KEJI - Real-Time Inflation Indicators Are Quite Weak
2023-05-16 15:00:00 ET
Summary
- Last week, April’s year-over-year export and import prices showed unusually large declines.
- Export prices declined by 5.9%, on top of another large 4.8% decline in March.
- Import prices declined 4.8%, matching the March decline.
Last week, April's year-over-year export and import prices showed unusually large declines. Export prices declined by 5.9%, on top of another large 4.8% decline in March. Import prices declined 4.8%, matching the March decline. We have seen large declines before, usually in bad recessions (2008, 2020), but there is no recession now. This dip is from rapidly falling inflation, making the latest Fed rate hike absurd.
U.S. Export Prices Year-Over-Year
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Fed is hiking rates based on trailing data in the various CPI indexes instead of monitoring the more real-time inflation indicators (mentioned above), which show a more precipitous decline in inflation.
The decline in the M2 Money supply by 4.1% (on a year-over-year basis in March, reported on April 25 by the Fed), the fourth such decline in a row, is truly historic and has never before happened since the data first became available in 1959. Such huge swings were likely normal in the 1700s Colonies and 1800s in the United States, as there was no Federal Reserve to smooth out the money supply. We had years of 15% to 20% deflation in those days, which raises the question of what our inflation rate would look like by the end of 2023 if M2 keeps shrinking. If the U.S. inflation rate turns negative, the Fed may look ridiculous.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
While this is happening, Chinese inflation is very low, at 0.1% for April, and it has been falling as the Chinese economy re-opens. Previously, Chinese inflation had been weak only in the 2020 COVID global shutdown and the 2008 Global Financial Crisis. Something is amiss on the global inflation front.
We are witnessing the aftershocks of the truly historic $6 trillion COVID inflation spree of the U.S. government, which prevented a Second Great Depression, but caused the present inflation mess. It would be comical, if not tragic, if the inflation rate turns negative after the fastest rate-hiking cycle in U.S. history.
Chinese Inflation Rate (Y-o-Y)
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Regional Banks Cannot Catch a Bid
Warren Buffett thinks some more banks may fail, as he said in a CNBC interview from Japan. I think the U.S. government better figure out a way to make the implicit guarantee explicit, as the depositor worries are accelerating the flight of capital out of the U.S. banking system into money market mutual funds.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
There was a temporary short-selling ban on financials in 2008 that some say didn't help much, but in this case, it may be necessary. Right now, if a bank stock declines, depositors panic and pull money out, weakening the bank, so it is the share price weakening the bank, not the other way around.
One way or the other, some type of intervention by regulators is necessary for the whole banking system, but so far, there is no word if it is coming. Waiting for an accident to happen before intervening may turn out to be more costly for the whole system, in my opinion.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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Real-Time Inflation Indicators Are Quite Weak