Jun 10

To investors,

Inflation in the United States was reported at 8.6% this morning. This is the fastest year-over-year growth in over 40 years. The most concerning part of this report is that economists and market analysts believed that inflation had peaked in March at 8.5% and was going to start trending downward in April and May.

We saw 8.3% in the April report, but the May numbers surprised these “experts” to the upside. Inflation hasn’t peaked and is continuing to accelerate higher. There is plenty of debate on why inflation is occurring. Is it undisciplined monetary and fiscal policy? Is it supply chain disruptions? Is it the Russia-Ukraine conflict? The economy is a complex machine, so each of these situations likely plays a role.

Rather than debate how we got here, we need to be focused on what can we do moving forward. The average American family is getting decimated financially right now. The cost of eating food at home has increased 11.9% over the last 12 months. Gasoline is up nearly 50% in the same time frame. That is almost impossible for a family to withstand, especially when wages aren’t growing at the same rate.

Charlie Bilello @charliebilello

Price increases over last year (CPI report)... Fuel Oil: +106.7% Gasoline: +48.7% Gas Utilities: +30.2% Used Cars: +16.1% New Cars: +12.6% Electricity: +12.0% Food at home: +11.9% Overall CPI: +8.6% Transportation: +7.9% Food away from home: +7.4% Shelter: +5.5% Apparel: +5.0%

But this data is not telling the full story. Take gasoline as an example — prices have doubled in the last 18 months.

Gabor Gurbacs @gaborgurbacs

In 18 months, the average U.S. retail gas price more than doubled. Source: gasbuddy.com/charts

If you look at shelter, it is being reported at a 5.5% annual increase. That doesn’t make a lot of sense though. Rents are up more than 15% nationally and real estate is up more than 20%. The lower official number is the result of methodology that doesn’t accurately reflect reality.

Speaking of methodology, many people may not realize that the last time inflation was this high in America, the methodology and calculation of the CPI metric was changed.

In layman’s terms, CPI was historically calculated by simply measuring the increase in price of various goods over time. If an item cost $1.00 a year ago, and now it costs $1.10, the inflation reading would be 10%. Starting in 1980, and numerous times afterwards, the CPI metric began to change as the Bureau of Labor Statistics attempted to more “accurately” measure inflation.

These changes included an assumption that people would stop buying expensive items during high inflation and swap them out for lower cost items. There is also a focus on incorporating changes in quality into the calculation. Regardless of whether you think these changes are good or bad, it is hard to see a world where the average American family is only experiencing the numbers that are being reported officially.

There are other measurements of inflation that we can look at. Truflation is a private market attempt to more accurately measure inflation and they are reporting just under 11% over the last 12 months. This doesn’t mean they are right, but it does mean that they are showing different numbers than the official metrics.

This brings me to my last point. Wages in America have failed to keep up with the historic levels of inflation. In fact, the inflation-adjusted average hourly earnings of American workers has been negative for more than a year.

The cost of goods and services are increasing, while wages are not keeping pace. This is disastrous for millions of families. These folks don’t want to take over the world. They simply want to build a life of happiness and financial security for their loved ones. Without the right education, the bottom 45% of Americans get financially damaged during these high inflation times. They have no investable assets and then live with 100% of their life savings in US dollars.

The Federal Reserve is backed into a corner now. You have Q1 GDP contracting. Inflation hasn’t subsided even though the Fed has been increasing interest rates and conducting quantitative tightening. They don’t have many more options other than to simply put their foot on the gas. The Fed could try to accelerate the interest rate increases, both in speed and severity, along with accelerate QT. I’m not sure that they will do it, but there aren’t many other avenues to pursue.

If the Fed does nothing, the real situation on the ground is not going to get any better for the average American. Inflation reports may start to look like numbers are falling, but much of that will be due to the base effect of increasing inflation starting last summer. People need help. Undisciplined monetary and fiscal policy created this mess. We just have to be careful that a continuation of bad decision-making doesn’t create an even worse situation.

Hope each of you has a great day. I’ll talk to everyone on Monday.

-Pomp

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THE RUNDOWN:

Key US Senators Introduce Crypto Bill Outlining Sweeping Plan for Future Rules: A wide-reaching, bipartisan crypto bill emerged Tuesday from U.S. Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.), who are seeking to extend a comprehensive set of regulations across digital assets in the U.S. and have given industry lobbyists something meaty to debate. Their bill would liberate small-scale purchases of goods and services from the mire of tax implications by making transactions of less than $200 tax-free – potentially clearing a path for a cryptocurrency that acts more like a currency. And, as expected, the legislation would grant new powers and a commanding presence to the Commodity Futures Trading Commission. Read more.

CFTC Chairman 'Encouraged' by Bill in Congress to Give the Agency More Crypto Oversight: Rostin Behnam, chairman of the Commodity Futures Trading Commission (CFTC), said Thursday that he is “very encouraged” that Congress is making moves to grant his agency more authority over digital asset markets. “It’s just a positive momentum, I think, for the technology, for the industry, for the economy,” Behnam said at CoinDesk’s Consensus 2022 in Austin, Texas,. “There are unique coalitions getting together on this issue, which is very rare in Washington.” Read more.

Marathon Digital Bitcoin Production Weaker Than Hoped in May: Bitcoin miner Marathon Digital in May experienced energization delays in Texas and ongoing maintenance issues at its Hardin, Montana, facility, leading to the production of about 47% fewer bitcoins than initially expected based on the company’s hashrate last month. Read more.

Circle’s Disparte Calls CBDCs ‘a Preposterous Idea’ in Digital Dollar Debate: You know it’s going to be a fiery conversation when one of the panelists says “F**k the Fed” in his opening statement. And no, it wasn’t a bitcoin bro saying it; it was Rohan Grey, a law professor at Willamette University and strident critic of the crypto industry, who shares its enmity for the legacy banking system but has very different ideas about how to replace it in the digital age. Read more.

Darius Dale is the Founder & CEO of 42 Macro, the leading macro risk manager adviser.

In this conversation, we discuss the macro economy, what's happening in the financial markets, how Darius is looking at various metrics, and what you should be considering as you're investing your capital.

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USC Professor: The US Dollar Is Broken

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