The local pub owner was telling my husband the other that he felt secure in the face of the inflation because he had pre-bought three months worth of beer supply. He could now relax for a bit because he knew what his costs would be for at least a quarter. After that, he was hoping the inflation situation would all simmer down.
This sort of thinking is very rational from the point of view of the pub owner. The “pre purchases” act as a type of hedge. The trend is also indicative of the problem central bankers are facing as they try to unpick panic buying effects from more sustained ones.
Much like with the petrol panic, a lot of the “inflation” manifesting today will be demand brought forward to today from tomorrow. In theory this should abate as soon as consumers reduce consumption in response to higher prices. That is and always has been the quintessential logic driving “team transitory’s” argument. And it’s definitely not an insane theory.
An important question facing retailers, as a result, is how much of the inventory they have accumulated in a panic might have to be sold below break-even rates?
The fear that a lot of it might be has been the talk of the market this week because a number of retailers posted disappointing retail sale figures that pointed to the need for sharp discounting of pre-purchased stock.
Here’s what the Morgan Stanley’s US equity strategy analysts had to say about it:
Excess inventoryis now a risk the market caresabout… Earnings reports from major retailers raised cyclical concerns among investors last week as they pointed to margin pressure,a struggling low end consumer and excess inventory build. While we think the margin pressure and waning low end consumer demand dynamics have been largely understood by the market, we think the excess inventory element and the associated risk to pricing is less understood and is just now beginning to be reflected in stock prices. This has been a risk we have been flagging for the past several months as the lagging economic data has reflected this development. What’s brought this risk to the forefront recently has been corporate dialogue around inventory build during 1Q earnings season—a dynamic that’s being reflected in rising inventory/sales growth spreads across S&P industries in 1Q.
It is very tempting to interpret the above as indicating inflation pressures are peaking.
Adding to that theory are rising auto loan defaults as well as defaults in other subprime loan markets. This points increasingly to the notion that a rate-rise ceiling will manifest very soon.
As far as wealth effects go, the following caught my eye from Goldman’s hedge fund monitoring team, which tracks the performance of concentrated shorts (which benefit when crowded shorts are squeezed by larger than expected inflows). As they noted this week:
“Since late 2021, however, a reversal in household investor flows has corresponded with a reversal in the performance of concentrated shorts. Based on estimated retail flow data from our trading desk, it appears that retail investors have now sold most of the US equity purchases that took place during the last two years. Likewise, our derivatives research analysts estimate that individual investors have now reversed more than half of the increase in call option buying and NDX stock positions that had accumulated since the start of the pandemic.”
A.k.a the Wallstreet Bets/ stonks force is powering down, which would imply Covid stimulus wealth effects are petering out too.
It’s hard to envisage anything other than a recession on its way.
But is it peak inflation? Harder to say.
I’m going to hedge myself by saying that while the peak inflation theory is very rational, it may be failing to account for what I consider to be a potential market blind spot.
Since 2008, easy money has helped to support a huge array of businesses and products that might otherwise have not made it.
This has expanded consumer choice to hitherto unheard of levels, injecting extreme variety into every single shopping basket. There isn’t just one milk. There are scores of different milks to choose from on supermarket shelves. Almond, skimmed, coconut-almond, rice etc etc etc.
My hunch is that as shoppers are forced to become more discerning, it’s this variety that we have become accustomed to on our shelves that will suffer first. The system just won’t be able to afford it anymore.
Small luxuries will have to be abandoned as the system orientates towards putting more essential supplies from more efficient suppliers first, while prioritising corporate profitability.
If that’s the case it’s not that discounting and price deflation will become the norm as inflationary forces give way to falling demand, it’s that inefficient suppliers will have to go bankrupt. Can cheap money come to the rescue of such trends to prop up the millennial fuss dollar again in this context?
I’m not sure it can.
The economy’s capacity to provide the market with lactose intolerant almond coconut blended milk can only be sustained at the cost of something else.
What the market needs to consider as a result is what that something else is.
But what if we are facing a Gos market reckoning?
My thesis remains that a huge portion of the global economy has, as a result of years worth of cheap money, been misdirected into supporting fundamentally unsustainable industries and business concepts that were predicated on globalisation, cheap labour and zero sum logic. All three of these conditions can no longer be assumed to be a given.
This is a big issue.
If the economy really has structured itself around ill-conceived assumptions that certain “technologies” (which were really monopolies) created efficiencies when they did not… then all the industries they in turn birthed should not necessarily exist.
This applies to everything from cheap taxis and delivery services, to the entire ad-based influencer economy — and the lifestyle adjustments these have facilitated.
If the base technology at the heart of these Schumpeterian “new jobs” is actually centred around a zero-sum reallocation of capital from one sector to the other, not productivity gains, then it’s very possible the entire pyramid of millennial fuss dollars will have to be toppled. Unless we are prepared to give up our sovereignty and become a de facto colony of a more productive state.
Yes, in theory, any economic restructuring that follows suit should be deflationary.
The problem is, if the QE printing presses or cheap money end up funding this restructuring, this might not be the case for very long. Too many non-productive companies will immediately start competing with productive ones over ever scarcer input and labour resources without delivering any aggregate efficiency gain.
The only way out of this quagmire, I suspect, is to make cheap money conditional to those who can demonstrate productivity gains. You know, like back in the old days of bank lending.
But this is potentially going to be a huge shock for the economy, akin to a USSR style breakdown.
I don’t think the USSR situation is an entirely crazy analogy – the only difference between then and now is that the subsidy systems that misallocated capital during the communist period were government based whereas now they are a function of inefficient private sector monopolies.
The bureaucratic load, meanwhile, is also very comparable in both systems.
I can really understand this now that I am working for myself, as I feel about 100x more efficient in an independent capacity than I did in a corporate structure. Yes I lack scale. But scale is meaningless if it leads to diminishing productivity rates at the unit level. If every efficiency endowed upon an organization as a result of scaling is offset by a lack of unit efficiency – nobody is better off! This is especially the case if it takes monopoly-sized scale to sustain any business.
As inflation bites and bankruptcies begin, the bureaucracy across the entire system, from the corporate to government level, will have to be unwound.
That’s going to be a big shock to people who have thrived as beneficiaries of those bureaucracies.
None of this changes the fact that defaults will skyrocket and that cheap money will no longer be able to stop this. This is how restructuring works. We have come to the end of the line.
The broad brush nationalisation of struggling mortgaged housing stock is the next logical step. As for all the out of work Youtube and Instagram influencers, some share of them can be put to work in the government propaganda industry. The others will have to find some real skills.
