CPI and PCE data from BLS chart by Mish

Worst of Both Worlds

Here's the Bloomberg take: US in ‘Worst of Both Worlds’ With High Inflation, GDP Slowdown

The US economy was slowing even before the brunt of any credit crunch stemming from the recent bank failures, while inflation accelerated, highlighting the enormous challenge faced by the Federal Reserve.

Inflation Take

• Demographics Part 1: The replacement of retirees and full-timers going to part timers with those less skilled is inflationary.
• Demographics Part 2: Expect huge increases in need for Medicare commodities and services.
• When the Fed cut rates to zero, existing homeowners could and most did refinance at or below 3 percent. This continually puts extra money in their pocket every month at the expense of Zoomers now looking for their first home.
• The SS COLA and 2023 tax adjustment support consumption at least for a while.
• Wage pressures due to minimum wage hikes perpetually raise worker demands for wage growth. And workers can get what they seek because of demographics.
• Biden's energy plan is hugely inflationary.
• Biden's push for more union jobs is inflationary.
• De-globalization, barely started is inflationary.
• Going from just-in-time manufacturing to better-be-safe supply chain management is inflationary. 

Deflation Take

• Money supply is very deflationary.
• Rising interest rates are deflationary. 
• Debt is very inflationary when you struggle to pay it back while asset prices fall.
• Unrealized bank losses curtail lending and that is deflationary. 
• A stock market crash would be very deflationary. 
• Rising unemployment would be deflationary.
• Demographics Part 3: Money is conserved in retirement especially if the stock market does not keep growing. 
• Demographics Part 4: SS does not make up for loss of job income. 

Those are the forces in play. 

Which View Has More Force?

"There's nothing more deflationary than not having a paycheck....6 to 12 months out we're not going to need labor to fill orders we don't have." @DiMartinoBooth

Headlines like the one below won't last long here. Europe not so much. QI clients know.

https://t.co/6DNK8jdeYQ

— Andrew Sinclair, CFA (@CT_Osprey) April 27, 2023

"There's nothing more deflationary than not having a paycheck....6 to 12 months out we're not going to need labor to fill orders we don't have."

M2 Money Supply Declines 8 Straight Months, ODL Down 12 Straight Months

Money supply is declining at the sharpest pace since the Great Depression.

For discussion, please see M2 Money Supply Declines 8 Straight Months, ODL Down 12 Straight Months

What Happens to Unemployment?

For the near to mid term, the severity of a credit crunch will depend the severity of rising unemployment and on bank losses that impact willingness of banks to lend. 

I am not as concerned about rising unemployment than most of the economic bears. 

Millions of retiring boomers will prevent a massive rise in the unemployment rate. 

In 2001 and 1990 recessions, the unemployment rate only rose 1.1 percent. Based on demographics, half that would not surprise me in the least. pic.twitter.com/YLHL8zvjaq

— Mike "Mish" Shedlock (@MishGEA) March 8, 2023

Expect the Opposite of the Covid Recession

Demographics and fundamentals both suggest the exact opposite of the Covid-recession that was very short and very steep.https://t.co/0eYOXqajGr

— Mike "Mish" Shedlock (@MishGEA) March 8, 2023

Demographically Sobering Thoughts on US Employment in the Next Five Years

For discussion please see Demographically Sobering Thoughts on US Employment in the Next Five Years

Assuming I am correct, and Adam hopes I am, the Fed has a huge problem with sticky inflation pressures. 

In contrast to other recessions, the Fed will not be able to step on the gas like before. 

The winds of de-globalization and decarbonization are blowing strongly in the Fed's face.

Now put war into the mix. 

Importantly, millions of people refinanced their mortgages at or below 3.0 percent. As a result, they have extra money to spend perpetually, every month going forward. 

The Fed cannot undo this inflationary pressure. Moreover, rate hikes have completely different impacts on retirees who welcome higher interest rates on bonds and on those who refinanced at great rates than those about to lose their job.

I do not recall anyone mentioning these important points.

What to Expect

If the Fed gets everything perfect (it won't) the best we can hope for is a long period of very slow growth or an economy that floats in an out of recession or near-recession for a long time.

If the Fed has overshot already, we are headed for a round of severe deflation given another hike is nearly certain. If the Fed undershoots or reverses prematurely, inflation can easily come roaring back.

The stock market is not remotely priced for either scenario or for a ping-pong from one to another. Nor is it priced for higher-for-longer. Instead, the market is priced for something beyond Goldilocks perfection. 

Both Sides Now

I've looked at debt from both sides now, from win and lose but still somehow it's debt's illusion I recall, I really don't know debt at all. 

When credit marked to market is rising, it's inflation. When falling, it's deflation.

So good luck no matter whether you expect deflation or inflation. Either way, the alleged worst of both worlds is about to get worse for most people.

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