You Won't Find Inflation Anywhere But In the CPI
(AP Photo/David Zalubowski, File)
You Won't Find Inflation Anywhere But In the CPI
(AP Photo/David Zalubowski, File)
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The word “supercycle” was nearly as overused as inflation has been. In fact, the two very much related; the latter the major thesis behind the former. History shows that given prospects for doomed fiat currencies the only shelter is the realm of the real, real assets like land as well as the stuff which comes from and up from it. Store of value among everything else.  

Combined with any number of supply restrictions, it was the perfect storm by which commodity prices would soar for years to come. This was the supercycle, not merely a rebound from 2020’s severe lows but a true, prolonged boom.

At the beginning of this year, Goldman Sachs’ head of commodity research Jeff Currie saw it all coming along. Speaking on BloombergTV, as recounted by an article published by Bloomberg, Currie hit upon all the major themes:

“The new year has started against a backdrop that includes record dislocations in energy, metals and agriculture, and significant amounts of money in the system, Currie said in a Bloomberg Television interview. In addition, investment positions in commodities are low, he added.”

A hangover from the lack of investment (Euro$ #3 then Euro$ #4 had each deprived many places around the world of the necessary capital) plus the lingering restraints of pandemic politics had meant a difficult time in 2021 meeting even a small rebound in global demand.

The more time that has passed, the more supply issues continue to hinder small “e” economics. Just this week, an estimated 50,000 workers went on strike in Chile to protest the loss of jobs from the government closing a copper smelter over purported “environmental issues.”

While the Chilean government assured the public (markets?) that there would be no impact on its financial bottom line, state-owned Codelco, the world’s largest producer of copper, sent mixed signals. On Wednesday, the Federation of Copper Workers Union president Amador Pantoja said, “We already have all divisions stopped today.”

Codelco’s interim CEO Andre Sougarret admitted (via Reuters) to “some discontinuity.”

It could not come at a worse time for the copper market. According to figures provided by the London Mercantile Exchange, or LME, registered copper stocks available for trade within the world’s most important commodity marketplace were just 117 thousand tons as of the latest accounting. The tradable inventory level is down 35% in just a matter of weeks.

Goldman Sachs and others in the space have correctly (thus far) forecast a material metal deficit they believe will linger for many years (with no investment in sight). This constant threat of disruption to already-limited capacity and severely strained availability (stocks) is the ultimate dream of any supercycle theorist.

So long as nothing happens to demand, that is.

None of it, however, is currently being reflected in the price of copper. The strikes, low inventory, nor the longer-range projections. Having reached nearly $5 per pound back in March, since then any additional capacity news has largely been ignored. As I write this, the spot price of copper is down huge, touching a low $3.72 per pound despite the developments in Chile.

To the copper market, what Chile?

Throughout the suite of major industrial commodities like copper, the same favorable supply factors have been cast aside as prices once-unstoppable come crashing down. Aluminum, the star of the space, currently trades less than $2,500 per metric ton after having been as high as $3,850 also reached in early March.

Two assumptions about the state of the world in 2022 had been taken as givens, as certainties. First, global economic demand, broadly speaking, would be propelled ever upward by a combination of powerful actions. It had been presumed since 2020 that reopening closed economies would provide enough lift for recovery, and whatever might have been left yet to cure immediately fixed by overactive government interventions.

As to the latter, this bred the second assumption, the lie of, as Goldman’s Jeff Currie put it, “significant amounts of money in the system.”

These beliefs underpinned the commodity supercycle thesis along with many others, including, as discussed last week, the cryptocurrency bubble as well as the widespread conflation of consumer price increases with inflation and an overheated economy.

Everyone has confused high rates of CPI expansion with actual economic expansion.

Perhaps the first to do so was former Treasury Secretary and establishment Economics pundit Larry Summers. In February 2021, when the “COVID relief” legislation was still being argued in Congress, the Harvard guy picked his nose up from its position embedded deep within its natural perch in the Keynesian textbook to warn:

“There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation.”

His main point was easy to understand. The economy, according to his model and knowledge, was already on its way back to full. At several points up to then, Summers had claimed it was nearly all the way there. And then the new Biden Administration comes along to out-Trump Trump with politically-calculated spending Larry believed would be way over-the-top.

And then add on top what Economists imagine are positive multiplier effects from “stimulus”, meaning that all things fiscal and monetary create lasting and positive feedbacks. Spending begets income which begets spending, and all that.

Once consumer prices began to behave in the manner Summers predicted, his view was taken as gospel without much mainstream scrutiny since it largely followed orthodoxy as well as the path of least resistance (mainstream technocratic cheerleading); further supported by other mainstream luminaries such as Warren Buffett who in May 2021 said the economy had been kicked into “super high gear”, creating an overall situation that was “red hot.”

As if all that wasn’t enough, officials at the Federal Reserve then completely changed course last fall and began sounding like Summers. Having first denied anything other than transitory supply factors (correct), Chairman Powell made (the politically motivated) decision to U-turn if only to catch up to the blame those like Summers had been casting over the Fed.

When doing so, central bank policymakers have had to make another run at the Phillips Curve even after the thing burned them badly several years ago.

This macro monstrosity quite purposefully proposes this very mistake – that inflation is somehow linked to a labor situation of maximum employment, therefore adding some detail to the overheating part of this rhetoric. Over the past several months, Fed officials like Chairman Jay Powell have intentionally used language invoking the Phillips Curve theory while wisely avoiding its name.

The faster consumer prices sped up this year, the more Powell remarked about “tight labor markets” therefore proposing rate hikes – conventional policy assumptions – would offer a cure (another Summers “prediction” come true). After all, we’re also supposed to believe that rate hikes slow the economy, therefore job creation, and if the use of Phillips is correct then inflation is solved.

Obviously, this is what everyone in politics would like the public to believe. After all, a tight labor market pushed beyond full employment doesn’t just sound like a good thing. Such would allow policymakers tremendous macro as well as perceived margin to undertake what they say is a necessary correction.

Thus, what is it that (non-energy) commodities right now propose along with crypto already? That Jay Powell and only a few rate hikes were more than enough to stamp out an extremely tight labor market? That the Fed’s fed funds target range upper bound of 1.75% is such a huge restriction on global commerce that global recession isn’t just likely, more likely imminent?

Of course not. There was never recovery. “Stimulus” deserves the scare quotes. Temporary supply shocks come with an expiration date. Money had never been printed.

If supply is as price-favorable as ever, then plummeting prices must be instead recognition that demand has indeed fallen off at the same time the dollar, in particular, keeps going the wrong way. None of what had been taken for granted is currently panning out.

It was never inflation.

You just can’t blame everyday folks for believing this stuff. Economic (small “e”) illiteracy is rampant, having long ago been replaced by Capital “E” Economics in a variety of flavors that aren’t any different from, or better than, each other.

This intellectual deficit has further bred the widespread inability to interpret, properly interpret, basic financial signals like interest rates and yield curves. Long before these commodities crashed, well prior to Bitcoin’s descent into winter, the yield curve, the eurodollar futures curve had done more than forewarn of each and the impetus behind them.

At the very same moment Warren Buffett was opining inflation, from just after Larry Summers first burst onto the inflation projection, the Treasury market had already poured the coldest of water on all the red hot, overheated words coming out of both and all others like them. I wrote at that time, early last May:

“Warren Buffett may be more beautiful in this contest than Bill Gross or some other Bond King pageant contestant, and he has without any doubt earned his legendary status in stocks, yet the ugliness in real money and the real economy is not going away no matter how shares are priced. You don’t have to take my word for it, I’m no authority on beauty; in bonds there’s no need for judges and gurus, there’s instead plenty of science and evidence stretching back at the very least to last century’s decade of the twenties.”

The mainstream suffers no such science. Once the curve flattened and contradicted all its assumptions, suddenly, everyone in it said, there was no value in bonds or their information.    

The Fed buys bonds therefore every last part of the bond market is tainted by none other than QE. It is the financial equivalent of the internet argument fallacy (you put a comma in the wrong place, therefore your whole argument must be wrong, everything you say or have ever said made invalid by the tiniest punctuation typo). The primary way to determine, in real time, whether or not QE (and related like fiscal intervention) is producing the intended impact is allegedly undermined by the very act of QE.

How convenient.

This was the “thing” about the QE-spoils-Treasuries error because it was never just the Treasury market or its yield curve; it hadn’t ever been one financial indication alone. There was an overwhelming catalog of market-based signals uniformly describing very different probabilities than “red hot.”

Interest rate swaps, the deep underlying guts of money and finance which never once picked up true inflation also never once experienced Open Market Desk bidding. Eurodollar futures, the first to invert last December, with no Federal Reserve buying anywhere around the futures pits. The dollar spiking in spite of all the piggy-backing claims of its imminent demise, no official contribution from the Fed.

Copper and aluminum should be shining brightest.

Now here we are, not in the place Larry Summers, Warren Buffett, or the supercycle had predetermined. Indeed, eurodollar futures inversion reaching well into the whites, upended all the way up to the December 2022 contract just this week. The further this creeps forward, the more confident the market is as to downside cases, the more imminent their expected arrival, and, worst of all, the more probable this ultimate depth reaches the full dreaded “d” of deflation.

The sophists have had their day.

No longer a question of “if”, hardly a question of “when”, it’s now mostly about “how bad.” Searching for answers to that one, you will not find inflation anywhere but CPIs. While that may sound like economic heat of inflation, that’s the sophistry.

Seeing beyond the situation, we might only hope the public itself finally finds this information which has been sitting there out in the open the entire time. And now time’s up.

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

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