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the cpi is kind of a false construct they use things like owner's equivalent rent to calculate shelter inflation and orders equivalent rent for the last 12 months is up two but the whole median home price is up 17. so if you would replace owner equivalent rent with home prices the inflation rate actually would have been eight percent year over year so there's reasons for really to worry about inflation the fed i think likes to talk about transitory i think the fed is most content when the inflation rate is higher than the bond yields all the way across the yield curve which they've managed to accomplish so they're trying to make people not scared about inflation by calling it transitory but how do they know how does anybody know whether it's transitory or not given the unusual circumstances that we're in well we've had a relationship between the fed growing its balance sheet and the value of the s piece 500 that's been in place for years now ever since i started quantitative easing and it's almost like a law of physics it's like if you take the capitalization of the s p 500 and you divide it by the fed's balance sheet it looks a lot like a constant and so once the fed started quantitative easing that reversed the stock market's collapse from the pandemic and they slowed it down a little bit because they were doing at such a breakneck speed but now they're continuing to do it and so the stock market continues to be supported by that also the valuation of the stock market even though it's really high by historical comparisons we also have very low bond yields relative to inflation particularly this week we have you know this the cpi came out at 4.2 year over year and then the ppi is up to 6.2 or something like this and bond yield on the 10-year treasury is at 1.65 so the yields are so negative so when you look at classic relationships like p e ratios look elevated the dr schiller's cyclically adjusted cape ratio was kind of matching those of all time highs and yet weirdly if you look at e divided by p there's a yield on stocks it's below average in terms of its valuation versus bonds so the fed has been manipulating markets for a long time and on top of that obviously we've had incredible amounts of free money fiscal stimulus last month there was another round of checks and i don't think a lot of people are aware that about a third of last month's personal disposable income was given by the government also the government is running a deficit that's about 30 percent of gdp in terms of their spending and they're only paying for a little less than half of it so there's a lot of distortions that are going on but with the money that's flowing it's helped to distort many economic series and also the value of most asset classes while the housing market's a good place to start home prices are up very strongly over the past 12 months i think the median home price in america is up 17 year-over-year and there are some markets that have been particularly attractive for people that are maybe rethinking their life in view of the pandemic that are up 30 or 40 percent so it's a massive distortion there also we have this strange thing of 8 million job openings and everywhere you go people are saying business people are saying i can't fill them no one will take them and it was obvious when they started these money giveaways that there was going to be an issue because right away everyone noticed that a certain fraction that was not trivial of people are making more money sitting at home watching netflix than they are at work and they don't want to go back i think one of the dangers that we've opened the door to is these stimulus checks are starting to feel like they might not go away they seem like there's always another round of them in fact this week gavin newsom governor of california has announced 600 to people that are making less than something like 75 dollars a year because the uh california thanks to the government money has gone into a large surplus of their budget at least temporarily so now in new york uh say new york and state of california a lot of people are getting seven thousand dollars per year tax free by not working so there's a lot of distortions there we've seen big distortions partly due to government programs but partly to the pandemic seeing a lot of distortions with automobiles not being available i actually bought a truck a couple of weeks ago and the the car dealer was a big car dealership they had no new trucks there weren't any now that's partly due to the chip shortage but all he had on his entire lot were two used trucks and the uh price that i bought the one i bought was used eight thousand miles on it the price was only two thousand dollars less than the sticker price of a new truck and the fellow who sold it to me he claimed and i think i believe him they was doing me a favor because he probably could have sold that truck thanks to shortages for more than the manufacturer's sticker price so a lot of distortions also average hourly earnings are very distorted because a lot of the people that were displaced from their jobs were the lowest wages so when we look at economic statistics we have to understand that there's been a huge mix shift the types of people that are in the mix of average hourly earnings are higher baseline job earners so average hourly earnings looked like they really spiked but you have to take the mix shift into consideration and it's kind of hard to do that so i was talking to a felix zuloff today and we were talking about how murky the crystal balls have become because we have such different data sets than what we had historically thanks to the sudden shock of the recession but also the way it was very unevenly felt in the economy my profession you know investments in finance actually hasn't had any growth in unemployment at all but when you go to you know obviously casino operators and carnival cruise lines types of people have a very large shock that's taken place so we're trying to figure it all out and it seems to me that interest rates are starting to get loosened up a little bit on the upside we had that incredible decline where the long bond the united states went to exactly 1.00 percent intraday you know and now it's up at 2.4 so i don't think a lot of investors are aware how much money has been lost if you panic into treasury bonds back last march or april i mean we're talking about losses that are pretty substantial about 30 percent it's equity market type of losses and your potential reward was a one percent interest rate per year for 30 years so lots of uh imbalance risk reward was brought on by the by the pandemic um i think the it feels to me like the market started worrying about it a little bit this week because the cpi print of almost point nine i think was point nine on the core and point eight on the headline was the biggest miss on cpi in many years and maybe even in my whole career the guess was for 0.3 and it comes out at 0.8.9 and that really shocked everybody we have a model of inflation at double line that's quite helpful for a few months forward goes off of a couple of variables it's been quite accurate we knew that inflation was going to go above three and a half but we thought it was going to be in a month or two and so the fact that it's already left up to 4.2 i think i believe in our model that it's probably going to go higher in the next couple of months the peak might be in july if we keep going higher from there then i think people are going to be seriously worried because the concept of transitory has everything to do with what they call base effects you know you came off very low numbers and it's almost like mount whitney is right next to death valley for a reason you know the big hole in the ground the dirt has to go somewhere inflation got so low that it was a natural rebound but one thing is to think about the cpi is kind of a false construct they use things like owner's equivalent rent to calculate shelter inflation and orders equivalent rent for the last 12 months is up two but the whole median home price is up 17.
so if you would replace owner equivalent rent with home prices the inflation rate actually would have been eight percent year over year so there's reasons for really to worry about inflation the fed i think likes to talk about transitory i think the fed is most content when the inflation rate is higher than the bond yields all the way across the yield curve which they've managed to accomplish so they're trying to make people not scared about inflation by calling it transitory but how do they know how does anybody know whether it's transitory or not given the unusual circumstances that we're in don't forget that ben bernanke way back in the day he had a completely wrong interpretation of the dire nature of the mortgage crisis he said it was confined to subprime and it was many many times worse than that so i'm not sure how they know it's transitory kind of kind of when they all say the same talking point starts to sound like some of the mainstream media you know where every single guest from either the tribe on the right or the tribe on the left has the same talking point so you wonder if if it's just a brainwashing mechanism the fed's trying to get investors into on this transitory stuff but i'll get worried if the inflation remains elevated through the summer and i think the bond yields would start to test the fed's resolve they say there's no limit to their quantitative easing and stuff like this we'll we'll see because if the rates go up the few buyers that there are for treasuries foreigners have been selling for years domestics have been gently declining in their ownership all you got's the fed and so with all of the debt that we have which is you know it's really the deficits really the true deficits about 20 of gdp absorbing those bonds if inflation stays high is going to be a really big problem and if you can't absorb those bonds and yields are allowed to rise well that's going to be really a problematic for the valuation of the stock market which is depending on zero short-term interest rates and suppressed long-term interest rates via quantitative easing so
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