Post by Admin on Jul 29, 2021 19:05:50 GMT -6
In his press conference after the FOMC meeting this week, Jerome Powell, Head of the Federal Reserve, made several comments that were noteworthy. The one I am going to focus on with this post is shown below.
Starting at 36:26 of the FOMC Press Conference on July 28, 2021, Chairman Powell States:
"The concept of transitory is really this. It is that the increases will happen. We’re not saying they will reverse. That’s not what transitory means. It means that the increases in prices will happen, so there will be inflation, but that the process of inflation will stop so that there won’t be … When we think of inflation, we really think of inflation going up year, upon year, upon year, upon year. That’s inflation. When you have inflation for 12 months or whatever it might be, I’m just taking an example, I’m not making an estimate, then you have a price increase but you don’t have an inflation process. So part of that just is, that if it doesn’t affect longer-term inflation expectations, then it’s very likely not to affect the process of inflation going forward. So what I mean by transitory is, just something that doesn’t leave a permanent mark on the inflation process. Again, we don’t mean, I don’t mean, that producers are going to take those price increases back. That’s not the idea. It’s just that they won’t go on indefinitely. So to the extent people are implementing price increases because raw materials are going up, or labor costs, or something’s going up, the question really for inflation really is, does that mean they’re going to go up the next year by the same amount?"
So this came as a shock to a lot of people, as confirmation to some others and as general confusion among most of everybody. What exactly did Powell say and why has it seemed to trigger inflationary sentiment and increases in precious metals prices since he stated it?
Let me try to explain with a graph:
What is in this graph?
I took a baseline of January 1 2011 and set that equal to a value of 100 for the CPI as reported. Then I took monthly data for the CPI print from Jan 2011 to Dec 2020 and graphed out the increases month by month increasing the previous month's value by each monthly CPI print. Those data points are in black. I put a linear trendline through this data to show the slope of the line, which is the rate of increase of the CPI over the time period on a yearly basis. I did adjust the equation to fix then end point at 2011 = 100. The slope value for this calculation is just below 1.9% per year. This shows that the CPI has been increasing at approximately 1.9% per year since 2011. Pretty close to the stated Fed target of 2% per year, right? I extended the trendline for this CPI increase out to 2025.
I took the monthly CPI data from 2021 using the same technique for monthly value increase, but graphed it separately in red. This short-term CPI trend shows an annual CPI increase (slope of the line) of just above 9.6% annually. I extended the trendline for this shorter term CPI increase backward 6 months and forward 6 months as well. At the upper end of this trendline, which corresponds with the end of 2021, I inserted a parallel line to the original black trendline (1.9% CPI increase) that is blue in color.
What do these lines mean?
The black line shows that despite the Fed's self-described failure to have inflation run at 2% per year, the CPI index has been increasing at nearly 1.9% per year over the period from Jan 2011 to Dec 2020.
The red line shows that the current increase in the CPI in 2021 so far (Fed self-described transitory inflation) is increasing at 9.6% per year.
What do these lines have to do with transitory inflation and what Chairman Powell said?
Chairman Powell, all of the other members of the Fed and several prominent members of the current presidential administration have been very vocal about our current state of "transitory inflation" and their goals of "full employment" and to average 2% inflation over the long term. These are very specific phrases that we have heard over and over in the last few weeks, and months. The details have been severely lacking though. What exactly is meant by full employment? How far back are they going in time to calculate their 2% average inflation? What exactly is meant by transitory inflation?
In successful, con artist fashion, Powell and those speaking on the subject have been purposefully vague and let us draw our own conclusions about what exactly they mean. The divisiveness that pops up as we argue different interpretations keeps us distracted and confused and asking more questions that they refuse to answer. Rarely, we get a glimpse into what Powell and the FOMC actually believe and usually it's different than nearly all of us expected, but makes all of the hints and vague statements make sense at the same time.
In this case, we are focused on the above statements having to do with defining transitory inflation. But let's try, if we can, to go back to before we heard these statements and what the majority of people THOUGHT transitory meant.
When Powell, Yellen and their cohorts came up with transitory inflation so many months ago, most of us arrived at the same conclusion. Transitory inflation was a phrase that meant that there would be increased inflation for a while and then the inflation would reverse and we would line up on trend again at the previous rates as if nothing had happened.
In terms of the graph above, we would see black line inflation historically, followed by a period of red line inflation, then the CPI would bend back and merge again with the black line to continue on in perpetuity. What we were seeing with the red line data was a blip, just a glitch of calculation and not real at all.
Several of us were immediately skeptical and went to on state that that is not really how these things worked and having that much control over something like inflation was near impossible once it got going.
Others among us chose to trust the government and the Fed and agree with their stance that things were indeed transitory and there was no need to get riled up about inflation or price hikes or anything. The transition would soon be behind us and we would be back to normal.
Powell, et.al. remained conspicuously vague, letting everyone continue with their own narratives of what transitory meant and simply used the phrase over and over without explaining exactly what it meant to them. Just like a great con artist would when the words they were speaking were getting the effects they desired. There were many more people in the "transitory" camp than in the "that's impossible" camp . . . and the markets showed it.
Come up to yesterday. Inflation is getting harder and harder to hide, no matter where you look. The camp for team "that's impossible" was getting bigger and bigger and harder to deny. But people in positions of power can never be shown to be wrong, egos are apparently a thing(!!), so a full explanation of the confidence game was in order. It turns out that both sides of the narrative were right and wrong at the same time. What Powell explained in his definition of transitory inflation is that instead of the red line inflation spike reverting to back to the original black line inflation, the red line inflation will cause price increases and then at some point in the future, that ironically cannot be predicted, we will return to the black line rates of inflation with the red line increase having been priced in.
In other words, if you assume that for the rest of 2021 we continue along at 9.6% rise in the CPI (red line) and then suddenly for 2022 and beyond to 2025 the rate of CPI increase goes back to 1.9% (blue line projection) then THAT is what Powell, et.al. meant by transitory inflation.
Huh . . . ok.
Team "that's impossible" were right in that transitory inflation is not reverting back to the black line, but they were wrong in that transitory inflation, defined in this way, was impossible.
Team "transitory" was absolutely right that inflation was indeed transitory, but the price hikes that they were expecting to reverse and make the cost of living go "back to normal" are here to stay.
So by this definition transitory inflation, while TECHNICALLY transitory, works to increase overall inflation, prices and cost of living just like it wasn't transitory at all, but not quite as badly as it would have if it had been permanent. As this fact dawned on the wider audience, you are starting to see the markets react to the idea that we now know exactly what is meant by "transitory" and increased inflation effects were seen across the board today.
However, there are several things that we don't know and the graph above is making a TON of assumptions, so let's be very clear about what the graphic says.
If the rate of inflation for this year so far continues until exactly the end of 2021 and at that point the rate of inflation goes back to exactly the same rate as it was between Jan 2011 and Dec 2020 then the effects of "transitory" inflation mean that in 2025 instead of prices having risen 27% from Jan 2011 to Dec 2025, they will have risen 33%.
However, even though Powell has said more now than he ever has before, just like a good con artist, he is leaving us to again draw our own conclusions. We have no idea how long the increased CPI rise over 1.9% will continue and we don't know how high over 1.9% it will get. The red line can bend back to the left and become steeper (YoY CPI rises of greater than 10%) or it could bend to the right and improve back towards 1.9% sooner than the end of 2021. The graphic only extends increased CPI rates to the end of 2021, but what if the slope is only slightly diminished (7% YoY CPI rise) but lasts until the end of 2022? How big are the differences in 2025 prices then?
So, while we have some additional information that shows that those in the increased inflation camp were effectively correct, even if they weren't technically correct, there is still a lot of gray area on what the actual policies and procedures that are in place will do as the situation evolves in the future. There are speculators on all sides and I remain of the same mindset as I have been for several months. That is, I believe the Fed is not going to fight inflation. They are saying everything that they can about the ways they can fight inflation and that they are going to use their tools if inflation gets too bad, but be aware of the way that the narratives and the definitions and the talking points change as their actions remain the same. No tightening, further expansion of the balance sheets and lip service to keep the masses subdued and assuaged that the Fed will come to fight when the time comes . . . as defined by the Fed and when they are damned good and ready and not a moment before.
Every few weeks/months, we are going to get another revelation just like we did yesterday and it's going to become more and more clear that the Fed is NOT going to fight inflation because it cannot crash the markets and it cannot bankrupt the government. In fact, their plan all along is to decrease the real amount of the sovereign debt by inflating it away and instituting a stealth tax on the people through inflation to do it. To paraphrase Erik Townsend (of the Macro Voices podcast) when he was a guest on the Rebel Capitalist Podcast posted this week (hosted by George Gammon) . . . interest rates don't necessarily have to rise just because there is inflation. Rising interest rates are totally the decision of the Federal reserve. In fact, if your purpose is to inflate the national debt away, you encourage high rates of inflation and low interest rates at the same time and reduce the debt in real terms on the backs of savers and investors alike.
That, my friends, is their plan. High inflation, low real interest rates and investment returns that, at best, can barely keep up with inflation. Watch as the months unfold and the narrative slowly changes justifying more and more of the same actions (inactions?) from the Fed. It may feel like something is changing in what they are doing, but the truth will be that either nothing will change or ineffective half-measures will be the norm.
Get your precious metals now and be prepared for what's coming.
Thanks for reading. Questions and comments are welcomed.
Starting at 36:26 of the FOMC Press Conference on July 28, 2021, Chairman Powell States:
"The concept of transitory is really this. It is that the increases will happen. We’re not saying they will reverse. That’s not what transitory means. It means that the increases in prices will happen, so there will be inflation, but that the process of inflation will stop so that there won’t be … When we think of inflation, we really think of inflation going up year, upon year, upon year, upon year. That’s inflation. When you have inflation for 12 months or whatever it might be, I’m just taking an example, I’m not making an estimate, then you have a price increase but you don’t have an inflation process. So part of that just is, that if it doesn’t affect longer-term inflation expectations, then it’s very likely not to affect the process of inflation going forward. So what I mean by transitory is, just something that doesn’t leave a permanent mark on the inflation process. Again, we don’t mean, I don’t mean, that producers are going to take those price increases back. That’s not the idea. It’s just that they won’t go on indefinitely. So to the extent people are implementing price increases because raw materials are going up, or labor costs, or something’s going up, the question really for inflation really is, does that mean they’re going to go up the next year by the same amount?"
So this came as a shock to a lot of people, as confirmation to some others and as general confusion among most of everybody. What exactly did Powell say and why has it seemed to trigger inflationary sentiment and increases in precious metals prices since he stated it?
Let me try to explain with a graph:
What is in this graph?
I took a baseline of January 1 2011 and set that equal to a value of 100 for the CPI as reported. Then I took monthly data for the CPI print from Jan 2011 to Dec 2020 and graphed out the increases month by month increasing the previous month's value by each monthly CPI print. Those data points are in black. I put a linear trendline through this data to show the slope of the line, which is the rate of increase of the CPI over the time period on a yearly basis. I did adjust the equation to fix then end point at 2011 = 100. The slope value for this calculation is just below 1.9% per year. This shows that the CPI has been increasing at approximately 1.9% per year since 2011. Pretty close to the stated Fed target of 2% per year, right? I extended the trendline for this CPI increase out to 2025.
I took the monthly CPI data from 2021 using the same technique for monthly value increase, but graphed it separately in red. This short-term CPI trend shows an annual CPI increase (slope of the line) of just above 9.6% annually. I extended the trendline for this shorter term CPI increase backward 6 months and forward 6 months as well. At the upper end of this trendline, which corresponds with the end of 2021, I inserted a parallel line to the original black trendline (1.9% CPI increase) that is blue in color.
What do these lines mean?
The black line shows that despite the Fed's self-described failure to have inflation run at 2% per year, the CPI index has been increasing at nearly 1.9% per year over the period from Jan 2011 to Dec 2020.
The red line shows that the current increase in the CPI in 2021 so far (Fed self-described transitory inflation) is increasing at 9.6% per year.
What do these lines have to do with transitory inflation and what Chairman Powell said?
Chairman Powell, all of the other members of the Fed and several prominent members of the current presidential administration have been very vocal about our current state of "transitory inflation" and their goals of "full employment" and to average 2% inflation over the long term. These are very specific phrases that we have heard over and over in the last few weeks, and months. The details have been severely lacking though. What exactly is meant by full employment? How far back are they going in time to calculate their 2% average inflation? What exactly is meant by transitory inflation?
In successful, con artist fashion, Powell and those speaking on the subject have been purposefully vague and let us draw our own conclusions about what exactly they mean. The divisiveness that pops up as we argue different interpretations keeps us distracted and confused and asking more questions that they refuse to answer. Rarely, we get a glimpse into what Powell and the FOMC actually believe and usually it's different than nearly all of us expected, but makes all of the hints and vague statements make sense at the same time.
In this case, we are focused on the above statements having to do with defining transitory inflation. But let's try, if we can, to go back to before we heard these statements and what the majority of people THOUGHT transitory meant.
When Powell, Yellen and their cohorts came up with transitory inflation so many months ago, most of us arrived at the same conclusion. Transitory inflation was a phrase that meant that there would be increased inflation for a while and then the inflation would reverse and we would line up on trend again at the previous rates as if nothing had happened.
In terms of the graph above, we would see black line inflation historically, followed by a period of red line inflation, then the CPI would bend back and merge again with the black line to continue on in perpetuity. What we were seeing with the red line data was a blip, just a glitch of calculation and not real at all.
Several of us were immediately skeptical and went to on state that that is not really how these things worked and having that much control over something like inflation was near impossible once it got going.
Others among us chose to trust the government and the Fed and agree with their stance that things were indeed transitory and there was no need to get riled up about inflation or price hikes or anything. The transition would soon be behind us and we would be back to normal.
Powell, et.al. remained conspicuously vague, letting everyone continue with their own narratives of what transitory meant and simply used the phrase over and over without explaining exactly what it meant to them. Just like a great con artist would when the words they were speaking were getting the effects they desired. There were many more people in the "transitory" camp than in the "that's impossible" camp . . . and the markets showed it.
Come up to yesterday. Inflation is getting harder and harder to hide, no matter where you look. The camp for team "that's impossible" was getting bigger and bigger and harder to deny. But people in positions of power can never be shown to be wrong, egos are apparently a thing(!!), so a full explanation of the confidence game was in order. It turns out that both sides of the narrative were right and wrong at the same time. What Powell explained in his definition of transitory inflation is that instead of the red line inflation spike reverting to back to the original black line inflation, the red line inflation will cause price increases and then at some point in the future, that ironically cannot be predicted, we will return to the black line rates of inflation with the red line increase having been priced in.
In other words, if you assume that for the rest of 2021 we continue along at 9.6% rise in the CPI (red line) and then suddenly for 2022 and beyond to 2025 the rate of CPI increase goes back to 1.9% (blue line projection) then THAT is what Powell, et.al. meant by transitory inflation.
Huh . . . ok.
Team "that's impossible" were right in that transitory inflation is not reverting back to the black line, but they were wrong in that transitory inflation, defined in this way, was impossible.
Team "transitory" was absolutely right that inflation was indeed transitory, but the price hikes that they were expecting to reverse and make the cost of living go "back to normal" are here to stay.
So by this definition transitory inflation, while TECHNICALLY transitory, works to increase overall inflation, prices and cost of living just like it wasn't transitory at all, but not quite as badly as it would have if it had been permanent. As this fact dawned on the wider audience, you are starting to see the markets react to the idea that we now know exactly what is meant by "transitory" and increased inflation effects were seen across the board today.
However, there are several things that we don't know and the graph above is making a TON of assumptions, so let's be very clear about what the graphic says.
If the rate of inflation for this year so far continues until exactly the end of 2021 and at that point the rate of inflation goes back to exactly the same rate as it was between Jan 2011 and Dec 2020 then the effects of "transitory" inflation mean that in 2025 instead of prices having risen 27% from Jan 2011 to Dec 2025, they will have risen 33%.
However, even though Powell has said more now than he ever has before, just like a good con artist, he is leaving us to again draw our own conclusions. We have no idea how long the increased CPI rise over 1.9% will continue and we don't know how high over 1.9% it will get. The red line can bend back to the left and become steeper (YoY CPI rises of greater than 10%) or it could bend to the right and improve back towards 1.9% sooner than the end of 2021. The graphic only extends increased CPI rates to the end of 2021, but what if the slope is only slightly diminished (7% YoY CPI rise) but lasts until the end of 2022? How big are the differences in 2025 prices then?
So, while we have some additional information that shows that those in the increased inflation camp were effectively correct, even if they weren't technically correct, there is still a lot of gray area on what the actual policies and procedures that are in place will do as the situation evolves in the future. There are speculators on all sides and I remain of the same mindset as I have been for several months. That is, I believe the Fed is not going to fight inflation. They are saying everything that they can about the ways they can fight inflation and that they are going to use their tools if inflation gets too bad, but be aware of the way that the narratives and the definitions and the talking points change as their actions remain the same. No tightening, further expansion of the balance sheets and lip service to keep the masses subdued and assuaged that the Fed will come to fight when the time comes . . . as defined by the Fed and when they are damned good and ready and not a moment before.
Every few weeks/months, we are going to get another revelation just like we did yesterday and it's going to become more and more clear that the Fed is NOT going to fight inflation because it cannot crash the markets and it cannot bankrupt the government. In fact, their plan all along is to decrease the real amount of the sovereign debt by inflating it away and instituting a stealth tax on the people through inflation to do it. To paraphrase Erik Townsend (of the Macro Voices podcast) when he was a guest on the Rebel Capitalist Podcast posted this week (hosted by George Gammon) . . . interest rates don't necessarily have to rise just because there is inflation. Rising interest rates are totally the decision of the Federal reserve. In fact, if your purpose is to inflate the national debt away, you encourage high rates of inflation and low interest rates at the same time and reduce the debt in real terms on the backs of savers and investors alike.
That, my friends, is their plan. High inflation, low real interest rates and investment returns that, at best, can barely keep up with inflation. Watch as the months unfold and the narrative slowly changes justifying more and more of the same actions (inactions?) from the Fed. It may feel like something is changing in what they are doing, but the truth will be that either nothing will change or ineffective half-measures will be the norm.
Get your precious metals now and be prepared for what's coming.
Thanks for reading. Questions and comments are welcomed.