What Everyone Has Seriously Wrong About Inflation

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LONGWave - JULY 2022

WHAT EVERYONE HAS SERIOUSLY WRONG ABOUT INFLATION!

Let me start by saying that the only thing that was "Transitory" about Inflation was Phase I - soon to be followed by Phase II and Phase III! Subscribers will recall we spelled that out two years ago [Video] before Inflation even arrived and the Federal Reserve started its flawed narrative about it being "Transitory"!

The fact is the US is entering its third modern era of a multi-wave, protracted inflation era, once again sustained by Stagflation.

To us at MATASII.com the old adage has never been clearer: "those who don't heed history are doomed to repeat it!". Let us reiterate why we believe this.

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WHAT YOU NEED TO KNOW

INFLATION/DEFLATION COMES IN WAVES
Inflation is now occurring in parallel with Deflation and BOTH are Coming In Waves.

VIOLATED INFLATION BARRIER LEVELS
Today there are increasingly tighter barriers to containing Inflation that if violated have serious consequences.

A NEW "INFLATOR" REPLACES GLOBAL DEFLATOR
The 25 year Globalization & Supply Chain Deflator has shifted to an "Inflator".

THE STAGFLATION KILLER
The US is entering the Third Modern Era of a Multi-Wave, Protracted Inflation Era once again driven by Stagflation.

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INFLATION PLUS DEFLATION

In 2020 we wrote extensively that Inflation would soon become a major problem. We felt Covid-19 and global lock-downs would be disruptive to Global Supply Chains which would lead to rising import cost. You would see we got it generally right if you were to review the October 2020 UnderTheLens video entitled "Inflation PLUS Deflation".

We primarily argued that we would continue to have Inflation PLUS Deflation occurring in ever increasing concurrent waves, but in differing areas. We have most recently been experiencing Deflation in Asset values, while experiencing inflation in energy, food, services and almost any areas not financed, but paid directly from real disposable income.

Regarding Inflation, we believe we are now completing Phase I of an expected three phases to unfold over the course of the final Inflation Shock Wave during the next 4-6 years. We are now entering the initial Deflation Shock wave that will see an unfolding US Recession with layoffs and corporate cutbacks. Wage and Benefit cuts and an unprecedented reduced demand shock to global supply chains will soon follow as we feel the impact of a Global Recession. (See Chart below: "We are Here").

UnderTheLens - 09-23-20 - OCTOBER - Inflation PLUS Deflation?

Inflation, labeled in red, has continued to rise but has had differing impacts as developed economies become more credit and consumption driven versus savings and productive investment driven.

Deflation, shown in blue, has more recently made increasingly stronger impacts due to the globalization of trade and labor arbitrage.

THE THREE INFLATION STAGES THAT STAGFLATION WILL DELIVER

We didn't describe our expected three phases of Inflation in our 2020 discussion videos and papers, but instead just represented them as one large "Tsunami" Wave! Now however, we need more granularity as that massive wave is quickly approaching.

As I already mentioned we are completing Phase I of the Tsunami wave with CPI and PPI numbers now at 40 year highs and not seen since the 1970s. Y-o-Y comparison numbers will soon start to show improvement and "lame-stream" media attention can be expected to shift to mounting Deflationary pressures. However, Inflation has not even been close to effectively being addressed and in fact will be left to burn with increasing force that Monetary Policy will no longer be able to adequately handle.

This happened in the 1970s as shown in the highlighted box below and labeled with the three phases that were experienced then due to ineffective policy actions and only resolved in Phase III by unprecedented actions by then Fed Chairman Paul Volcker. Volcker's bold actions could not be taken today because of levels of leverage, debt, zombie corporations and financial rehypothecation.

THE 70'S WASN'T THE FIRST TIME FOR UNCONTROLLED INFLATION!

We also experienced multi phases of growing Inflation as highlighted by the white box below. It rose out of the solutions to end the Great Depression, Roosevelt's broadened scope of the role of central government fiscal spending and the cost of WWII. The advent of macro-prudential policies of Financial and Negative Real Rates solved that problem in the post world war era through to the early 1960s. The Negative Real Rates required to solve today's problem are also no longer plausible.

INFLATION OVER 6.5% HISTORICALLY BECOMES A LONGER TERM PROBLEM!

As shown to the right (red bar), anytime we have experienced sustained inflation over 6.5%, it has resulted in multi-phased attempts at resolving inflation and getting 'the genie back in the bottle".

NOTE: The chart above going back even further into the 30s 40s and 50s shows the same 6.5% inflation threshold problem.

AN INSURMOUNTABLE PROBLEM

Our sense is that current thinking holds that the coming recession will bring inflation down to manageable levels. That thinking is false!

Prior episodes where inflation was above 6.5% were not solved by recessions. The only proven solution has been to take US Treasury Yields higher than or equal to the inflation rate. The chart below shows to have been the case in the 1970s and the gap (on the right) is not even close to being achieved.

THE NEW BARRIERS

THE TRAP: IT IS A MUCH LOWER RECESSION BARRIER TODAY

The problem today is we can no longer take Treasury Yield rates to levels above ~4% without steeping a recession into something even much worse!

Fed Funds Rates even close to a 4% level (see Orange Fed Funds Rate below) historically can be expected to cause something to break somewhere in the financial system which would trigger broad based unintended consequences and third party collateral damage.

CONCLUSION

GLOBAL STAGFLATION (Slow Growth with High Inflation) HAS SEVERE CONSEQUENCES

What is going in America is about a planned reduction in the US Standard of Living. This is a flawed attempt as part of the "Great Reset" to re-balance the global financial system. The simple truth is the US can no longer consume more than it produces to the point of consuming the world's depleting and much needed financial resources.

WHAT WE WILL EXPERIENCE:

Asset Devaluation (Chart Right)
Household Net Worth as a % of Disposable Personal Income (Chart Below)

MATASII'S EXPECTED LONGER TERM S&P 500 OUTLOOK

CURRENT MARKET PERSPECTIVE

THE WORST IS STILL IN FRONT OF US

EXPECT A SHORT TERM BEAR MARKET COUNTER RALLY

FADE THE UNFOLDING COUNTER RALLY - SELL THE RIPS

THE POST 2022 Q2 BANK EARNINGS RALLY

We warned of the likelihood of this occurring in the latest video (AN EARNINGS RECESSION). If you haven't viewed it yet - you should!

YOUR DESK TOP / TABLET / PHONE ANNOTATED CHART

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ADDENDUM: PRIOR WRITINGS

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PRIOR WRITINGS

VIDEO:
UnderTheLens - 06 22 22 - JULY - A Quickly De-Stabilizing World?
NEWSLETTER:
07-04-22-An EU Sovereign Banking Crisis II

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The problems in Europe continue to worsen at what appears to be an accelerating rate!

UnderTheLens - 06 22 22 - JULY - A Quickly De-Stabilizing World?

Former Regan Budget Director, David Stockman lays out the case at the InternationalMan.com of the seriousness of the current EU problems. It is a long paper but worth the time for those trying to come to grips with what is centrally wrong in the EU and with the ECB!

"The trio of the Sanctions War, Green Energy Crusade and the Virus Patrol is a mortal threat to capitalist prosperity. That’s already evident in the Eurozone where these policy diseases are most advanced and where the real GDP growth rate has plunged by 74% from its pre-2008 crisis rate."