Pick Your Poison

Chart of the Day: Pick Your Poison – Deep Recession, or Hyperinflation?

Markets have recently been fixated on the mounting speculation that the Fed will hike four times (or even “six or seven” times, thanks to Jamie Dimon’s comments) and commence shrinking its balance sheet. This is to attack the much-reported skyrocketing inflation rates (currently at 7%).

But will these Fed hikes actually happen? Whether due to Omicron or because the vast majority of US consumers are tapped out, recent economic data are suggestions that our economic elites will have a very serious decision to make. First, check out the chart below that juxtaposes employment vs. retail sales.

Employment vs Retail Sales 2022-JanWe have 4 million fewer people working in America compared to pre-Covid and yet retail sales are up 22%. How can retail sales be up if not near as many people are working? There are many reasons, but one can postulate the two main reasons.

  1. Total retail sales are up due to inflationary effects but do not explain the entire 22% retail sales rise. Why are Americans on a buying binge?
  2. Americans are hoarding due to Covid and future economic fears. Perhaps Americans are not as stupid as one might think. Though many may not understand all the economic data underneath, they know something is coming.

This chart above also debunks the recent Democrat narrative that supply chain issues are causing inflation. If there is no supply how can the retail volume be rising in this way? Supply chain issues can cause transient issues in inflation but can’t explain the long-term inflation trends and would not cause the Fed to even consider raising rates.

The above chart of employment vs. retail sales is not sustainable. Something will cause this chart to return to the mean. Bank of America’s Michael Hartnett put it best when he said that the “End of Pandemic = US Consumer Recession” (more here). But this may not necessarily be true in the short run. As stated before, the economic elites (mostly the Fed) have two options.

  1. Recession: Fed decides to stop inflation with multiple rate hikes, sending the US economy into a recession. This recession could be further exacerbated into a deeper recession as consumers are already tapped out.
  2. Hyperinflation: The economic elites refuse to allow the economy to go into recession and not execute the Fed rate hikes. Further stimulus is coming for the economy via government fiscal policy with even more stimulus bills passed by Congress. The result will be hyperinflation that is significantly higher than we see today.

Of course, the economic elites will try to thread the needle – but the charts have gotten to such an extreme point it may not be possible. Which path our economic elites take remains to be seen. Pick your poison – either way, it could get ugly in 2022.

See more #chartoftheday posts.

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 RWR original article syndication source.

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    • What is the default position? My guess is the Fed will act dovish – Biden’s nominees to the Fed board appear this way. Hence, most likely hyperinflation – unless we get a change in leadership at the WH. But even with this hyperinflation, we could still see a recession, though milder if the Fed does not raise rates significantly (as in case 1).

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Written by Tom Williams

Born down on the farm in America's Midwest, my early life was spent climbing the ladder via a long career in information technology. Starting as a technician, and after earning a degree going to night school, I eventually found a place working at ATT Bell Laboratories as a software engineer.

Later moving into management and then a long stint in a major management consulting firm working with major banking, telecommunications, and retail companies. Working in various states in America, I also spent considerable time living and working in several European countries - currently expat in France. As a side career, I was heavily involved in real estate development and an avid futures trader. This experience can give one a unique view of the world.

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