The S&P 500 took a big downward hit of 4.3% in a revival of the inflation fears from a few weeks ago. This fall comes on the back of an 8.3% rise in inflation. The 8.3% is nobody’s idea of a good number, but it’s not the whole story.
The market, as usual, looks like it has oversold with inflation as the current excuse. This is a fairly normal, irritating, double-whammy effect. You devalue your equity assets at the same time you get hit with rising prices. It’s a great way of losing both ways.
The current US inflation rate comes with some pretty disingenuous baggage. The 8.3% is the annual figure. According to the Bureau of Labor Statistics, the net increase for August 2022 was 0.1%. The world may not be ending just yet, perhaps? The 0.1% rate means the inflation has at least temporarily and very clearly gone off the boil.
That won’t stop people from finding new, exciting ways to lose money, though. There are other underlying stats and an almost-plausible rationale. The big, brutal rent increases and other costs are also part of the mix. Those are real costs which can only have negative effects on the economy.
Other factors are also waddling around in this unimpressive mix of data. The big drought, so scrupulously ignored, is doing some damage, too. There are also trade and supply chain issues. Imports are likely to have to put up prices due to the many international horrors.
The untarnished perfection of the obsessively insular US domestic economy, in short, is doing its thing of reacting to itself. It typically reacts and overreacts rather than fixing any of its own problems. Meaning all of these things are actually multiple disparate issues put through the blender and coming out as inflation.
There’s a catch or several to this idyllic situation. The big catch is that the price rises can only go so far. The US economy is huge. It doesn’t like losing money. The market in particular doesn’t like filing down its profit margins. Market resistance can come in two forms – Refusal to pay, and the entry of better, cheaper pricing and costing options.
This mysterious process is sometimes called “competitive capitalism” which did at some time actually exist. Mythological though it may seem, at some point, it will have to happen.
Point being – Nobody is going to just sit there and get slaughtered by cost increases. It’s a great way of going broke, but that’s about all you can do with it.
That 0.1% from the BLS is another catch. That 0.1% is hardly an indicator of runaway inflation. Quite the opposite – It may mean slowing growth, and rather sudden slowing growth. 0.1% is about as low as you can go without an electron microscope and a deerstalker hat.
Here comes the cynicism…
So why would the allegedly adult market react to 0.1% by wiping out 4.3% of its asset values? Waal, y’see, noble prairie fence post, They’re not talking about the 0.1%. They’re talking about the 8.3% net annual rate.
All you need to do is do a little programmed selling and start a stampede. Then you pick up your stocks at 4.3% cheaper. That’s a lot of money when you’re talking index values. The rent and cashflow issues could be fixed with some almost-sane portfolio management and a first year accountancy student; but who has time for sanity these days?
Not that this is a particularly healthy economy in many ways. The deranged efforts to get more rent out of people who don’t have any money isn’t an indicator of market mental health, either. The supply chain problems could be fixed by a 5-year-old, but maybe 5-year-olds have better things to do with their time.
Try this perspective:
Prices are being raised by people apparently determined to cut their own throats who then panic at the idea of the inflation they’re causing.
Doesn’t matter how much you raise prices if people won’t pay those prices. That is the absolute, immovable, bottom line, and it’s not going anywhere.
The mainstream US domestic economy isn’t famous for its affluence anymore. Remember that survey that said most US households couldn’t handle a $400 unexpected bill?
This is also the end of the post-truth era when it comes to real money vs hype. Nobody can or will believe they’re safe. Spending will either stop or almost stop, as seems to be happening.
The theory here is that mindlessly gouging people to make sure they can’t spend even if they want to can only destroy asset values. Who’s going to pay $5000 a week to live in a cupboard? Who’s going to accept a valuation based on that sort of business, particularly with property overheads and taxes?
However cynical you are about the economy, just realize that this stupid situation is entirely self-inflicted. These are the same people who get up in meetings and bleat demurely about “great numbers”.
Now ask yourself – Why would these innumerate bloodsucking vermin suddenly feel the need to gouge the entire country? Maybe there are some large gaping holes in those great numbers?
Why would a housing sector go to such lengths to make sure they have no tenants? Why would a vast supply chain be in no hurry to manage so many glaring issues?
If you think “supply and demand” still has anything to do with real-world economics, these questions are interesting. Why destroy access to supply, with such huge demand?
While we’re at it – Why put extra pressure on a credit market likely to go nuts? At these prices, private credit and mortgage defaults are inevitable. …Unless that’s the “idea”? Shades of 2008 if that happens.
The American public was screwed to the point of mass necrophilia in 2008. This, with sufficient stupidity, could be worse. Just add a few corrupt people to the mix, if you can find any, and see what happens.
I don’t buy a single bit of this self-serving market behavior. The stock market, as usual, will benefit from overselling. So will the short sellers. The margin dwellers will get incinerated as usual. The actual cause of real inflation, price gouging, will not be mentioned in any meaningful way.
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Disclaimer
The opinions expressed in this Op-Ed are those of the author. They do not purport to reflect the opinions or views of the Digital Journal or its members.
