My main worries to end the week (Prices/CPI and other stuff)

Karl Winterling - June 10, 2022

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My main worries to end the week are:

• The economic models the Fed was using in December for predicting inflation don’t seem like they’re suited for the current economic situation. The Fed needs to seriously investigate why these models are wrong and make sure unwarranted assumptions are not sticking around or leading the Fed to be less aggressive than it has to be. We really don’t need the Fed to be too optimistic about inflation right now.
• Interest rates impact the price at which investors are willing to buy stocks (the other main consideration being company profitability or expected profitability), which is part of why raising interest rates slows the economy and inflation. If food and fuel costs/shortages get much more serious (or “go parabolic”), the Fed can’t do much about that but might feel pressured to raise rates more aggressively than it has to and cause a recession (or a worse recession) without a good reason. Interest rate hikes will not magically produce more fuel and food.
• There are counter-arguments to media reports like this (I hope those counter-arguments are wrong). If an income bracket literally can’t afford food or food is simply not available somewhere, niceties (and more) go out the window. Yes, we produce food domestically but fewer imported products = more people buy a lower supply of domestic products.
• (Mods: remove if this is too political, I’m trying to keep left vs. right ideology out of it and focus on the correlation between job approval ratings and crises). Biden’s job approval rating is historically low for a president, and lower approval ratings typically go along with recessions or crises like inflation in the 1970s or the 2008 Financial Crisis. Yes, Trump’s job approval rating was also pretty low throughout his presidency but (not to get too political or get into left vs. right) many people, right or wrong, found him offensive, thought he was too ignorant to do his job, thought he was an agent of a foreign power, or thought he did not respect the US Constitution or separation of powers. Therefore, it makes sense to assume that many people perceive current federal-level leadership as weak. Yes, you should be worried about what people are willing to vote for if they decide the government or economic/social/political system can’t fix their problems and those problems get too bad. Political extremists on the far left, far right, and elsewhere often spend their time sitting around and waiting for a crisis.

Suggested preps:

• Food (at least 2 weeks, more if possible, like a few months or a year). Assume that food prices could double within the next year, though my baseline assumption is that we will face acute rather than chronic food shortages if there are availability issues.
• Get your finances in order (or try your best).
• Prepare for possible civil unrest.
• Humans adapted over hundreds of thousands of years to survive. Something in the news might shock you, but remember that you will not always feel the same way. The world could turn into a place that you don’t think is worth living in, but there’s a lot that has to happen before you know that for certain.

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Karl, thanks for the list and for the suggestions. I would add a covid virus that evolves faster than vaccines can keep up with (so far). People in my area are generally acting like covid is over, and yet my county is currently in the red zone (local hospital impacted, etc.). 

I think mitigating the risk of chronic illness should be a top priority for preparedness. That means the usual diet and exercise and stress reduction approaches are more important than ever. I’m not a medical professional. Yet it seems to me that avoiding a constant state of autonomic nervous system arousal is very important to lessen the risk of chronic illness from an overstimulated nervous system.

That might mean limiting news consumption, joining an online meditation group, reconnecting with our core philosophical or spiritual principles and rededicating ourselves to them, strengthening relationships with local farmers / CSA (community supported agriculture) ventures, learning the strengths and weaknesses of our neighbors, making our living space as delightful as possible, increasing our generalist skills, and more.

As I understand it, people in the U.S. have paid significantly less money for food than people elsewhere in terms of percentage of budget. If the price of food goes up 25% to 50% here, maybe we’re still in an acceptable ballpark, tough as this may sound.

Regarding the Federal Reserve’s models, I wonder if we’re seeing fewer smooth curves everywhere in terms of human behavior and more sharp rises and drops. For example, inelastic demand curves for a while, then totally elastic curves. Maybe the models want to smooth this out. Maybe some people are “overreacting” with their purchasing and other choices, and others are “underreacting.” Which group has the most financial and social resources? 

It seems to me that things are going to be more abrupt and jerky and reverse course more often. Unsettled times leading to more unsettled times. Roller coaster looks like the good old days because there was at least a track. This feels more like a severe weather event. 

Regarding the possibility for civil unrest, I’m not ready to give up on local government and the  fabric of civic life. I see civic life as tattered and frayed but not yet beyond hope. I don’t think “you’re on your own” is where we are at yet. Maybe we need to lean into mending it, carefully and with personal limits, for a while. 

Thanks again for the post.

 

People paid around 20% (on average) of their income on food in the late 1960s but pay more like 8% (on average) now. Food prices could double with acute shortages of some items and many people wouldn’t starve or become malnourished. So there’s a ways to go before a “true” famine (though that isn’t impossible in the near-to-medium future in 2023-2024 or beyond).

Most of the economy has been fairly “smooth” since 1990 and that might influence people’s expectations.

I agree protecting your nervous system is important for long-term survival: get good sleep, limit news exposure, meditation, join a church or other religious group (look up different liberal and conservative theological views—you can be very religious without necessarily giving up on rationality or becoming a fundamentalist), low-cost activities, etc.

 

Re: food prices.  In the 60’s people ate at home a lot more than we do now.   A major consideration is the impact of the food that we are eating.  Obesity, diabetes, high blood pressure, etc. are all way up from what they were in the 60’s.  These are influenced largely by what we eat – way too many processed food with large amounts of sodium, carbs(sugars) and fats.  Our intake combined with the overall decrease in activity all combine to make for a sicker society.   While food costs have decreased dramatically, the amount we spend on healthcare for chronic illnesses has gone up to make up the difference.  

Things that make you go hmm…or ugh!  We have been buying frozen turkey burgers, same brand same store for about the past three month – on a low carb not quite paleo diet – and noticed a change today.  The current stock is 6 burgers vs. 8 that we last purchased about 6 weeks ago & the price went up $1 a package.  I checked when we got home (still have the last box) and sure enough, the weight had dropped from 32 ounces to 24.  A 25% decrease in content, combined with a roughly 10% increase in price in SIX weeks.  Wow! The other thing I have been noting recently is that the quality of produce has declined – more overripe/moldy/rotten stuff in packages.   Wondering if we can chalk that up to slowdowns in the supply chain/lack of folks to harvest crops/weather.  Any thoughts on that?

 

Any cheap perishable food (like meat, produce, or your “paleo” non-processed food) has a lot more cost inputs from labor, transportation, refrigeration, grocery stores discarding expired food while maintaining their low profit margins, etc. The price of cheap nonperishable food is therefore much more sensitive than other food to the labor shortage, general inflation, gas prices, and higher costs related to supply chain inefficiency.

An obvious way to mitigate these costs is growing your own food.

 

My take is raising the interest rate is a result not a cause. The problem is Quantitative Easing, or rather, quantitative tightening. QE was the process of government buying loans from banks. When a bank writes a mortgage or corporate loan for example, that money is invented then and there from thin air. The catch is the bank is restricted to how much it can loan based on its assets. If it can go to the government and trade that mortgage for a Treasury Bond all of a sudden that loan turns into an asset and the banks can write another loan inventing even more money.

You remember the whole problem in the oughts was making mortgage sausage and selling shares to investors (other banks). Those shares were thought (or at least sold) as if they were grade A but turned out to be much less. Quantitative easing replaced that process by substituting the government as buyer. Unfortunately the government is even less discriminating.

Upshot is mortgage and all other rates were held artificially low for a decade and a half because governments can buy as many as they please. Rates now have shot up several points seemingly on the small prime rate increase… but really it went up because of the announcement that the government was going to stop buying them indiscriminately and in fact are going to start selling.

Since the pandemic governments globally have taken on trillions on top of the trillions since 2008. Money has been free if you have connections, in the EU they were actually negative—meaning they paid YOU to take the loan! But with the end of that gravy train corporations now must raise prices to provide a product and make a buck. And they are.

I think much of the “supply line” issues are in fact cash flow issues as corporations retool to make profit from consumers rather than government.

Fossil fuels are finite. The best quality coal is gone. The easy, pooled, pressurized oil is going. The Gushers of yore are extinct and we are resorting to what was once a tertiary method (fracking) and like tar mining, is more manufacturing process which requires much higher costs to produce. The frack boom was just that, a flash in the pan. The Permian basin will peak in a few years like all the others have. 

Kunsler has gone off into the right hand bar-ditch but back in the day he called the end of cheap fossil fuel the Long Emergency. There is a lot of oil on the sidelines right now, there always is, so supply might still surge for a year or three. Regardless, I would urge folks to pay attention because energy made us and can break us.

If you have time, this is a great overview of oil geopolitics, the russian war, etc: Energy at the End of the World Seminar – Peter Zeihan

 

I think the main causes of inflation are:

1. Ultra-low interest rates, which were more or less a “bribe” to get investors to go along with COVID restrictions (like “we promise you a huge economic boom after COVID is less of a threat”).
2. COVID triggered an acceleration of the tendency for the rate of profit (or more “external physical reality ROI,” less so “income statement profit”) to fall, especially with energy resources. The war and lockdowns in China compound that pre-existing acceleration. In other words, we’re in the Long Emergency.