This Is What The Start Of Deflation Looks Like

While the Fed is busy hiking rate because their PCE is telling them to, the economy is facing serious headwinds.

The reality is that we see reversal in prices happen in pieces. It is something that is customary when the price increase is NOT due to money printing. When there is excess money, as was the case in the 1970s due to the massive expansion of the Eurodollar system, we see across the board price impacts.

Today, we have a much different story. This is why the comparisons to the 1970s is not vaild. They were a totally different set of circumstances.

A lot is being made of the supply chain disruption, and rightly so. We live in a world where the manufacturing of products is a global affair. Anything that interrupts that is going to have a significant impact upon what is taking place across the globe.

The locks of 2020 did a number on the economy. Most of what normally took place came to a screeching halt. This led to massive increases in prices in 2021 since there were shortages in just about everything.

Nowhere was this more evident than in shipping. Of course, as the discussion of recession mounts we are seeing where this is coming from.

Shipping Price Skyrocket Then...

Remember when the news was how the price of shipping was going through the roof. The amount being paid to ship a container full of product skyrocketed. Of course, this fed into the price escalation that we saw. When companies were spendig 4-5 times normal to ship the same goods, you know there is a problem.

The above chart is from Freightos Data. This tracks the global contrainer rate. Notice something about the chart?

Naturally, we see how the price left the longer term trend in 2021 and shot up. This peaked in September, then something interesting happened: it reversed.

Since that time, but for a short bump in the Spring, it has headed down. It is still a bit elevated yet each week it is getting closer to the norm. In fact, it has not had a week where it went up since June. That means every week, for 4 months, it dropped.

What does this tell us about demand?

The answer is clear. This is just another sign that matches what we discussed for months: supply is outpacing demand with inventory data, since Q4 of last year, showing record inventory gains.

Do you think it is coincidence with the contrainer rates starting to fall?

We all know the answer to this.

The Fed Didn't Cause This

Contrary to what the Twitter economists (and mainstream for that matter) believe, the Fed did not cause this. The Fed does not print USD so the ability to create too much money is not possible. Other than physical banknotes, Fed liabilities are not legal tender. And since we do not settle using paper money, it is just about worthless.

Reserves from the Fed, the ones they use during QE as an example, are bank instruments that are pegged to the dollar. They can be redeemed for $1 in physical cash. It cannot, however, be converted to "digital" dollars like what the commercial banks create.

Therefore, something else must be going on here. Since the commercial banks have let at a rate of 1.03% since Q3 of 2008, that means the banks are not radically increasing the supply of USD. Thus, we are left with the fact that money did not cause this problem.

What did cause it is not being resolved. This is nothing more than a massive supply-demand battle. In 2021, there were major shortages, at least for most of the year. Then, in the 4th quarter, something changed. Suddenly, retailers noticed they were getting swamped with inventory. It is something we covered at the time since the month over month gains were record, two out of the three months.

This was one major warning sign things were cracking. Now, we have laptops, big screen tvs, and a host of other products which were hot in 2020 sitting on shelves. Warehouse space is at a premium since we are dealing with so much excess stuff.

The only thing left is for the layoffs to start. Have you noticed how things such as movies are struggling. There were a number of high budget releases that bombed. This is a sign that people are being very careful with their money. Many streaming services are starting to suck wind too. This is normal as households look to readjust their budget. Discretionary options such as HBO+ or Netflix end up being casualties.

None of this is out of plain site. We are seeing it clear as day. For the better part of a year we discussed the upcoming headwinds that are only getting stronger. Unfortunately, the switch from inflation to deflation can often flip quickly. Economy contraction can be brutal.

Like most things, they are slow on the way up but fast going the other direction.

As we can see with contrainers, one the slide starts, it can last a while. Anyone want to guess where container rates will be in a month?

My guess is lower than they are this week.

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