Month: May 2021

While there was far more than met the eye in Biden’s $6 trillion budget (released late on Friday ahead of the “long weekend” as if Joe desperately hoped nobody would read it as it pissed off both conservatives as well as socialists) as discussed last week his budget proposal to Congress did reveal what Goldman has called the “most important number” in the budget – it calls for an increase in the deficit of $800BN over 10 years (0.3% of GDP over that period) to accommodate his “American Jobs Plan” (AJP) and “American Families Plan”(AFP). While the amount is not surprising, according to Goldman this is the first time the White House has formally shown the net effect of their proposals over the ten-year period Congress will use when it considers them.

Why is this important?

As Goldman explains, this figure will be relevant to the congressional debate, as Democratic leaders will need to choose a dollar figure to include in a forthcoming budget resolution that directs the committees that will craft the fiscal package. Whatever figure they choose figure will set a limit on the reconciliation legislation that follows. In most recent budget resolutions, the directive has come in the form of a directive to increase the budget deficit by a certain amount. However, congressional leaders could also specify separate spending directives and tax directives. In either case, once the amount is set, the legislation that follows may not increase the deficit by more than directed.  While congressional Democrats are free to choose a different amount, the Biden budget is the first  formal indication from any of the key decisionmakers regarding how much they propose to increase the deficit to fund their proposals.

Besides the formalized deficit number, most of the details in the budget were already previewed in White House releases over the last several weeks. The White House already announced the two major proposals, the AJP and AFP (American Jobs and Families Plans), several weeks ago, and there were few other policy proposals in the budget outside of those plans. For the most part, the specific figures in the budget match fairly closely with what the White House had already laid out. These plans are summarized in the table below.

As for the “6 trillion proposal”, Goldman expects Congress to scale back the proposal, “with a risk that it is scaled back more than we have been expecting.” Goldman’s forecast assumes that Congress enacts a package of slightly more than $3 trillion, with tax increases of around half this much. However, for the first time since the start of the pandemic, the risks to Goldman’s fiscal assumptions appear skewed to the downside.

Why? Because if congressional leaders adopt the White House position that the total deficit impact of the forthcoming fiscal package should be kept to around $800bn over ten years (i.e., the “most important number”), this would mean that Congress would need to raise taxes much more than expected (which is unlikely as even centrist democrats have balked), or increase spending far less than expected.

And with regard to taxes, Goldman expects less than half of the Biden proposals to become law:

Specifically, we assume Congress will pass a 25% corporate rate, rather than the 28% the White House proposes, and that congress will substantially scale back the corporate tax increases on international income. We expect the top marginal individual rate to increase as proposed, but the capital gains rate is more likely to settle around 28% and that the increase is unlikely to take effect retroactively, as there appears to be tepid support for a capital gains rate increase among some centrist Democrats and making the tax hike retroactive could reduce support further.

Meanwhile, as noted above, the budget highlights the smaller scale of any additional fiscal boost. The budget proposes to increase the deficit by $118bn (0.5% of GDP) in FY2022, and $224bn (0.9%of GDP) in FY2023. Spending would increase by more than this—$265bn (1.1%) and$530bn (2.2%)—but around half of this would be offset with tax increases. These are big numbers in a normal policy and economic environment, but this amounts to only a fraction, on an annual basis, of the fiscal support Congress has provided over the last year. The chart below shows the Biden Administration’s estimate of the proposals effect on the budget deficit over the next ten years.

What happens next? We expect Congress to begin moving forward on these proposals next month.

Although bipartisan discussions on an infrastructure package are continuing, the already low odds of success appear to be dwindling further. With a nearly $1.5 trillion gap between the White House’s proposal and the Senate Republican offer, and even less overlap in how to finance the new spending, it is hard to see how a bipartisan agreement will come together. Instead, congressional Democrats are likely to move forward with one large reconciliation bill, requiring only 51 votes in the Senate, that encompasses both of President Biden’s major proposals (the AJP and AFP).

Here, Goldman assumes that the House and Senate Budget Committees will begin to move forward with the irrespective budget resolutions by mid-June, which will lay the procedural groundwork for the reconciliation bill and, as described above, set a limit on the deficit impact. It is possible that the House will begin to pass legislation in committee in June, but full House passage of the actual reconciliation bill will likely take until July.  The Senate could start on the bill in July, but passage in September or October looks more likely than July at this point.

Three weeks before China admitted that a mysterious virus was circulating in the city of Wuhan, a 61-year-old woman who lived about a mile from several bat research facility was known as “Patient Su” at a local hospital, according to the Daily Mail.

Her identity was accidentally revealed after a leading Chinese official sent a screen-grab to a medical journal which partially revealed personal information, including the fact that she was admitted to the Rongjun Hospital in Wuhan, and “almost certainly lived in the Kaile Guiyan community on Zhuodaoquan Street, about 600 metres from the medical centre.”

What’s more, “Patient Su” became ill three weeks before China claimed anyone had been stricken with the novel virus.

The academic then detailed two more suspected cases reported to Wuhan doctors on November 14 and 21, along with several others before December 8 – the date that China gave to the World Health Organisation for the ‘earliest onset case’.

The Health Times article included a screenshot of the two November cases on the professor’s database. Although personal details were blurred out, some were visible, including the hospital name and home district.

They show Patient Su was treated at Rongjun Hospital in Wuhan and, given the building and street numbers, almost certainly lived in the Kaile Guiyan community on Zhuodaoquan Street, about 600 metres from the medical centre. -Daily Mail

Patient Su also lived close to a stop for the high-speed rail line believed to have played a key role in spreading the virus around the city of 11 million people, according to the report. 

Both the hospital and Su’s presumed residence are in the Hongshan district, where both China’s CDC and a downtown site run by the Wuhan Institute of Virology were located less than a mile away. According to former lead US State Department investigator David Asher, three researchers became ill with a mysterious respiratory condition in November 2019 – with the wife of one scientist dying.

One Washington source told The Mail on Sunday that US intelligence on the Wuhan researchers was collected in late 2019 in data-scraping from routine surveillance. It is thought to include tapped phone conversations, texts and emails.

He said it was not discovered until efforts were intensified last year to investigate the pandemic’s origins and any possible links with Wuhan laboratories – and that it is backed by testimony from a source with access to one of the units. -Daily Mail

The Wall Street Journal last week reported on the three ill lab workers who ended up in the hospital – claims which Beijing furiously disputes. Meanwhile, US President Joe Biden has ordered a 90-day intelligence review after it was revealed that US intelligence agencies have been sitting on a ‘raft’ of un-analyzed intelligence gathered during the course of their investigation – largely because establishment minions wrote it off as a partisan witch hunt.

“The time has come for China to open up all its files so the world can find the truth about the origins of this pandemic,” said Tom Tugendhat MP, Chairman of UK’s foreign affairs committee. “We cannot protect against future risks if there is not recognition that we all need to share knowledge and learn from any mistakes.”

Covering up the report

Professor Yu Chuanhua, professor of biostatistics at Wuhan University, was the one who revealed that Patient Su fell ill three weeks before the official disclosure date. According to the Daily Mail, however, China is hard at work performing yet more damage control.

Professor’s Yu’s interview with Health Times took place on the day China’s health authorities issued a silencing gag on the novel coronavirus as President Xi Jinping tried to regain control of the situation.

Yu rang the journalist within two days to retract this information, claiming the dates had been entered incorrectly and all the other suspected cases before December 8 needed verification.

The details were discovered by Gilles Demaneuf, a member of the ‘Drastic’ group of online digital activists who have uncovered many of the facts seen as contradicting the official Chinese narrative that Covid-19 was a disease that crossed over naturally from animals. -Daily Mail

“We were able to pinpoint the exact name, age and address of a very early suspected case nearly one month before the official first case,” said Demaneuf, a French data scientist who works for a New Zealand bank. “That address is right next to the subway line No 2 and also not far from a People’s Liberation Army hospital that treated some of the other earliest cases.”

Demaneuf argues that the new findings highlight how many more clues might be accessible if people continue to pursue the lab leak theory, rather than “wishful acceptance at face value of statements from China.”

By Noi Mahoney of FreightWaves,

Transporting goods in and out of Mexico can be a challenge for both experienced and new shippers or logistics professionals.

U.S. Customs and Border Protection (CBP) is tasked with assessing all commercial or pedestrian traffic entering the United States by airplane, overland vehicle, ship or on foot. However, in Mexico, about 10 different organizations are tasked with implementing customs clearance, issuing permits and certificates of imports/exports and protecting the border, including the Mexican army, the Guardia Nacional and the federal Tax Administration Service (SAT). 

In July 2020, Mexican President Andrés Manuel López Obrador put the army in charge of customs at border crossings and seaports across the country. The move was aimed at fighting corruption and drug smuggling. The SAT was previously in charge of customs but has a long history of corruption, according to Obrador and media reports.

“We have taken this decision about management of the port because of the mismanagement, the poor administration of the seaports, the corruption, the smuggling of drugs into the country through these ports,” Obrador said during a July 19 press conference. “Ports, and especially customs, have long been enclaves of corruption. It is not just a matter of capacity, of professionalism, it is of honesty.”

SAT, under the army’s supervision, still operates the day-to-day customs transactions across Mexico’s ports, collecting customs taxes as goods cross the border, as well as applying fiscal and customs laws. 

Mexico has 49 customs offices or districts around the country overseen by SAT. They include the border cities of Nuevo Laredo, Ciudad Juárez, Tijuana, Reynosa, Matamoros and Nogales, Arizona. 

SAT has three bureaus involved in the country’s foreign trade. These are General Administration of Customs, General Administration of Foreign Trade Audit and the General Legal Administration.

Depending on the type of goods, other federal authorities could also intervene in the transport operations of goods to and from Mexico. Other Mexican agencies that are involved in customs clearance include:

• Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food issues certificates of import and export and inspects goods for human consumption.

• Ministry of National Defense grants import and export permits and inspects goods (weapons, cartridges and explosives) during customs clearance in Mexico.

• Secretary of Health issues the sanitary import and export authorizations and verifies and inspects certain goods in accordance with regulations on health supplies.

• Secretariat of Environment and Natural Resources issues import and export authorizations and inspects goods in regard to the protection of the environment.

• Secretary of Energy issues the permits for the import and export in Mexico of hydrocarbons, nuclear, radioactive materials and fuels.

In 2020, Mexico’s annual customs revenue from foreign trade was $49.4 billion, according to SAT.

Brace for more pessimistic news about the global semiconductor shortage…

Intel is now going on the record and doubling down on statements that its CEO made on 60 Minutes earlier this year, stating that it could take “several years” for the current supply shortage of semiconductors to be resolved. 

CEO Pat Gelsinger said that the pandemic-inspired “work from home” trend caused a “cycle of explosive growth in semiconductors”, according to Reuters. 

“But while the industry has taken steps to address near term constraints it could still take a couple of years for the ecosystem to address shortages of foundry capacity, substrates and components,” Gelsinger commented. 

Gelsinger also reiterated Intel’s plans to expand: “We plan to expand to other locations in the U.S. and Europe, ensuring a sustainable and secure semiconductor supply chain for the world.”

Intel is trying to keep pace with Samsung and Taiwan Semiconductor – both of which also have plans to expand, including into the U.S. – to increase semi production. 

We noted in mid-May that TSMC had plans of “doubling down” and vastly increasing its investment for production in Arizona. The chipmaking giant said at the time it was “weighing plans to pump tens of billions of dollars more into cutting-edge chip factories in the U.S. state of Arizona than it had previously disclosed”.

The company had already said it was going to invest $10 billion to $12 billion in Arizona. It now appears to be mulling a more advanced 3 nanometer plant that could cost between $23 billion and $25 billion. The changes would come over the next 10 to 15 years, as the company builds out its Phoenix campus.

The move would put TSMC in direct competition with Intel and Samsung for subsidies from the U.S. government. President Joe Biden has proposed $50 billion in funding for domestic chip manufacturing. 

Commerce Secretary Gina Raimondo, in early May, called for a “major increase” in U.S. production capacity of semiconductors. She commented: “Right now we make 0% of leading-edge chips in the United States. That’s a problem. We ought to be making 30%, because that matches our demand. So, we will promise to work hard every day, and in the short term also see if we can have more chips available so the automakers can reopen their factories.”

Authored by Isabel van Brugen via The Epoch Times,

Rep. Michael McCaul (R-Texas), the lead Republican on the House Foreign Affairs Committee, on Sunday said it was “more likely than not” that COVID-19 originated from a lab accident, calling it the “worst cover-up in human history.”

“I do think it’s more likely than not it emerged out of the lab, most likely accidentally,” McCaul said during an appearance on CNN’s “State of the Union.”

“Let me say, this is the worst cover-up in human history that we’ve seen resulting in 3.5 million deaths, creating economic devastation around the globe.”

His remarks come amid calls for a deeper probe into the origins of the CCP (Chinese Communist Party) virus following widespread concerns that the pandemic may have been sparked by a laboratory accident in China’s central city of Wuhan. President Joe Biden has ordered the U.S. Intelligence Community (IC) to ramp up efforts to investigate the virus’s origins.

Infectious disease expert Dr. Anthony Fauci admitted last week that he’s now “not convinced” that COVID-19 developed naturally, and called for a deeper investigation into its origins.

Early reports about an outbreak of the CCP virus first appeared in Wuhan in late 2019, when a cluster of cases was reported by state-controlled media to be linked to a local wet market. More than a year later, the origins of the virus remain unknown, although the possibility that the virus leaked from a laboratory at China’s Wuhan Institute of Virology (WIV) is now receiving wider recognition.

The Wall Street Journal reported on May 23 that three researchers at the WIV were hospitalized in November 2019 with symptoms consistent with seasonal flu and COVID-19. The newspaper cited unnamed U.S. government sources familiar with a previously undisclosed U.S. intelligence report.

“That was suppressed by the Chinese Communist Party,” McCaul said, referring to the hospitalizations of the three researchers.

McCaul said Biden’s calls for a deeper probe into the origins of the CCP virus were “long overdue,” and called on the United States to “pull our supply chain” out of China as a “punitive” response.

“My response to this whole thing is supply chain. We need to pull our supply chain out of the region, that being medical supply, rare earth mineral supply,” the lawmaker said.

He also warned that the president’s investigation could be inconclusive because “they [Beijing] have destroyed everything at the lab.”

White House press secretary Jen Psaki, said on May 24 that the Biden administration has “repeatedly called for the WHO to support an expert-driven evaluation of the pandemic’s origins that is free from interference or politicization.”

“Now, there were phase one results that came through. We were not—during that first phase of the investigation, there was not access to data, there was not information provided. And now, we’re hopeful that WHO can move into a more transparent, independent phase two investigation,” Psaki said.

It’s not like we didn’t tell you so… 

The introduction of COVID status certificates is creating a two-tier society whereby vaxxed people enjoy their full rights and other perks, and non-vaxxed are heavily penalized.  

The latest example is in Florida, where a concert promoter for a future rock show this summer in Tampa Bay charges $18 per ticket for vaxxed fans and $999.99 for non-vaxxed fans, according to Tampa ABC affiliate WFTS. 

“To be eligible for the DISCOUNT, you will need to bring a government-issued photo ID and your PHYSICAL COVID-19 Vaccination Record Card (if you have lost it keep reading, we got you). You will need to have had your second shot of Pfizer or Moderna, or your single shot of Johnson and Johnson COVID-19 vaccine on or before 6/12/2021,” Paul Williams of Leadfoot Promotions wrote on his website where tickets can be bought. 

“If you do not care about the discount, tickets are available for a flat rate of $999.99,” continued Williams . 

The concert is set to take place on June 26 at the VFW Post 39 venue in St. Petersburg. It will feature appearances from three rock bands: Teenage Bottlerocket, MakeWar, and Rutterkin.

“We’re all vaccinated. We encourage everyone to get vaccinated so we can see you in the pit,” Ray Carlisle, singer from Teenage Bottlerocket, told WFTS.

This is just another example of COVID creating vast inequalities among society. Vaccine status certificates could worsen social divisions wherever they are used. Those who are vaxxed can return to everyday life, while those who aren’t vaxxed will be left out in the cold. 

So what about the people who have recovered from the virus and have developed antibodies and have opted out of vaccines? 

They are also left out, despite a new study from the University in Melbourne, Australia, which provides evidence that immunity triggered by the infection will be extraordinarily long-lasting. 

Why can’t people who have the antibodies achieve the same status as those who have been vaxxed? 

Authored by James Bovard via JimBovard.com,

On Memorial Day, the media do their usual sacralizing of war. Instead, it should be a day for the ritualized scourging of politicians.

During the last 70 years, their lies have resulted in the unnecessary deaths of almost 100,000 American soldiers and millions of foreigners. And yet, people still get teary-eyed when politicians take the stage to talk about their devotion to the troops.

On Memorial Day 2011, for instance, the Washington Post included numerous touching photographs of graves, recent widows or fatherless kids by the headstones, and stories of the troops’ sacrifices. The Post buried a short article in the middle of the A-Section (squeezed onto a nearly full-page ad for Mattress Discounters) about the U.S. military killing dozens of Afghan civilians and police in a wayward bombing in some irrelevant Afghan province. The story’s length and placement reflected the usual tacit assumption that any foreigner killed by the U.S. military doesn’t deserve to be treated as fully human.

The Washington Post celebrations of Memorial Day never include any reference to that paper’s culpability in helping the Bush administration deceive America into going to war against Iraq. When Post reporters dug up the facts that exposed the Bush administration’s false claims on the Iraqi peril, editors sometimes ignored or buried their revelations. Washington Post Pentagon correspondent Thomas Ricks complained that in the lead-up to the U.S. invasion of Iraq, “There was an attitude among editors: ‘Look, we’re going to war, why do we even worry about all this contrary stuff?’”

The Post continued aiding the war party by minimizing its sordidness. When the Bush administration’s claims on Iraq’s nuclear-weapons program had collapsed, the Washington Post article on the brazen deceits was headlined, “Depiction of Threat Outgrew Supporting Evidence.” According to Post media columnist Howard Kurtz, the press are obliged to portray politicians as if they are honest. He commented in 2007, “From August 2002 until the war was launched in March of 2003 there were about 140 front-page pieces in the Washington Post making the administration’s case for war. It was, ‘The President said yesterday.’ ‘The Vice President said yesterday.’ ‘The Pentagon said yesterday.’ Well, that’s part of our job. Those people want to speak. We have to provide them a platform. I don’t have [sic] anything wrong with that.”

World War I: Transport of the Wounded. Oil painting by Ugo Matania. https://wellcomeimages.org/indexplus/image/V0018185.html [Wikimedia]

The Post was not alone in its groveling to war. Major television networks behaved like government-owned subsidiaries for much of the period before and during the Iraq War. CNN chief news executive Eason Jordan explained a month after the United States attacked Iraq, “I went to the Pentagon myself several times before the war started and met with important people there and said, for instance, at CNN, ‘Here are the generals we’re thinking of retaining to advise us on the air and off about the war,’ and we got a big thumbs-up on all of them. That was important.” Jessica Yellin, a CNN correspondent who formerly worked for MSNBC, commented in 2008, “When the lead-up to the war began, the press corps was under enormous pressure from corporate executives, frankly, to make sure that this was a war that was presented in a way that was consistent with the patriotic fever in the nation and the president’s high approval ratings.” NBC news anchor Katie Couric stated that there was pressure from “the corporations who own where we work and from the government itself to really squash any kind of dissent or any kind of questioning of it.”

Before the war, almost all the broadcast news stories on Iraq originated with the federal government. PBS’ Bill Moyers noted that “of the 414 Iraq stories broadcast on NBC, ABC, and CBS nightly news, from September 2002 until February 2003, almost all the stories could be traced back to sources from the White House, the Pentagon, and the State Department.”

But this record of servility and deceit has not slackened the media’s enthusiasm to drench Memorial Day with sanctimony.

In reality, Memorial Day should be a time to remember the government’s crimes against the people. Politicians have perennially sent young Americans to die for false causes or on wild-goose chases.

Over the past century, war memorials have become increasingly popular. However, most of the memorials do little or nothing to inform people of the chicaneries or deceits that paved the way to or perpetuated the war. It would be a vast improvement if each war memorial also had an adjacent monument of major lies—such as an engraved plaque listing the major deceits by which the American public were swayed to support sending American boys off to die for some grand cause.

UH-1D Operation MacArthur Vietnam 1967 [Wikimedia]

The Vietnam War memorial in Washington, for instance, lists the names of each American killed in that conflict. If that memorial could be complemented by excerpts from the Pentagon Papers—or from some of the major admissions of deceit by some of that war’s policymakers—the effect on the public would be far more uplifting.General Patton said that an ounce of sweat can save a pint of blood. Similarly, a few hours studying the lessons of history can prevent heaps of grave-digging in the coming years. President Trump has saber-rattled against Iran, North Korea, Syria, and other nations. His bellicose rhetoric should spur Americans to review the follies and frauds of past wars before it is too late to stop the next pointless bloodbath.Memorial Day can benefit from the creativity of free spirits across the board. Tom Blanton, the mastermind of the website Project for a New American Revolution, proposed in an exchange on my website changing Memorial Day to make it far more realistic:

It used to be that Memorial Day was to honor dead soldiers. In recent years, we are asked to also honor veterans (who already have a day) and active duty members of the armed services. This may be an indication that the politicians feel there aren’t enough dead soldiers…

I think Memorial Day should simply be renamed Tombstone Day and people should decorate their yards with styrofoam tombstones like they do for Halloween. True-believers might even consider a few flag-draped coffins made of cardboard and maybe hanging dismembered arms and legs made of rubber from their trees.

Blanton’s proposal would provide a shot in the arm for party stores during the slow period between Valentine’s Day and Halloween. And it would be a spark for conversations that were far more substantive than the usual flag waving.

I would favor celebrating Memorial Day the way the British used to celebrate Guy Fawkes Day. Fawkes was the leader of a conspiracy in 1604 to blow up the Parliament building in London. Until recently, the British celebrated the anniversary of that day by burning Guy Fawkes in effigy. (Government officials have recently banned such burnings on the grounds that something bad might happen because of the fires. The movie V for Vendetta probably made some bureaucrats nervous.)

It would be appropriate to celebrate Memorial Day by burning in effigy the politicians whose lies led to the deaths of so many Americans (and innocent foreigners). Those whose images deserve to be torched run the gamut from Lyndon Johnson to Defense Secretary Robert McNamara to Richard Nixon to Bill Clinton (Kosovo) to George W. Bush (Iraq, et cetera), to Barack Obama (Afghanistan, Libya, et cetera). Donald Trump’s warring has primarily resulted in the killing of foreigners, but they are also worthy of remembrance and lamentation. The burnings could be accompanied by recitations of the major offenses against the truth and liberty that each politician committed.

The best way to honor American war dead is to cancel politicians’ prerogative to send troops abroad to fight on any and every pretext. And one of the best steps towards that goal is to remember the lies for which soldiers died.

Former Trump National Security Adviser Micheal Flynn made an off-the-cuff statement over the weekend that a Myanmar-like military coup not only could happen, but “should happen” in the US.

Speaking at the Dallas “For God & Country Patriot Roundup,” branded by Business Insider and MarketWatch as a “QAnon conference” (because a quilt with a “Q” on it was auctioned off at the event), Flynn was asked during a Q&A session “I want to know why what happened in Myanmar can’t happen here?“

To which Flynn – who spent 33 years as an Army intelligence officer – replied: “No reason. I mean, it should happen.“

Here is the video of former national security advisor Michael Flynn saying that he thinks a coup like the coup in Myanmar should happen in the US. pic.twitter.com/7mGYjfXg18

— Mamie 😌 (@MC_Hyperbole) May 30, 2021

After it was revealed that the FBI pressured Flynn into pleading guilty amid threat of going after his son, leading the DOJ to drop its case against him (which a judge finally closed eight months later), Flynn has become an icon among former President Trump’s most ardent supporters.

According to the New York Times, “He was one of the most extreme voices in Mr. Trump’s 77-day push to overturn the election,” and suggested using the military to rerun the vote in key battleground states – which then-President Trump could have imposed martial law to enact.

“People out there talk about martial law like it’s something that we’ve never done,” Flynn told Newsmax several months ago, noting that the military had taken over for civilian authorities dozens of times in US history.

Submitted by Keirh Dicker of IceCap Asset Management, as excerpted from the May 2021 report: “Californication”

The Elephant in the Room

Since we now know the extreme monetary policy implemented by the Americans is actually less extreme when compared to the Japanese, the Europeans, the Chinese, the Canadians and others, then there must be something else happening to create all of this (nonsensical) drama about the US Dollar being on the verge of collapsing.

And this is where the reflation trade comes into play. Monetary theorists have always proclaimed that if you produce excessive stimulus via interest rate cuts, balance sheet expansion and especially when combined with excessive stimulus, then inflation is going to storm back with vengeance.

And since it has been over 40 years since inflation was a problem for the developed world, most have become either dismissive about the potential for inflation, or have simply become ignorant towards this monetary demon.

Here is the long-term showing core inflation in the USA.

Inflation isn’t everywhere.

It’s true how every picture tells a story, and this picture of American core inflation tells so many stories, that like many stories, they tend to become distorted over time.

For starters, economic purists will forever proclaim that inflation is a phenomenon created by monetary policies. In other words, if a central bank prints money or does other excessive things, then inflation is right around the corner. And since no one wants to run into anything around any corner – this must be bad.

Yet, a casual view of this US inflation chart clearly shows how from the late 1980s to present day, inflation has never been a challenge. And perhaps more importantly (or embarrassing for the inflation purists), inflation has not once jumped out from around any corner.

Absolutely there were times when inflation was maybe about to become a concern – but those concerns were quickly swished away, not by the magical, deep thinking, parlor smoking, cognac drinking central bank economists – but instead simply by the explosion of the global economy.

Yes, the great equalizer to any inflation concerns was globalization. The inclusion of increasing more emerging market economies into the manufacturing supply chains of the developed world did wonders for keeping prices lower.

Have a gander at the chart next column.

Inflation can be complicated.

While the prices of some items have exploded upwards, the prices for other items haven’t budged. While some people dedicate their entire lives to studying inflation, and can support or refute any discussion about inflation – one incredibly important fact will always remain about inflation. The vast majority of people fall asleep at the mere mention of the word.

And since IceCap Global Outlooks are not in the business of putting people to sleep, we’ll cut straight to the chase.

To start with, and in our opinion, runaway inflation across the education and healthcare industries in the USA (and other countries) is a function of union powers for compensation and retirement packages across universities and colleges, and a function of the American approach to providing both private sector and public sector offerings across the healthcare sector.

Put another way – these two very large and vitally important economic services are structured to GENERATE strong inflation. Price increases in these sectors have little to do with low interest rates and quantitative easing. The remaining items in the chart clearly show a lack of inflation over time. While computer costs have mostly remained the same over the years, and this would be thought of as a positive contributor to inflation, the productivity powers within these computers have expanded exponentially. In other words, consumers are absolutely getting more bangs for their bucks.

This is also true for many other items within our shopping baskets.

At the same time, we are not oblivious to the obvious concerns with the exclusion of house prices from most inflation calculations.
For those who are not aware, the rapidly rising price of homes in your neighbourhood is excluded from inflation calculations.

Yes, you heard us right.

Economists have instead decided to use Owner Equivalent Rent (OER) as the factor to represent housing within inflation calculations. Let’s just say this metric kinda understates the true impact of housing on the average Joe’s wallet.

Another interesting inflation phenomenon is the central bankers’ keen focus on trying to foster an economy that produces inflation at an average annual rate of 2%. What we find so incredibly ironic about this 2% target is how it was calculated, or deemed to be appropriate. Despite extraordinary volumes of publications, millions of hours of lectures, armies of PhDs, and lifetimes of tobacco filled pipes and bourbon enjoyed near gentle simmering fires; the 2% target is simply a number magically created out of thin air.

The other interesting thing about our central bank power brokers, none of them can answer why inflation hasn’t been booming over the last 20 years.

Central banks have failed.

Since the 1999-2000 tech bubble burst, we’ve lived through nearly 15 out of 20 years with interest rates near 0%, while also having central banks implement quantitative easing.

Yet, during these same 20 years, core inflation has been greater than the magical 2% target rate a grand total of 3 years.

• Alan Greenspan failed.
• Ben Bernanke failed.
• Janet Yellen failed.
• Wim Duisenberg failed.
• Jean-Claude Trichet failed.
• Mario Draghi failed.
• David Dodge failed.
• Mark Carney failed (twice).
• Yasuo Matsushita failed.
• Masaru Hayami failed.
• Toshihiko Fukui failed.
• Masaaki Shirakawa failed.
• Sir Mervyn King failed.
• Mark Carney (again) failed.

Yes, all of these highly respected leaders of the central banks for USA, Japan, Eurozone, Canada, and Britain all failed to produce the 2% target rate of inflation. And just as these past central bankers failed with their primary objectives, it is highly likely their successors will also face an F on grading day.

The reason for our confidence is rather simple – in the eyes of these past (and now current) central bankers, the reason for this complete lack of monetary success was due to one thing – our central bankers simply didn’t cut enough rates or print enough money.

Yes, this is the point where Einstein would make a casual observation. In our minds, the IceCap observation is rather obvious – the reason inflation hasn’t soared to the moon is due to all of this central stimulus actually creating the opposite effect than what was intended.

Instead of historic stimulus resulting in companies and households going on historical spending and buying sprees, it has had the opposite effect – larger amounts of private capital has decided to not participate in the economy. The irony of central banks inability to generate inflation lies in their solutions to generate inflation.

For starters, central banks believe lower interest rates are good for everyone. Even suggesting otherwise will earn you scowls from those in charge. Yet, consistent and continuous low interest rates has absolutely massacred the risk-adverse saver’s ability to receive basic income levels to sustain their living standards.

Remember, there are two sides to every interest rate story.

One side is borrowing to either make a long-term investment, or to fund short-term needs – note that both actions are simply borrowing from future income streams.

Quantitative Easing explained.

The other side is receiving interest for lending to the borrower. For this individual, this represents cumulative past savings being used to fund current consumption. When these two sides are in equilibrium – it is adding value to the global economy. When these two sides are in disequilibrium – value is detracted from the global economy.

By stacking the interest rate deck in favor of borrowers over savers, central banks today have created a period of disequilibrium. In other words, it shouldn’t be a surprise that our economies and financial systems are acting in unusual ways. In addition to the zero % interest rates, there’s another elephant in the central bank room. And while most people are now aware of this large, slow moving and space eating animal, most do not understand just how destructive it has been on the global economy.

This elephant of course, is quantitative easing, or QE as the central banks like to say. In its very simple form, QE is an indirect attempt by central banks to suppress interest rates and keep them low everywhere for as long as possible. To achieve this non-capitalistic outcome, the following occurs:

1. Government spends more than it collects in taxes
2. Government must now borrow to make up the difference
3. Government issues bonds which are bought immediately by the country’s largest commercial banks
4. These large commercial banks, then immediately sell these very same bonds to the central bank.

This process achieves two immediate outcomes:

1. Central banks are in effect (in)directly funding governments budget deficits (and debt rollovers)
2. These central bank purchases are so large, that they influence the price of these bonds, as well as all other bonds in the world. The net effect is lower interest rates.

That’s not the whole story. There’s much more.

To start with, in order for central banks to “buy” government bonds from the commercial banks, it needs money.

Exactly where do they get this money? They simply create it out of thin air – they print it, using their keyboard. Now, this is the point where QE and money printing gets a bit confusing.

Many refer to them as being the same. This isn’t true, there is a difference. It is true the central bank “prints” money” out of thin air. Yet, it is untrue that this printed money is unleashed into the economy and intentionally create inflation.

Instead the following happens:

1. Commercial bank buys new bonds from the government
2. Central bank buys these same bonds from the commercial banks
3. Central bank pays for these bonds by crediting the commercial banks’ RESERVE account at the central bank

Credit Creation Remains Weak

Note that these new reserves cannot be withdrawn by the commercial bank. In effect, QE (or money printing) actually remains clogged in the banking system and can only be released by the commercial bank via new loans or credit creation.

It is this “clogged-up” portion of the entire QE process that makes us question whether the surging inflation story is really occurring due to QE.

If QE was working as intended, bank loans should be surging in line with QE. Instead, the opposite is happening. Of course, if QE is not being directly injected into the economy – what else is the reason for surging prices across housing, commodity and stock markets?

To begin with, one needs to look at the other side of the Keynesian Economic Theory gambit. By this of course, we are referring to the fiscal stimulus, or “stimmy” as it is now so un-eloquently known.

Yes, seemingly everyone around the world has either directly or indirectly received their stimmy from the government.

Initially, these checks were intended to act as income replacements due to the pandemic shutdowns. Yet, today it is now widely known that stimmy checks are  actually for amounts greater than what people were receiving as wages for pre-pandemic  work.

As a result, many stimmy checks have been spent (or invested) on housing, renovations, DoorDash food, stock markets and crypto currencies.

Supply chains have been greatly affected by pandemic shutdowns.

Make no mistake, this fiscal flood has been the driver of the rapid recovery. At the same time, pandemic shutdowns have also had the effect of stopping manufacturing and production of many items and goods needed for a normal economic cycle.

Here’s an example of price increases resulting from supply constraints. This table from Tyson Foods shows significant price increases, yet volumes are down across the board.

When the shutdowns are combined with the stimmy checks, the final outcome is lower supplies smacking directly into higher demand for goods and services. The result is increasing inflation.

The question of course is whether this is a temporary or permanent increase in inflation.

Currently, practically every investment house and market pundit is warning that inflation is about to sustain itself, not inline with the 1970s experience, but rather inline with the German Weimar experience from the 1920s.

And they claim it is all because of the US Federal Reserve printing money.

As markets always move in extremes, the question to ask is “what happens if higher or hyper inflation isn’t around the corner?”

The answer “a sharp reversal of the reflation trade.” Of course, another way to quickly offset all this talk and forecasts of inflation is a quick and sustained correction in equity markets.

A 20% decline would very quickly take the oomph out of the inflation expectations game. Any sudden loss in paper wealth can very quickly change all of those house purchases, renovations, and big ticket purchases.

The point we make is whenever the vast majority of the market is in agreement with any market movement, theme or future expected event – the probability of an unexpected event can very quickly create a scene where everyone is suddenly running towards the other side of the boat.

The story of the year

We acknowledge this whole inflation story is a bit unusual for many investors, yet it is absolutely THE story facing markets today. Let’s finish by squaring the inflation peg and how we believe this story will play out:

1. central bank monetary policy is not creating inflation.
2. Fiscal policy and especially stimmies, is creating inflation.
3. Global shutdowns during 2020 April May June created disinflation and these data points will cause a base effect producing higher year over year inflation for these same months in 2021.
4. Shutdowns and other pandemic responses has created supply disruptions. Unless these disruptions turn permanent, these effects will wane as supply comes back online.
5. Any severe (-20% or more) equity market correction will have a negative wealth effect and will also reduce inflation expectations.
6. Longer term Inflation will likely be driven by commodity prices and supply effects driven by non-pandemic factors.

Imagine a year ago, you were told there would be a pandemic so severe that the entire global economy would be completely shuttered for several months, and then not returning to normal capacity 12 months later. Also imagine, you were told that the social and political reaction to the pandemic was so severe that all travel for business, vacations and education would be effectively halted. As well, imagine you were told that all central banks reduced interest rates to 0% or negative %, printed unlimited amounts of money (quantitative easing) and bailed out federal, state, and provincial governments. And finally, take a few minutes to imagine you were told that governments would mandate temporary deferment of debt, rental and lease payments, while also paying workers who lost their jobs and businesses who closed their doors.

Considering the above, imagine you were then asked how would financial markets perform 1 full year out.

Most objective people would disbelieve how a pandemic could have this effect on the world. And these same objective people would believe global financial markets would be a rather unpleasant experience.

Instead, we have the opposite.

We have a non-financial world where many of the day-day changes in our lifestyles are slowly becoming the new (and expected) norm.

In addition, we have a financial-world where practically every market has gone parabolic.

Whereas many people refer to the year 2020 as the year from hell, 2021 may eventually be referred to as the year from disbelief. Maybe Dionysus, the Red Hot Chilli Peppers and Hank Moody actually did infiltrate our global economic and financial systems. Or maybe, we are all simply experiencing a cognitive dissonance.

More in the full May 2021 note below

India’s second coronavirus wave finally crested during the month of May as the 7-day average declined steadily over the course of the month, while deaths remained stubbornly high until the second half. But even more than the numbers, the spread of a mutated COVID strain first discovered in India, a strain tagged with the handle B.1.617, has raised alarm as it spread around the world.

And now China is reacting to evidence of a recent cluster of cases caused by the Indian variant to further tighten China’s border between India and their mutual neighbors. After imposing a new border at the summit of Mt Everest ostensibly to keep climbers from Nepal, which has also seen a surge in cases attributed to spillover from India, from crossing over, a partial lockdown has been imposed in the Chinese city of Guangzhou, where the cluster of cases was discovered.

It has been months since China imposed the last partial lockdowns associated with COVID, which was put in place in January during an outbreak in and around the province of Hebei, which is near Beijing.

People leaving the city, which is also the provincial capital and has a population of more than 15MM, must test negative for the virus within 72 hours before their trip. Already, some 520 flights have been cancelled at Guangzhou Baiyun International Airport, one of the world’s busiest air travel hubs, as of 1140 local time on Monday.

Earlier, authorities announced stay-at-home orders for residents of several streets in the city’s Liwan District, where the first infected patient was discovered on May 21. Chen Bin, the deputy chief of the provincial health commission, confirmed to Xinhua that all locally transmitted cases found in Guangzhou since May 21 had been linked to the B.1.617 Indian variant.

China has largely managed to contain the spread of COVID-19 since the outbreak began in Wuhan around December 2019. While cases have (officially) slowed to a crawl, scrutiny of the virus’s origins has intensified amid a growing body of evidence that the virus escaped from a lab in Wuhan, while geneticists are finding even more evidence that the vaccine was likely human-made, the result of “gain of function” research that Dr. Fauci and others have championed (Dr. Fauci even argued that the potential risks of a global pandemic are outweighed by the potential benefit to society) for years.