Thursday, July 28, 2022

America's Horrific Long-Term Fiscal Forecast

Some people think America's main fiscal problem is the gap between the two lines. In other words, they worry about deficits and debt.

But the real problem is government spending. And that's true whether the spending burden is financed by taxes, borrowing, or printing money. Full story here.

GDP Got Eaten By Inflation

Technically, because GDP was negative for two quarters, it's a recession. However, there are caveats to current economic conditions, which mean if it is a recession, it's very mild. And there's still that pesky 2yr/5yr bond rate inversion (2.9/2.72).

It's inflation that is the beast, which will undo everything.  The GDP Price Index came in at an 8.7% increase, well above expectations of an 8.0% gain and compared to the unrevised 8.2% rise seen in Q1.

By Kelly Evans
The Exchange, CNBC

Why was real GDP negative in the first half of this year? Because inflation ate up all the gains.

The bombshell report this morning showed that real GDP shrank again in the second quarter, by 0.9% annualized, after a 1.6% drop in Q1. But wait, how can real GDP be shrinking while the labor market at the same time added 2.7 million jobs, and the unemployment rate fell from 4% to 3.6%? Because inflation ate up all the real economic gains.

Nominal GDP--actual dollars before any adjustment for inflation--surged by a whopping 6.6% in the first quarter, and 7.8% in the second quarter. That's twice the size of what we used to see in the sluggish expansion of the 2010s. Turns out, it's way more than this economy can actually handle. So the huge nominal GDP boom we've had is all simply going into higher prices; the inflation rate was over 8% in the quarter, and that's how you end up with a negative "real" print.

Was the U.S. actually in recession, meaning the end of a business cycle? Probably not, as we've already discussed. The economic indicators, from the labor market to retail sales to industrial production, were all higher in May than January, and so far for June as well. Just yesterday, new orders for durable goods--a key leading indicator--came in stronger than expected. Orders have steadily risen this year, running as of last month at a 6% annualized pace--which would not be happening at the end of a business cycle. As for leading gauges of the labor market, new jobless claims actually fell last week, to a modest 256,000.

What this all shows is an economy that was overheated by monetary and fiscal stimulus, not one that was too soft or too weak. How else do you end up with 8% surging nominal GDP last quarter, on top of last year's whopping 10% gain? Certainly you don't get that from supply-chain constraints or high oil prices. And because we couldn't handle it all quickly enough as "real" economic gains, instead we simply got higher prices. 

Inflation caused negative real GDP.

Sunday, July 24, 2022

Fully Funding Education

In the race for Texas governor, Beto O'Rouke keeps claiming that he'll fully fund education. But it's already over-funded, and without the legislature, he can't do anything. Empty promises. Currently, more than $60 billion is spent on Texas education (not including universities). 

Saturday, July 23, 2022

Yield Inversions Are Back; Get Very Little Mention In Press

Federal bond yields, when inverted, normally signify an upcoming recession. That's something we've been anticipating for some time, so whether it's a predictor or confirmation, is anyone's guess. It's not the first time yields have inverted in the last year or so. 

It's just something all investors should be aware of, and plan for accordingly. I think the overall market has priced in these facts already, with the DJIA down about 15%, the SP500 down 18%, the NASDAQ100 down 25%, and the Russell down 27%. 

These declines are up from yearly lows, with rebounds of 5% to 10% in the last month or so.

This chart shows the short term bonds have larger yields than the longer term 10-year and 30-year bonds. It should be the other way around. 

Friday, July 22, 2022

It's Not Just Gas: Food Prices Skyrocket

Food prices helped drive the Consumer Price Index up 9.1% in the past year, marking the biggest annual increase in 41 years. According to government statistics, food costs rose 10.4% in the past year — the fastest pace since February 1981.

Driving the increase: Energy prices were responsible for more than half of the monthly gains in headline inflation, with gas prices rising over 11% last month, Axios' Neil Irwin and Courtenay Brown write.

However, the average price of regular-grade gas is falling. As of this morning, it is at $3.92 in the greater Austin area — down from $4.65 a month ago.

Thursday, July 21, 2022

Inflation Costs $8,000 in Purchasing Power

The Republicans on the congressional Joint Economic Committee have calculated that from January 2021 through the end of this year, inflation will have cost the typical American family nearly $8,400. If these trends continue, this means that inflation will have erased all of the $6,400 median household income gains that were made under Trump. Here are the highlights:
  • Prices increased 13.3 percent from January 2021 to June 2022, costing the average American household $718 last month alone
  • Even if prices stop increasing altogether, the inflation that has already occurred will cost the average American household $8,616 over the next 12 months.
  • In the United States overall, the monthly inflation cost in June 2022 was highest within transportation ($343), followed by energy ($214), food ($85), and shelter ($81).
  • Families in Colorado are facing the highest transportation inflation ($487) and shelter inflation costs ($149); families in California are facing the highest food inflation costs ($111); and families in Texas are facing the highest energy inflation costs ($282).
Full report here

Friday, July 15, 2022

Biden Sells Off Strategic Oil Reserve

As shown by the chart below, the Biden administration is selling off US Strategic Petroleum Reserves (SPR) at the fastest pace on record. As of today, we are now at the lowest levels since 1985.

Here is where things get concerning: despite the biggest decline ever in the SPR, total US oil inventories (outside of the government’s emergency SPR) have barely budged off their lows. Let me repeat that. The biggest release of oil ever in the US has barely increased our total domestic inventories.

Low supplies can only mean higher prices (oil was at $97 today, July 15, down from its peak of $130 in March 2022) in the future, if demand remains the same -- or increases. you cannot have economic growth without energy to power that growth, and we will continue to see a humanitarian crisis until governments all over the world work to increase natural gas, nuclear energy, and oil production. If they don’t, shortages, cost-of-living spikes, and disruptions to our food and energy systems are likely to persist.

Biden is set to ask Saudi Arabia (today, July 15) to pump even more, in the latest effort to tame high energy prices that are weighing on the economy. According to the International Energy Agency, the Saudis and UAE are the only two producers with significant spare capacity, holding just under 3 million barrels a day of idle output between them (about 3% of global demand).

"The world has never witnessed such a major energy crisis in terms of its depth and its complexity," IEA Executive Director Fatih Birol warned at an energy forum in Sydney earlier this week. "We might not have seen the worst of it yet. This is affecting the entire world."

No sure I agree totally with that statement, but Biden's policies to date have only made the situation worse. 

Thursday, July 14, 2022

Housing Affordability Index Continues to Weaken

On a national scale, housing affordability weakened in May as monthly mortgage payments jumped to 5.31% versus the same time last year at 3.01%. The housing affordability index illustrates a decline, although the real estate market remains robust.

Although there’s been some flattening due to higher rates and fears of a recession, these headwinds could bring the supply and demand back in alignment following months of frenzied home-buying post-pandemic and a seller's market riddled with bidding wars.

Wholesale Inflation Surges to 11.3 Percent

Inflation at the wholesale level climbed 11.3% in June compared with a year earlier, the latest painful reminder that inflation is running hot through the American economy.

The Labor Department reported Thursday that the U.S. producer price index, or PPI — which measures inflation before it hits consumers — rose at the fastest pace since hitting a record 11.6% in March.

Last month’s jump in wholesale inflation was led by energy prices, which soared 54% from a year earlier. But even excluding food and energy prices, which can swing wildly from month to month, producer prices in June jumped 8.2% from June 2021. On a month-to-month basis, wholesale inflation rose a substantial 1.1% from May to June.

Thursday's PPI report came a day after the Labor Department reported that surging prices for gas, food and rent catapulted consumer inflation to a new four-decade peak in June, further pressuring households and likely sealing the case for another large interest rate hike by the Federal Reserve.

Consumer prices, as measured by the consumer price index, or CPI, soared 9.1% compared with a year earlier, the biggest yearly increase since 1981.

Wednesday, July 13, 2022

Inflation in at 9.1 percent. Nothing to see, says Biden

More than half of all Americans weren’t even alive the last time prices rose at this pace of 9.1%. Yet Democrats say dam the torpedoes and full speed ahead with another $1 trillion tax and spend bill. Stimulus is a large part of what caused this runaway inflation to begin with. I wonder why they don't get it. 

Biden remarked that the data was backward looking, that June's numbers didn't reflect the drop in oil prices in July. Nothing to worry about. These aren't the droids you're looking for. OMG. All data is backward looking; otherwise, its a projection or prediction, or just a wild ass guess. Even the Carter administration didn't have this level of incompetence. 

This is a scary bunch ruling Washington these days. November can’t get here soon enough

Thursday, July 7, 2022

Pace of New Debt

From March 2020 through June 2022, the federal government added $7 trillion in debt.

To put that in perspective, the federal debt reached a total of $7 trillion in 2004, covering a span from George Washington to the first term of George W. Bush.

That means the federal government has racked up 215 years’ worth of debt in just 27 months.

While some amount of deficit spending might have been hard to avoid during the worst of the COVID-19 pandemic, Washington kept breaking out the credit card to continue an unnecessary and wasteful spending spree, oversaturating the economy and making inflation problems inevitable.

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