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These are the words never to be uttered. Not if you know what is good for you. They have nothing to do with national security. No secret formulas locked tightly away from prying eyes. A taboo imposed by strict observance with the codes of positive messaging. Keeping up the pretense for as long as it may last, lest the whole house of cards fold.

The press did have its fun with the devastating news. Why wouldn’t the media? The company’s name forever keeps open the door to punning. Calling yourself Target, the inevitable wordplay follows whenever you, ahem, miss.

Once the phrase was issued in the giant retailer’s earnings report, the headlines wrote themselves. Investors Take Aim, roared one. How Target Could Miss Its Target, quipped another. No one at the NYSE was laughing, however, not with the stock down having wiped out a quarter of its value in a single day – taking the rest of the equity market along for the ride.

What was it that the company said which was so disturbing to so many? The truth.

This has never been inflation. Sure, consumer prices have surged and while the Federal Reserve had gone bonkers with ultra-mega-QE, those mere correlations rather than any causation. By now you know the drill: supply shock. Demand curve shifts rightward, hampered by supply side inelasticity (including the inability to ship goods), prices are the only way to adjust.

They did. But then what?

Since there had never been any inflationary money behind it all, closing out the shock would inevitably mean harmful redistribution. We all pay more for those goods whose supply/demand imbalance is least favorable, and if what’s least favorable are goods that we all need, consumers pay up for these non-discretionary items at the expense of anything discretionary.

Consumers who can’t afford to keep up with rising costs for the basics then stop buying their same amount of so many other things. Higher ticket spending, usually higher-margin goods for retailers, get put off or just canceled altogether, a dream pushed too far beyond the shrinking means of a struggling citizenry.

And that’s just what occurred within the thousands of Target stores during the prior three-month earnings period, the one which coincided with consumer prices further squeezed than they had been since the early eighties. The press release allowing this truth simply stated the previously forbidden, “lower-than-expected sales in discretionary categories.”

Target hadn’t been the only one to warn, either, as if some backroom conspiracy had been launched by the (macro) devil himself. Walmart reported the very same, maybe to an even wider extent.

On the business channel CNBC, Walmart’s CFO Brett Biggs tried to explain it as if some shocking and unexpected development. He talked about customers purchasing fewer items per trip inside the big box. How they had skipped new clothing or other merchandise to trade down, in his words, to smaller items made by cheaper brands. All the stuff consistent with demand destruction.

It was such a smack in the face that #recession was sent trending on Twitter by Thursday morning. In the aftermath of such rude awakening, the headline from Reuters simply said, Investors jolted as U.S. retailers show inflation hitting consumers.

But why was this so much of a shock? In one sense, it never really was. To public opinion, what may be shaped from the financial media, it may have been. Convention that has been propped up on the idea this was all somehow inflation, as the Reuters headline stated.

Both Target and Walmart showed why it never once was. For one, while consumers are being beaten down by prices, so are these retailers! In other words, contrary to inflation “psychology”, their bottom lines have been grossly harmed by input costs they are not able to pass along to their customers.

The country’s biggest retailers also just said they won’t be able to do so for the foreseeable future, thereby cutting even deeper into their own already-questionable profits reliant on these desperately shaky consumers.  

Much of the narrative surrounding inflation says that, for the first time in forever, companies finally had been able to achieve this legendary pricing power status. And once they had, they’d be able to send their input costs forward to get paid by patrons.

Consumers would then, according to the theory, demand higher wages to pay the higher costs of goods, get them, which then just puts the pressure right back on company inputs all over again.

This purported wage-price spiral, like Bigfoot, has been spotted repeatedly over the last year. Even the GOP members of the House Ways and Means Committee cited “economists” who have already been thinking this way:

“With more than 60 percent of Main Street businesses reporting they were forced to raise their prices to keep up with inflation, which has reached the highest rate since 1982, economists are warning the U.S. is at risk of a wage-price spiral.”

Some at the Federal Reserve have said they, too, have become very concerned about this “spiral” taking root, using those fears as justification for the current degree of hawkishness. Within the minutes of its March meeting, the FOMC repeatedly mentioned wages and how increases were “substantial” and spreading:

“Many participants indicated that their business contacts continued to report substantial increases in wages and input prices that were being passed through into higher prices to their customers without any significant decrease in demand.”

You can almost always tell what won’t happen by how much Economists and their econometric models claim it already is happening. Reality repeatedly has a way of simply passing them right on by; the symbolic bird for monetary policy is never dove or hawk, rather ostrich.

The Fed’s barely two rate hikes in, rates not yet to 1%, and the worst news is already surfacing in the public arena. Demand destruction is here already, announced by actual businesses doing actual business with actual consumers during the same quarter when the Bureau of Economic Analysis “shockingly” reported a negative GDP figure.

Go figure.

You can’t say you weren’t warned. Maybe most of the public didn’t know how to interpret the signals, or didn’t know where to find them, but over the last year the vast majority market opinion added up to this very ending. Curves, inversions, you name it; even the stock market this time.

The process is straightforward enough, even if the details are incredibly complex. If there’s inflationary money, there will be genuinely inflationary consumer prices. Without the former, the latter consumer price increases could only be of the supply-shock variety.

There was no money. There was never any money. Therefore, dare I write, transitory.

But what would a transitory supply shock mean? Prices go up based on supply/demand imbalance, and then the economy comes crashing back down.

I wrote the following all the way back in December, just a few weeks after the eurodollar futures curve had first inverted, a key warning sign that the entire global system was more and more firmly implanted on the downside of a supply shock and therefore how the entire market, including TIPS, was preparing for it to inevitably end:

“The upside-down TIPS breakevens along with the flattening curves globally are dependable signals that consumer prices are not going to continue to accelerate; or even very likely to continue at these levels for very long. On the contrary, the markets are more and more pricing something like the early 1990’s where especially the supply shock in oil more likely contributes to their eventual downside.”

The more sinister and worrisome elements followed in the aftermath of Wednesday’s stock trading. With illiquidity spreading throughout global markets such that the equity selloff reached its very uncomfortable proportions, the following morning was witness to one of the most sustained and persistent “scrambles for collateral” since the depths of March 2020’s GFC2.

Four-week Treasury bill yields, already obscenely low, that huge liquidity premium, right at 2am EDT Thursday dropped considerably lower, down to 46 bps from 50 bps (well below RRP’s 80 bps) and then remained there. Most times, lesser scrambles will arrive and clear up in a matter of an hour, maybe hour and a half.

Not this one. Not only did the 4-week yield stick at 46 bps, it was followed by another scramble arriving at 615am EDT pushing the rate to a low of just 44 bps. And this, too, would stay around, down at this lower bottom until 8am. The entire pre-US session slammed by shortage.

When we observed scrambles for collateral last year, July 2021, for example, they hadn’t yet reached that sort of unknowable point-of-no-return always in the background dividing the system between nuisance and true peril:

“In short, if we had already observed those warnings then we’d have expected before today that the deflationary pressures including collateral had already crossed a threshold, of sorts, from mildly irritating where repo and general funding was difficult to roll over into outright more dangerous where rolling over becomes near impossible. The global dollar system not yet having passed through into that stage, not yet having triggered those other key alarms, this indicates that this system still has sufficient elasticity and space to absorb imbalances.”

That was one way (out of many) we’d known it was never inflation, how there hadn’t been the monetary excesses genuine inflation requires.

Now much further on, the system has gone and used up whatever margin for error might’ve been left. That’s when the fire-sales become the real threat - more than a threat on Wednesday - especially should these then transform into their self-reinforcing feedback loop.

Pile a (more than) realistic recession threat into this deflationary money mix and it all gets very dangerous very quickly. The more deflationary money restrains normal financial function, the more it will add to the downside supply shock tendencies, merely confirming risk aversion in deflationary money-makers leading to more deflationary money constraints. And so on.

Rather than a wage-price spiral, our chief danger is this more-than-typical eurodollar spiral. Inversions, swap spreads totally opposite the Fed’s rate hikes, and, most of all, T-bills that are wildly overpriced because of this same systemic monetary shortfall; a collateral deficit that’s now reached these alarming levels with no end in sight.

If anything, there’s more to come because with less economy there’s far more risk to get validated.

The Federal Reserve’s dual mandate, of course, requires the body to achieve both price stability as well as maximum employment. It has failed on the first even if for reasons, a supply shock, well beyond its control or influence.

Rather than state that fact and speak the truth, Jay Powell is on a political crusade which today seems closer to its embarrassing end already. Rather than achieving mythical Volcker territory as planned, instead with the US economy poised dangerously on the precipice of ruining the second half of its directive. Price instability alongside rising prospects for far less than max employment.

The FOMC already missed Target.

Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

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