Inflation is defeated! Rejoice!

Stocks are skyrocketing right now on the news that inflation was only 8.5% for the month of July. It was 9.1% last month.

A half hour into trading, the S&P is up 1.7% and the Nasdaq up 2.1%.

Because inflation is 8.5%.

Does that make any sense to you? I didn’t think so. But market participants want so desperately to be bullish once again, it should be no surprise that this is happening. 

Remember, these are people who for the past 13 years have grown accustomed to the Fed propping up the stock market and making sure it always goes up.

Thus, they believe the fed really wants to get back to doing so, and as soon as we see the slightest hint that inflation is coming down, the money printer goes back on to overdrive, interest rates plunge to zero, and the stock market can go vertical again.

People really believe this is the default scenario, and that inflation is just a temporary setback. Like the cops showing up to a rollicking party to tell you to turn the music down—“Yeah, sure whatever you say, man.” And then as soon as they’re around the corner, you turn the music back up. 

I don’t think people fully understand how seriously the Fed takes inflation. It’s going to take more than just a one month down-tick in the inflation rate for the Fed to pivot to a full blown money printing bonanza like we saw in 2020. In fact, it will take a massive recession to pivot to that point. 

And that’s the most ridiculous part of all this: do people really think the Fed monetary policy regime of 2020 and 2021 is normal? That that is the Fed’s default setting—0% interest rates and printing trillions of dollars?

Because 2020-21 was not normal. That was in response to the Pandemic and the lockdown-induced economic depression. The Fed’s not just going to go back to that because it was good for the stock market. 

It literally caused the inflation we’re seeing this year (partly).

And somehow just because the inflation rate went down to 8.5% from 9.1% that means inflation is gone, vanquished and defeated, and it’s time to go back to 0% rates and print trillions of dollars?

It’s the most idiotic thing I’ve ever heard. 

And not only that, the inflation rate decline is an illusion, too. 

It all came from energy, which is the only thing going down right now:

You can see that “all items ex-food/energy” still increased at 0.3% month over month. Yes, that was slower than the 0.7% increase seen in June, but lower oil prices affect everything. You can’t really exclude energy prices from your inflation calculation.

This chart shows it in a different format:

The only thing that went down is energy, that pink bar.

And do you know why energy is going down?

Because the US government is emptying its strategic petroleum reserve to put downward pressure on oil prices. In other words, Our government is flooding the market with stockpiled oil to keep prices down. This is why you’re seeing gas prices come down lately.

Essentially our government is doing the equivalent of burning through its savings account to make ends meet—which is an apt analogy since the majority of Americans are doing the same thing. 

And so of course the SPR release is going to lower oil prices. When you massively increase the supply of oil by a million barrels per day, that will happen.

Not only do oil prices go down, but virtually everything else falls, too, because nearly everything is tied to the price of oil. Why are airline fares lower? Lower fuel costs.

So the SPR release has a massive impact on the inflation rate, because oil is the foundation of the global economy. Everything that is transported needs oil, and if oil is more expensive, everything gets more expensive.

But the problem is the SPR release is a temporary solution. Eventually the SPR will run out. This idea that inflation is beaten is an illusion. It’s a fugazi.

This article on the SPR is from the Department of Energy’s official website, published May 24:

WASHINGTON, D.C.—The U.S. Department of Energy’s (DOE) Office of Fossil Energy and Carbon Management (FECM) today announced an additional Notice of Sale of up to 40.1 million barrels of crude oil from the Strategic Petroleum Reserve (SPR). This Notice of Sale is part of President Biden’s announcement on March 31, 2022, to release one million barrels of crude oil a day for six months to address the significant global supply disruption caused by Putin’s war on Ukraine and help stabilize volatile energy costs for American families.

The Strategic Petroleum Reserve is a reserve of one billion barrels of crude oil, held by the US government, specifically for oil crises and wars. And so releasing a billion barrels a day for 6 months (April through October 2022) means roughly 180 million barrels of oil.

In accordance with the President’s announcement, 90 million barrels will be released between May and August through two notices of sale totaling 70 million barrels and 20 million barrels from ongoing emergency sales. DOE has been executing on this announcement releasing oil from the Reserve at approximately that rate over the last several weeks.

Today’s notice of sale represents the next step in executing on this release. The release is being done in stages. The first 90 million barrels will be released between May and mid-August. This includes 20 million barrels already scheduled to be released in May before the President’s March announcement, 30 million barrels noticed for sale on April 1 following the President’s announcement, and the 40 million barrels being released through this notice of sale. The remaining 90 million barrels will be released between August and October.

So the SPR dump will end after October, and it’s a safe bet that oil prices will start to go back up then.

Most of this down-tick in inflation is tied to the SPR release, and little else.

The fall/winter will be the moment of truth, as that’s when Russia will really put the squeeze on global energy prices. Once the SPR dump is completed in October, then the global energy market is going to be at the mercy of the Russians and the Saudis.

And another point: with strategic crude reserves at their lowest level since 1985, eventually at some point, the US government is going to have to become a net buyer of crude to replenish the reserves, as opposed to a net seller, which they are currently. The SPR will have to be replenished at some point, and doing so will send oil prices higher.

The “Strategic Midterm Reserve”–well put.

So as I see it, this is little more than a temporary relief during peak travel months, enabled almost entirely by the SPR release.

Yet the stock market is rejoicing as if inflation is done and all is back to normal once again.

It’s delusional.

This tweet sums things up pretty well:

Food at home: +1.4% month over month (so from June 2022 to July 2022), a 13.9% increase year-over-year (meaning July 2022 compared to July 2021).

Meat prices up 0.6 month-over-month, 10.9% year-over-year.

Dairy up 1.7% month-over-month.

Rents up 0.7% month-over-month.

Electricity prices up 1.9% month-over-month and 15.2% year-over-year (!)

The idea that inflation is whipped is delusional.

Nothing structurally has changed–and even if inflation truly was heading lower, it would only be because the US economy is slowing to the point of recession (which it is already in technically).

In other words, if the inflation situation has structurally changed, that means the US consumer is basically tapped out and the economy is heading off a cliff. How is that bullish?

The issue here is that inflation is not whipped, and the US consumer is on the ropes. We are in full-blown stagflation right now.

It would be one thing if the silver lining to the consumer being tapped out was that inflation was starting to come down, but as I’ve just shown, inflation is not starting to come down, at least not in a real sense.

But the consumer is very much tapped out. That’s real.

I was booking a flight the other day and saw something I’ve never seen before: the option to finance a plane ticket. Normally, for my whole life, when you buy a plane ticket, you pay it all up front. But I just saw that airlines are now offering the option to break up the cost of a plane ticket into 12 monthly installments. Instead of paying like $370 or whatever it was up front, you pay like $30.80 a month for 12 months instead.

Does that seem like something you’d see in a booming economy?

People are going into debt to afford airline tickets.

And it’s not just airlines, either. All sorts of online retailers are offering this “Buy Now, Pay Later” option, through companies like Affirm (stock ticker AFRM) and Klarna.

Amazon offers it for larger purchases too, either through Affirm, the Prime Store Card, or the Amazon Prime Visa credit card. Say you buy a $200 pair of shoes, you now have the option to break that up into 4 monthly payments of $50.

Think about this from the simple perspective of, “Why are companies suddenly offering this on almost every online purchase?”

The answer is because people can’t afford anything anymore. They are stretched so thin, they can’t afford to a $200 or $300 purchase anymore. They simply do not have it in the budget.

People are literally going into debt to buy shoes and airline tickets.

But at the end of the day, people want Stocks To Go Up, and so stocks will go up. People will take the inflation print at face value, conclude everything is awesome and the economy is booming like it’s the late 1990s, and go back to bidding up stocks like gangbusters.

I don’t know. I’m going to probably start buying some inverse ETFs soon here to bet against this market rally, but nothing would surprise me at this point. I would not be shocked if the market goes up another 10%.

It takes a lot to break a 13-year permabullish mindset.

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