Taps Coogan – January 11th, 2022

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For the past year and a half we’ve repeatedly brought up two ideas. The first was that inflation was going to overshoot the Fed’s dreadfully bad base effect/transitory inflation call due radical changes in the size and structure of monetary and fiscal stimulus. That’s now history.

The second was that we live in an historically interest rate sensitive economy dominated by too much debt and over-financialization that is premised on excessively accommodative policy. In other words, the moment the Fed got serious about raising interest rates and reducing its balance sheet, inflation would peak. That’s now.

Simply put, so long as the Fed viewed inflation as transient it would be persistent, but once it viewed it as persistent it would prove transient.

Well, right one cue, one of the leading indicators that inflation was going to exceed the Fed’s laughable base effect argument, manufacturing prices paid, looks like it has peaked, via Acemax Analytics.

Because the CPI/PCE numbers lag reality, inflation may keep rising for another print or two, but the notion that we were at the start of a 1970s era of persistently higher inflation despite rising interest rates and a bear market never really held up to scrutiny. Debt, demographics, financial assets, etc… are in many ways in the exact opposite place as the early 1970s and much closer to the setup in the late 1920s.

The Fed’s policy mistake of keeping QE and ZIRP on full blast all year despite high inflation, resulting in an obvious financial bubble, was amateurish. Now under-estimating the sensitivity of that financial bubble to tightening, and the sensitivity of the economy to financial markets, would be a much more serious mistake.

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