed in China and to clear the backed-up ports, which at this point keep getting worse, AND we know COVID isn’t going away that quickly and easily anyway. That’s a best-case fantasy. But, even if it did, it would take a few months to get all factories up to speed, traffic moving and ports cleared. That won’t be in time to keep the Fed from killing markets.

For now, China is even going to kill its Olympic-Games hopes by locking things down so tightly that even some athletes might not be allowed to compete. China’s total lockdown policy — zero COVID tolerance — will continue to crush its economy for months to come. Maybe by summer COVID will be diminishing, but that still leaves a lot of NEW damage to come.

Beijing has emerged as the latest COVID hotspot after China’s health authorities scrambled to contain the spread of the omicron variant in Tianjin, a coastal city near Beijing, and weeks after they locked down Xi’an, a western Chinese city of 13MM that has been locked down since just before Christmas.

Zero Hedge

Containers are stacking up at the already backed-up Shenzhen port in China as congestion in the U.S. and Europe ripples back to Asia, delaying ships picking up goods from the manufacturing and technology hub.

Bloomberg via Yahoo!

For now, crews are confined to vessels, whether they have COVID or not. This leaves crews with no shore-leave after months at sea, which gives shipping operators reasons to try to skip Chinese ports, some of which are closed to business anyway, or they risk losing their crews who do have the freedom to walk at some point when they touch the shores of home.

China’s major New Year break, which begins in the coming week will only exacerbate the shortages as the nation takes a loooong holiday.

Goods are stacking up as ships coming to pick them up have in turn been delayed by congestion in the U.S. and Europe.

We keep hearing that the clogging up of shipping lines is going to clear. We’ve been hearing this for months. Then why haven’t they. They just keep getting worse, especially in China, the COVID epicenter. (These are the kinds of statement that have gotten my articles banned at a couple of major publishers, but they are the truths that need to keep getting told, regardless.)

Ships arriving to the Yantian terminal are delayed by an average seven days and the number of ships arriving from Europe and the U.S. has fallen more than 40% in the past two weeks, the terminal said in a customer advisory Wednesday. That comes on top of the problems Shenzhen port was already facing, with a viral outbreak earlier this month leading to lockdowns of districts, testing of workers and trucking delays at the Yantian and Shekou container terminals.

There is no way all of that fades away in time to help the Fed any at all by alleviating the supply shortages that the Fed was once saying were “transitory.” Yes, Mr. Powell, they are transitory, but only in the sense that you are also transitory, and so is the earth itself on a long enough timeline.

As it turns out, even recent reports that ships backed up in port were down in number did not mean the hope some might have thought. Ships have simply given up on aching at those ports, so they are waiting out at sea or making port elsewhere.

“Delivery times lengthened significantly in 2021, and January 2022 began with many companies reporting severely constrained output, input costs rising faster than at any point in the decade prior to the pandemic, and Omicron causing fresh uncertainty,” Chris Williamson, chief business economist at IHS Markit Ltd said in a recent report.

Does that sound like supply shortages will be easing in time to curtail inflation and help the Fed avoid fighting a war against inflation?

It’s not just China, all shipping operations have been affected world-wide,” said Mark O’Neil, chief executive officer at Columbia Shipmanagement Ltd. “It’s almost certain that we will see more delays to shipping because omicron is a short, sharp step backwards.”

We were already in a bad place, so we cannot afford a step backward. It means, the delays that are part of the cause of global shortages just got longer! Things are not moving in the direction the Fed needs in order to have room to back away from its new tightening regime when it finds, as it certainly will, that the new tightening is crashing markets all around it. If the Fed were to back up, it would only make inflation worse and bear the public’s wrath. We don’t like rising prices and emptying shelves. That’s scary business when you start to see it show up.

How bad is it?

According to multiple sources, average transit times have risen to double pre-COVID levels — and they’re still increasing…. With every passing month, more vessels, container equipment and goods inventories are getting waylaid in the Pacific…. Flexport’s Asia-U.S. OTI [Ocean Timeliness Indicator] reached an all-time high of 114 days last week. That’s 41 days or 57% higher than at the same time last year, and 63 days or 125% higher than at the same time in 2020, pre-COVID.… “This is intended as a straightforward and transparent measure of how severe the crisis is.”

American Shipper

That doesn’t sound like a plug that is being cleared out. That sounds like a lot of inflationary pressure continuing to build up on the supply side of the inflation problem. I like a straightforward and transparent measure that cuts through the Fed’s fog and the government’s fog and all the market analysts’ fog, who have stocks to sell, and through the delusions of investors who want to believe their parade is going to continue.

“You see a lot of things that jump around and other fleeting measures. You might say, ‘Hey, I got a great spot rate out of Yantian so I guess the crisis is over’ or ‘There was stuff on the shelves when I went shopping yesterday so I think we must be OK.’ But the OTI is something that is fairly consistent, you can see it over time, and you can see the degree of variability over time. You can see that these are dramatically longer times than we’ve had before — and they haven’t backed off yet. 

Let’s suppose the supply chain fairy waved a wand and solved all of these problems and we went right back to the old shipping times of the pre-COVID era again. What would the ‘all clear’ look like? You wouldn’t see an immediate drop because it would take awhile for things to sort out [due to the OTI’s retrospective nature]. But you should start to see this trending down as each stage [Asia factory to ships/ocean/U.S. port] moves faster. And we haven’t seen that yet. If this resolves, you should see something very different here.”

While China goes into its New Year holiday, the rest of the world does not, so the shipping logjam around China will only get worse. China will continue to exacerbate shortages for months to come as will problems along other freightways. There is a lot of clog to clear:

American Shipper

While the above chart measures how bad the plug is in terms of time delay, the following chart quantifies it by indexing how congested ports are around America:

American Shipper

It seems that there is no sign of imminent improvement. All available data shows that congestion and bottleneck problems are worsening.

There is not even the slightest room for doubt that this clog is going to take a significant amount of time to clear even if Omicron goes away today. There is no hope here to maintain a fantasy delusion that this problem will clear up before the Fed is forced to raise interest rates and then raise them faster just to keep up with the newly empowered bond vigilantes.

Labor crisis

Omicron is doing all of that in the US, too, of course — diminishing labor at US ports and among US truckers and other shippers but also at US factories and warehouses and at stores where shelves need to be stocked, etc. However, all of this was baked in months ago to where Omicron is only making it worse and more evident.

So long as labor is in short supply, these shortages in goods and services will continue, and labor is not coming back anytime soon, even if Omicron evaporates from the face of the earth tomorrow because much the labor supply has packed it in and left for good.

With gas prices already topping $4 a gallon in many places and shelves already starting to appear bare here and there (read “Food Shortages Punching the Populace in the Gut“), Joe Biden may have to soon go far beyond the courts in backing away from his own BMs (Biden Mandates). He may have to mandate that everyone he fired go back to work, even if they are sick, to help resolve a national labor shortage his mandates have made worse.


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