People See Better Than Economists

 

Statue of a REAL economist — Adam Smith. Photo by K. Mitch Hodge on Unsplash

Can you believe the Treasury market is already unwinding its bets that the Fed is done fighting inflation, even as the Champagne is still bubbling in half-empty flutes left behind from everyone’s celebration of the Fed’s victory? Of all the odd things, the average consumer out there, who is not heavily invested in stocks and bonds, seems to believe inflation is actually kind of bad and getting worse.

One of our highlighted articles today says consumers are continuing to increase their expectations that inflation will actually rise in the months ahead. I guess something happened on the way to the market, and they figured out that prices seem to be rising faster now, even though the government has clearly told them that isn’t so! Most of these consumers don’t even read The Daily Doom; so, how do they figure this out? People like Jerome “Powerball” Powell and Yanet Jellin’ would like to know where they are getting their peculiar ideas about inflation.

The bond market, once praised for being “the smart money” hasn’t figured it out, so it found itself on the opposite side of the bet from consumers. Says one article today:

American households see inflation accelerating to 4.5% over the next year, up from 4.2% in October and from 3.2% in September, the University of Michigan's twice-monthly survey of consumer sentiment showed. That is the highest rate since April.

Imagine that! Their expectations have been climbing each of the last three months right along with the actual climb in each month’s inflation! What an odd coincidence. From that, I conclude, it’s like they can see. Whereas Fed officials and all the people who write about the Fed in mainstream financial media must all be like cave fish.

In fact, unlike brilliant college-educated stock investors, consumers don’t believe inflation will even be back to normal five years from now; and their estimates of how long this battle will last have also consistently been getting worse:

Over a five-year horizon, consumers now see inflation running at 3.2% on average, up from 3.0% in October and 2.8% in September.

And, just to give you a clue of how far off the highly educated economists, who write about these things in the media that matters to all who care about pedigrees and political correctness, from understanding what they are writing about:

"These expectations have risen in spite of the fact that consumers have taken note of the continued slowdown in inflation," survey Director Joanne Hsu said in a statement. "Consumers appear worried that the softening of inflation could reverse in the months and years ahead."

Um, no. Actually you and nearly all the economists out there have been taking note of that in your writings, and you just mistakenly thought consumers were listening to you and believing you because you thought you were important and thought you knew something. It doesn’t occur to you that all your words might mean nothing at all to them. It turns out consumers have been taking note of price tags, which are smarter than you are, even though they are just bits of paper and ink. Consumers have been feeling that month-on-month rise in the rate of inflation that you don’t think is important at all, so your writings have ignored it.

That goes like this for you guys who keep focusing on information largely driven by what was happening months ago … I guess because it says what you want to believe:

U.S. inflation has slowed notably since the summer of 2022 when the annual rate of price increases reached the highest since the early 1980s…. As measured by the central bank's preferred gauge, price increases of late have been running at 3.4%

Those would be year-on-year price increases. However, regardless of your YoY drop in the rate of price increases, consumers have been noticing that for several months now things seem to be going up faster again. So, they are kinda betting on that. But that is because they are the smart money now — the people who don’t have their heads stuck up that physiological area that you guys might as well wipe with your diplomas because that is apparently all they are worth.

"For a data dependent Fed, this is not good news as they do not want to see consumer inflation expectations become unanchored, since historically it becomes increasingly difficult to reset consumer psychology towards a lower inflationary environment," Quincy Krosby, Chief Global Strategist for LPL Financial … said in a note following the latest Michigan survey.

Maybe someone should tell the Fed that expectations for a rise in the rate of inflation are already anchored among people who actually shop for things! That would not include mainstream economists because they clearly are not people, and it wouldn’t include anyone making decisions at the Fed because they have people who shop for them.

Another article on the subject also notes,

In other economic news, applications for US jobless benefits fell last week after a run of increases, a slight reprieve in what otherwise has been a gradually cooling labor market.

Oh, good. At least, the labor market is going the opposite way of what the Fed needs to see in order to pivot as the stock market is certain it is going to do any week now … as it has been certain every other week this year. Left, right; left, right — so goes the pivot dance. Up, down; up, down go the stocks.

Someone needs to tap the broken labor gauge with their finger or snap everyone writing in the financial world between their eyes to wake them all up to the realization that the gauge is broken. By the time that particular thermometer tells you anything consistent or accurate about how hot the labor market and economy are, we’ll already be roasting in the fires of financial hell.

Nevertheless, the permabulls aren’t giving up their irrational exuberance anytime soon (at least, not until next week or the one after):

“The sentiment set up is constructive for now,” Calvasina wrote in a note, saying that an indicator of investor appetite that’s proved reliable in 2023 is sitting in a range typically followed by 10% gains in the S&P 500 over 12 months.

Nice. Constructive in a time of deconstruction. Which means they are not giving up their delusions about inflation:

“Valuations can stay higher than many investors realize,” as cooling inflation should support price-to-earnings multiples, she wrote.

Oh, you mean that inflation that cooled upward in temperature for three of the last four months then held steady for the last of the four months, but only held steady because of the Great CPI Lie on healthcare costs and the drop in energy, which the Fed always ignores anyway? That cooling inflation?

Fortunately, we can alway count on the Yellen brain trust:

“I do think we’re making considerable progress in bringing inflation down. But Americans do notice higher prices from what they used to be accustomed to,” Secretary of the Treasury Janet Yellen recently told CNBC’s Squawk Box. 

Make that “Americans do notice higher-and-higher prices” … as in rising at an increasing rate, and then you have it right. You are making considerable progress in getting prices to rise nearly every month since the middle of summer, with the exception of the last month that merely held at the same elevated rate.

Earlier in the week Yammering Yellen had noted,

“Although prices in general are rising less quickly, Americans still see increases in some important prices, including food, from where we were prior to the pandemic. And this remains notable to people who go to the store and shop,” Yellen said on CNBC’s Squawk Box Monday.

Ya see, Yellen, that’s the thing: The people who actually go to stores and shop out of need are not seeing what you are seeing in the places you spend your Saks of government gold, such as Saks Fifth Avenue. I’m talking about the people who have to eat!

Their inability to see reality may, however, catch up to these government turkeys who gobble up everything that is yours, including the turkey on your table and the cranberry sauce, with the inflation they created:

As President Joe Biden runs for reelection, this disparity between what the Biden administration sees as “considerable progress” and what voters see in their monthly household expenses is shaping up to be one of the strongest headwinds Biden faces.

Yes, there seems to be a lot of disparity these days between what voters who eat see at the store and what they read in government reports written by the campaigning carnivores who are eating them … as I wrote about here: “The Deeper Dive: The Great CPI Lie Exposed.”