Private inventories to GDP are rock bottom

This is because of a sudden & forced shift to at home goods consumption that caught everyone offsides

The restocking upturn is set to continue

Once the industrial upturn runs it's course, we'll be back to the same old trends

There's been a secular trend of services consumption growing faster than goods consumption.

That trend shifted suddenly but is unlikely to last for years after the economy re-opens. This shift is likely temporary and a result of forced lockdowns, fear of consumer-facing businesses, etc.

As a result, all the inflation we are seeing is from the goods sector which has similar long-term and short-term trends.

We're unlikely to see a sustained trend of goods inflation rising faster than total inflation once lockdowns end, supply chains are freed and the rush to restock inventories (using industrial commodities) ends

It won't end tomorrow so we have to keep watching the leading indicators.

I believe the inflation picture is coming from this vector while the inflation coming from QE is more centered around financial assets.


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More from @EPBResearch

13 Jan
I have been discussing the trends in inflation lately.

Today's report showed more of the same.

Inflation is coming from the industrial upturn, concentrated in the goods sector while the services sector is showing declining rates of inflation.

Headline inflation ticked up slightly and is mostly a balancing act between rising goods inflation and falling services inflation.

2/ Image
Goods inflation continues to rise, jumping to nearly 4% on a year over year basis.

Goods inflation (and industrial commodities) are rising due to manufacturing backlogs caused by shutdowns and the overall shift to at-home goods consumption and away from services consumption.

3/ Image
Read 5 tweets
11 Jan
It is difficult to change a 10-year trend.

Long-term expectations do not change as frequently as daily market fluctuations would make it seem.

A quick update on Treasury rates through the lens of the DKW model

*As of Dec. 31*

In previous threads, I made the distinction between long-term secular trends in growth and inflation and shorter-term (2-6 quarters) trends in nGDP growth

Right now, the long-term trends are unaltered because long-term trends just don't change that fast but we have a very strong cyclical upturn in the economy, centered primarily on the shift to goods consumption bolstering the manufacturing sector and industrial commodities.

Read 12 tweets
4 Jan
Consensus continues to conflate the inflation story, mixing and matching long-term and short-term charts to fit what is generally a secular inflation narrative.

Here are my two cents to make the distinction clear.

There are long-term, secular trends in inflation driven by trend economic growth, monetary policy & fiscal policy.

There are also short-term trends in inflation that are driven by the ups and downs in the manufacturing industry.

If we look at any of the critical long-term monetary variables, a secular shift in inflation is not yet in the cards.

The money multiplier "m" continues to fall which means the new money supply is coming from fiscal spending (finance day to day needs) and QE from non-banks.

3) Image
Read 11 tweets
30 Dec 20
US Dollar Trends

The Fed Trade Weighted Dollar Index fell another 1% over the past month.

The decline was led by the dollar falling against advanced economies as the dollar was down less against emerging market economies

The Fed's trade-weighted indexes are my preferred US dollar aggregates, far better than popular measures like the $DXY due to the concentration

The USD is down 7% across the board in the last six months.

Surprisingly, the USD is still up on the year relative to EM economies

With exceptions, the USD moves counter to global industrial growth

An industrial boom generally puts downward pressure on safe-haven dollars in exchange for more risk while economies are accelerating

Read 8 tweets
29 Dec 20
Diminishing Marginal Returns

The productivity of our debt is collapsing and that is creating a major problem.

The problem is here now, and not in the future.

Here is why:

Charted below is the increase in total debt and the increase in nominal GDP in the 8 quarters before each of the last six recessions.

In other words, how much did debt increase, and how much did GDP increase in the final two years of each economic expansion?

As the chart shows, it is taking a larger amount of debt to increase GDP.

Read 10 tweets
28 Dec 20
M1 money supply is rising at nearly 70% year over year

What is going on and does this mean inflation is coming?

Shorter Answer: No

Longer Answer: Not from the monetary channel

Money supply started to accelerate at the end of March, almost 9 months ago

Inflation was the concern at the time.

"Not in the short-term" but over the long-run was the phrase

9 months later & inflation is lower than when the pandemic started because velocity collapsed

There is a cyclical upturn ongoing in the manufacturing sector which is giving rise to "goods" inflation but that is wholly separate from the (lack of) inflation emerging from the monetary channel that many fear with posts of M1 or M2 money growth.

Read 12 tweets

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