What Is Really Driving “Inflation” Today

Roughly speaking — very roughly – there are five theories, and two subsidiary theories, proposed by different groups of economists and others to explain rising prices, or “inflation” so-called:

  1. Bad monetary policy – the central bank “printing too much money” which effectively devalues the currency relative to the value of real goods and services, driving prices up
  2. Corporate Greed – companies exploiting the public, squeezing higher profits and driving prices up
  3. Rising Inflation Expectations – a psychological explanation, which strangely holds that if the public thinks prices will rise, that alone can cause prices to rise
  4. Supply Constraints – bottlenecks in the economy that create shortages of key goods (e.g. energy and other commodities), driving prices up
  5. Demand Pressure – an economy that is running “too hot” with excessive demand that leads buyers to be willing to pay more, driving prices up – which is often explained as the result of… [these are the subsidiary theories]
  6. Loose fiscal policies that give consumers too much “extra” cash to spend, like tax cuts or stimulus checks
  7. Wage increases driven by workers’ demands for excessive compensation

These are more than mere theories. They represent distinct and comprehensive worldviews, expressed in broad economic philosophies and partisan political platforms.

Which explanation, or worldview, is correct? The question is important, because different theories lead to different and often mutually incompatible policies. A full answer would call for a book-length treatment. But two general points underscore the complexity of the problem:

“Inflation” – which, to be clear, refers very specifically to a measured rise in posted prices of the items in a market basket of goods and services defined by the Bureau of Labor Statistics – seems like a simple symptom, but it can be and likely always is very complicated with multiple contributing causes; in other words, several of these factors may be causally relevant at the same time

“Inflation,” so defined, is not the same “always and everywhere” (pace Milton Friedman) – just as a fever in a person can arise from many different causes – some innocuous, some annoying, some lethal – a rise in prices can issue from various sources of stress in the economy, not all of which should carry the same weight in spurring public policy

In the concrete present moment, however, “all of the above” is not a satisfactory answer. Policy-makers – at the Federal Reserve especially, but elsewhere in government – as well as investors, trying to anticipate the direction of the financial markets – need to decide which of these factors – supply, demand, the money supply, psychology – is likely to predominate today, as the immediate guide for action.

The Federal Reserve – following a prevailing fashion in economics – appears to have decided that the psychological explanation carries the greater weight right now. Fed officials have resorted to tough talk, and performative interest rate rises, to try to knock down our inflationary expectations going forward. If they can somehow calm our feverish expectations regarding future inflation – Fed policy folks speak of preventing our expectations from “de-anchoring” – and if it brings actual current inflation down, that will constitute the much-desired “soft landing.”

But there is a harsher tone now emerging from the chorus. If (we are told) throwing cold water on the public psyche is insufficient, it may become necessary to inflict damage on our standard of living, to reduce actual demand. How? By raising the unemployment rate for example – as Larry Summers has urged:

“‘We need five years of unemployment above 5 percent to contain inflation—in other words, we need two years of 7.5 percent unemployment or five years of 6 percent unemployment or one year of 10 percent unemployment,’ Summers said during a speech at the London School of Economics.”

We need 10% unemployment? This is what a “hard landing” means? According to this view, it will be necessary to inflict actual economic pain on millions of people.

To support this explicitly nasty policy, the sainted Paul Volcker is invoked – he who “broke the back of inflation” 40 years ago – although Larry Summers is more than ready to claim credit for this grim insight.

Frankly, this is an obscene recommendation. But it is worse than that — it is also wrong.

It’s The Supply Chain, Stupid

Step back even a little from last month’s CPI headlines, and the first important Hard Fact to acknowledge is the obvious one: The world economy has been slammed and shaken by three once-in-a century external shocks in the space of less than two years.

  • Covid, the worst global pandemic in 100 years
  • The Invasion of Ukraine, the first major war in Europe in 75 years
  • Monetary stimulus on a massive scale, unprecedented since World War II

Like tossing that boulder into a small pond, the effect is chaotic disruption of all important trends. The chart for almost every economic measure, whether demand-side, supply-side, or monetary, shows whiplash.

The Big Picture is a carnage of dislocation. All the normal trends and relationships are broken. Beginning one fine day in March 2020, Consumer Demand shifted violently down, then violently up, and always and especially “sideways”– i.e., consumers, in lockdown, or working remotely, unable to pursue many normal activities, or simply becoming cautious as the pandemic spread uncertainty everywhere, altered their buying patterns dramatically. As has been widely noted, there was a major displacement of spending away from the consumption of services, and in favor of the consumption of goods (durable and nondurable).

In dollar terms, over a 30 month period, consumer spending on services fell about $1.5 trillion from the trend line while purchases of durable and nondurable goods increased by about the same amount.

What all this amounts to is a recipe for putting the supply chains that serve our economy under extreme, but temporary stress. Consider the implications of the shift to goods over services.

Many services are entirely performed in a defined location (e.g., restaurants, hair salons, healthcare) – where there really is no physical supply chain as such (although the service providers may be hampered by supply problems for the goods used in performing the service). Many other services have migrated online (e.g., banking, or streaming media).

“Goods,” however, are physical objects – boxes of cereal, automobiles, microchips – that must be assembled or manufactured (from other physical inputs, with their own supply chains), inventoried, packaged, trans-shipped (often from a great distance), delivered to the end customer, tracked and cared for all along the way.

When one speaks of supply chains, one is speaking about the “goods” side of the ledger. Greater spending on goods rather than services puts a much heavier burden on real supply chains. Suddenly injecting a trillion dollars of additional demand for all sorts of physical products ripples through these tightly-coupled networks. Small glitches can derail or delay the process of “fulfillment.” For want of a nail, etc. –

In addition, there is the information deficit created by the shocks described above. Physical supply chains rely on accurate information flow from customers to manufacturers and vice versa (and all the intermediate parties). But the chaotic nature of the past 30 months has disrupted this process. It has blown up the forecasting models that customers use to place orders and manufacturers use to prepare for them.

The auto industry is a case in point, where the initial impact of the pandemic triggered classic defensive responses from the car companies, which quickly cut back orders to many parts suppliers on the assumption that the auto industry was about to enter a severe recession. When the opposite happened – consumer demand quickly surged above pre-pandemic levels – the automakers were unable to restock the parts they had canceled. The drastic losses in revenue they suffered, especially from the inability to procure semiconductor components, have been well documented. (More on that in an upcoming column).

Sheer complexity is another problem. Physical supply chains have ramified enormously, in scale and geographical dispersion (i.e., globalization). The example of the moment is the semiconductor industry, which comprises a vast eco-system with tens of thousands of critical or near-critical suppliers, reaching across the entire world. A White House report recently underscored the boggling intricacy of the supply network that underlies the digital economy.

“The Semiconductor Industry Association notes that one of its members has over 16,000 suppliers, more than half outside the United States, and that a semiconductor may cross international borders as many as 70 times before reaching its final destination.”

Then there is “science” – specifically, the science of modern logistics management, as it is taught in leading universities and disseminated through international standards bodies. Doctrines of “lean manufacturing” and “just-in-time inventory management” have been widely adopted, and they have squeezed the margin of safety out of the system in pursuit of mere efficiency.

All across the manufacturing world, traditional “shock absorbers” (e.g., physical inventory) have been stripped down to bare minimum levels. All this leads to the crisis which is now driving the price trends in the global economy. The New York Federal Reserve has recently developed a measure of supply chain stress. That stress level has exploded.

This is the primary cause of the inflation today: the supply constraints. Inflation is not being driven by “excess demand” in any permanent sense (once the stimulus checks are spent). At this point, it is certainly not being driven by growth in the money supply(which has fallen now back to levels below the long term average). [Two large questions related to the monetary causality theory are to be noted:

The efficacy, or more generally, the wisdom of aggressive money supply expansion in response to the pandemic crisis in the Spring of 2020

The nature of the lag between the money supply expansion, or now, its return to normal levels, and the effect on prices

Those issues will be sidestepped for now, with this passing comment: whatever the merits of the expansive policies in 2020 – and I think they were well-justified by their chief objective, properly realized, i.e., the avoidance of a severe recession at the time – the growth of M2 has been declining rapidly for at least 18 months, which means it is approaching the point where it should begin to show a deflationary effect.]

As to the Expectations theory of inflation, which the Fed seems to be hanging its hat on for now, that is also a large topic for another day – but available measures of inflation expectations are not showing the surge in public concern for future inflation – the dreaded “de-anchoring” – that the theory looks for as the root cause of price instability.

And finally, as for the Corporate Greed theory, this too finds no real support in the realm of factuality (although it has plenty of political voltage in some precincts).

Good News & Bad News

“It’s the Supply Chain” – has become the answer to everything, it seems. But it really is the answer to the question of what is driving “inflation” right now. Supply chain stress comes in many forms – shortages, bottlenecks, dislocations geopolitical (Ukraine), medical (China’s Covid-Zero policy and the shutdowns), and more pedestrian cases, like –“One of the world’s most legendary companies has run out of trademarks – that little blue oval emblem that reads ‘Ford.’ Reports say that their supplier cannot deliver the right number of blue emblems like the ones that Ford puts on the back of its F-150 trucks…

The average car has over 30,000 parts. The F-150 comes with six engine options, seven trim levels, and so many options that some estimates say there are over 20 million possible configurations. But, that little badge, that nameplate, that trademark, has to be there. Reports say that Ford thought about alternatives like laser etching or retrofitting the trucks when the badges become available. Doubtless some people would have bought the car without the Ford badge affixed. Many or perhaps most would just wait. With all of the supply chain issues, we have really hit the end of the road with this one.”

It’s a great little vignette, but then, it’s not so little. “Ford on Monday said it expects to have about 40,000 to 45,000 vehicles in inventory at the end of the third quarter that couldn’t be shipped to dealers because they were awaiting needed parts. Many of these vehicles are high-margin trucks and SUVs and the shortages primarily involved parts other than semiconductors, the company said.”

The Good News is that supply constraints of this sort are almost alway self-correcting. Businesses and consumers don’t sit in limbo. They respond, build new capacity, fix transportation problems, expedite shipments, increase supply; customers defer purchases, find substitutes, wait it out or work around, innovate. The market mechanism does actually function, even if imperfectly and with a lag. The shocks suffered in the last two years have been severe, but the supply chains are beginning to clear. (More on the specifics in a future column.)

The Bad News is that policy makers seem to have panicked (along with the media, who gave up hope almost immediately). I thought for a while that Fed Chairman Jerome Powell had the backbone to stand against the chorus of bad advice he was getting from so many quarters, and allow the system to find its footing again. But the pressure to “Do Something” has prevailed.

We have now entered the chapter of “performative monetary policy” – taking measures which everyone knows will (1) have no positive effect on supply chain problems – there is nothing the Fed can do to speed up the delivery of those blue oval logos – but (2) may well cause real economic havoc. Fighting inflation by “reducing demand” – which, perversely, means raising prices (like on your mortgage), and throwing millions out of work (as Volcker did) – is one of those ideas John Maynard Keynes warned us about

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

My first career: I spent 25 years in the high-tech segment of the wireless technology industry, involved in the early development and commercialization of digital wireless

Source: What Is Really Driving “Inflation” Today

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Low Fee Hedge Fund ETF Gives Investors A Bear-Market Refuge With 22% Return This Year

With both stocks and bonds falling sharply this year, investors becoming discouraged by a standard 60/40 portfolio are beginning to pile into one three-year-old ETF that has served as an effective hedge for this year’s bear market.

New York-based Dynamic Beta Investments’ managed futures strategy ETF has gained 22% this year, far outperforming the S&P 500 Index’s 10% decline and the Bloomberg U.S. Aggregate Bond Index’s 10% drop. Managed futures funds are actively managed portfolios of futures contracts for assets ranging from stock indexes to commodities like oil and gold. Dynamic Beta’s fund aims to replicate managed futures strategies at 20 other hedge funds and investment firms and charges a mere 0.85% in management fees.

Dynamic Beta’s founder and co-managing member Andrew Beer, who runs the firm with a Paris-based partner Mathias Mamou-Mani, boasts that a podcast recently dubbed him the “Jack Bogle of hedge funds.” “No one has figured out how to pick which hedge fund’s going to do well, just like they haven’t figured out how to pick which stock is going to do well,” Beer says.

“The most reliable way to outperform is by cutting fees.” Most managed futures hedge funds charge limited partners 20% in performance fees based on profits and 2% administration fees per year. Managed futures funds have largely fallen out of favor in the last decade, lagging behind stocks during the bull market following the Great Recession. Societe Generale’s CTA index tracking the 20 largest such funds at firms like Clifford Asness’ AQR and Systematica Investments has gained more than 7% in a year only once since 2010.

But when the stock market plunged in years like 2002 and 2008, the index returned double digits. Many of these hedge funds are out of reach for retail investors, with high account minimums and management and performance fees that eat away at returns. Beer contends that Dynamic Beta’s ETF, trading under the ticker DBMF, can come close to replicating their portfolios for a fraction of the cost.

Dynamic Beta’s model analyzes daily data on returns for the 20 funds in the managed futures index and maps it to the market’s daily fluctuations to approximate how long or short the hedge funds are in futures contracts for various stock indexes, bonds, currencies and commodities. The ETF rebalances every Monday based exclusively on this algorithm. It’s grown from $65 million to $418 million in assets this year, with heavy inflows through June and July.

The biggest driver of DBMF’s gains this year has been its heavy short position on the Japanese yen, which has declined 14% against the dollar in 2022. The fund is also short the euro, short U.S. Treasuries and short the S&P 500 and international stocks. Its only long position is in crude oil. DBMF’s portfolio is simple, with just 10 futures contracts included, but that macro picture can replicate 90% or more of the pre-fee returns of leading hedge funds, Beer says.

“We’re not trying to say these guys have X amount in pork bellies and copy that. We’re basically saying, what are the big trades?” Beer says. “You don’t need to pay somebody 4% or 5% to do the big trades. We’ll do it and we’ll do it efficiently.” Beer started his career out of Harvard Business School in 1994 in the traditional hedge fund world, landing a job working for Seth Klarman’s Baupost Group.

In the early 2000s, he tried his hand at branching out on his own, cofounding two small hedge funds: commodity trading firm Pinnacle Asset Management and China-focused Apex Capital Management. After a few years, he started the venture that would become Dynamic Beta in 2007 as Belenos Capital Management. Its initial fund did well in the recession, but growth was slow for the first decade while its assets were housed in managed accounts with higher minimums.

It didn’t help marketing that managed futures flopped for the next several years. In 2018, French firm iM Global Partner bought a 50% stake in Dynamic Beta. IMGP scours the world for unique asset managers to partner with and was looking for a footprint in the “liquid alternatives” space. With their help, Beer and his staff launched the managed futures ETF in May 2019, and an equity long-short ETF came next in December of that year, aiming to replicate the gross returns of 40 equity hedge funds.

That fund hasn’t generated as much traction, with just $16 million in assets, and it’s down 1.6% this year. With three UCITS products–effectively mutual funds which are based in the European Union–as well, Dynamic Beta now manages $1.2 billion altogether. There are no other managed-futures ETFs close to the size of DBMF, though the firm does have competition in the broader hedge-fund-replication sector.

New York Life subsidiary Index IQ offers a hedge multi-strategy tracker ETF (QAI), down 7% this year, which seeks to replicate a variety of tactics. It has 0.75% management fees and $730 million in assets. Beer is hopeful that any of Dynamic Beta’s products could scale to become multi-billion dollar funds as investment advisors look beyond traditional stock-and-bond allocations.

“We believe that there are thousands or tens of thousands of RIAs who are now looking at the collapse in 60/40 portfolios and saying, I need something to add to this,” Beer says. “The next step is to get a big following in the wirehouses and the Morgan Stanleys and Merrill Lynches of the world.”

I’m a reporter on Forbes’ money team covering investing trends and Wall Street’s difference-makers. I’ve reported on the world’s billionaires for Forbes’ wealth team and was previously an

Source: Low Fee Hedge Fund ETF Gives Investors A Bear-Market Refuge With 22% Return This Year

Critics by Benzinga.com. Benzinga

Among the certainties on Wall Street are the following: Hedge funds usually carry high fees while exchange-traded funds usually carry low fees.

Some ETFs grant investors exposure to hedge fund strategies or stocks held by hedge funds without the punitive often found in the hedge fund space. For example, the Goldman Sachs Hedge Industry VIP ETF (NYSE: GVIP), which debuted in November, gives investors hedge fund-esque access at a somewhat reasonable fee.

Finding A VIP In GVIP

“GVIP’s 10.7 percent gain year to date through May 4 was ahead of the S&P 500’s 7.4 percent,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Monday. “While constructed from the bottom up, information technology (32 percent of assets) and consumer discretionary (27 percent) stocks are most prominently held. Consumer staples (4 percent) and industrials (4 percent) stocks were underweighted relative to the S&P 500. There are currently 19 stocks that were now in the ETF at the end of 2016.”

GVIP follows the Goldman Sachs Hedge Fund VIP Index and holds the 50 stocks that appear most frequently in 13F filing as top hedge fund holdings. GVIP charges 0.45 percent year, or $45 on a $10,000 investment. That is nearly double the average fee for U.S.-listed ETFs, but still cheap compared to a direct hedge fund investment.

Going With The GURU

The Global X Guru Index ETF (NYSE: GURU) is one of the seasoned names among hedge fund ETFs, having debuted nearly five years ago. The ETF follows the Solactive Guru Index. GURU holds stocks that are deemed to be “high conviction” hedge fund ideas.

GURU, “with approximately $60 million in assets, but down from a year earlier is a more established way individuals can invest in stocks held by hedge funds. GURU launched in 2012 and is comprised of the top US listed equity positions reported on Form 13F by a select group of hedge funds that the index provider Solactive deems as having moderate turnover rates and other characteristics,” said Rosenbluth.

CFRA has Market-Weight ratings on GURU and GVIP. GURU charges 0.75 percent per year, or $75 on a $10,000 stake.

Related links:

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Why All Investors Need To Own Gold and Bitcoin

I was lucky enough to find myself on GB News at the weekend, standing in for the veteran broadcaster Alastair Stewart, who was taking some no doubt well-deserved time off. No prizes for guessing what subject was the main focus of the two two-hour programmes.

The world has changed, and investors need to take that into account

There were all sorts of guests – Russian, Ukrainian, Polish – who all knew their onions, and added so many profound insights into the conflict. I sat there trying to ask sensible questions while absorbing as much information as I possibly could. I can’t pretend to be informed on this subject, despite being a lot more so now than I was a week ago – like most of us, I guess.

We covered so many subjects. The incredible bravery of the Ukrainian people and the resilience they have shown in the face of much better-armed opponents; the apparent strategic mistakes made by Russian forces so far, and the poor communication; the ruthlessness of Putin, the need to win and the risk that he doubles down.

We also covered sanctions, Swift and the weaponisation of money; the war on the oligarchs and the kleptocrats; the imminent refugee crisis; propaganda; the tacit alliance between Russia and China – and that China will be watching all of this and learning; the ramifications for Taiwan; the dependency of so many nations on Ukraine and Russia for food supplies. And much more besides. I watched, listened and tried to learn.

I left the studio with a distinct feeling of dread that this invasion may prove to be the beginning of something much bigger. Russian commentator Konstantin Kisin, who hosts the popular podcast Triggerpod, kept repeating the point that in terms of historic significance this invasion is “bigger than 9-11”. The geopolitical landscape has changed, he said, and the West is at war.

On both days, I left the studio feeling glad that I owned gold. It has been a source of immense disappointment and frustration to me, as regular readers will know, but there is a time to own gold and now would appear to be one of those times. I have reported more times than I care to remember on the vast amounts both Russia and China have accumulated over the last 20 years.

Meanwhile, the way that the West has weaponised its money and banking against Russia is extraordinary – unprecedented even, and made possible by digital banking and modern technology. China is surely looking at this weaponisation, looking at Taiwan, and thinking that to protect itself, it needs to de-dollarise as quickly and discreetly as possible. Indeed, we know China has already been doing that.

With so much money frozen abroad, one of the few ways in which Russia can actually fund itself is by selling its gold, probably via Dubai, so that may mean selling pressure. Even so, I think gold rises from here.

Hold gold, bitcoin and gold miners in the Americas

Inflation comes with war; money gets debased, no matter which side you are on. If there is some kind of China-Russia, anti-West alliance, then just as we have retaliated against Russia through Swift and the banking system, that alliance will do the same in reverse. Ergo, it will wage war on the dollar.

Western money is vulnerable. Fiat money has been printed into oblivion, while interest rates have been suppressed. Official inflation is already at 7%, while actual inflation is arguably much higher. Yet the system probably can’t take interest rates much above two or three percent. There is too much debt.

When the price of raw materials – commodities and natural resources – goes up even more because a key supplier, Russia, has been cut off, the pain of inflation is going to get worse. Governments may well attempt to impose price controls, but history shows that any relief that comes from price controls is only temporary. For the most part they don’t work and often just lead to shortages.

I’ve said for many years all China has to do is declare what its gold holdings really are – and you can see last year’s estimates here (I will do an update on this soon) – and that will be tantamount to a declaration of war. My theory, remember, is that China’s gold holdings are as big, if not bigger than those of the US.

I know I have long moaned about gold. It’s the most analogue asset there is in a world where all the value is digital. But I have also said many times that I continue to own it. It may be analogue but it has also been money since forever. It’s the first metal we ever used. 

We used it long before the Bronze Age, when we discovered smelting. Its purpose was the same as it is now – as reward, as display, as store of value, as tool of trade (in this case barter). In other words, as money.

But I have moaned about it because it has been such a perennial disappointment for so long.The currency wars are hotting up. Attacks on national currencies are going to become the norm; the rouble has been bombed already. Don’t think that at some stage the dollar, euro and the pound are not going to come under attack, because they will. Other fiat currencies will get caught in the crossfire.

Gold and bitcoin are the places to hide. On the subject of bitcoin, I see this conflict as an opportunity for it to decouple itself from the Nasdaq. If Swift is out of bounds, and governments in conflict have their tentacles running through the banking system, the use case for bitcoin suddenly got more compelling. What better way to transfer value across borders? You want to own both. And all those gold miners located far away from all of this in the Americas. There’s going to be a lot more demand for their product.

Source: Why all investors need to own gold – and bitcoin | MoneyWeek

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Stock Futures Point to Losses for Tech Shares

U.S. stock futures ticked lower, with big technology stocks on track to lead losses after the opening bell.S&P 500 futures declined 0.5%, Dow Jones Industrial Average futures slipped 0.2% and Nasdaq-100 futures fell 0.8%. The contracts don’t necessarily predict movements after the opening bell.

In Europe, the Stoxx Europe 600 fell 0.4% in morning trade. Consumer staples and healthcare sectors notched the biggest losses while industrials and energy sectors rose.

Anheuser-Busch InBev slipped 2.7% snapping a run of gains of more than a week and Smith & Nephew declined 3.8%.

The U.K.’s FTSE 100 lost 0.4%. Other stock indexes in Europe also mostly fell as France’s CAC 40 was lower 0.2%, the U.K.’s FTSE 250 shed 0.3% and Germany’s DAX was down 0.4%.

The Swiss franc gained 0.1% against the U.S. dollar, with 1 franc buying $1.10. The euro depreciated 0.1% against the dollar, with 1 euro buying $1.17. The British pound was flat against the U.S. dollar, with 1 pound buying $1.38.

In commodities, international benchmark Brent crude strengthened 0.4% to $84.00 a barrel. Gold slipped 0.3% to $1,797.90 a troy ounce.

German 10-year bond yields were up to minus 0.105% and the yield on 10-year U.K. government debt known as gilts was up to 1.040%. The 10-year U.S. Treasury yield gained to 1.606% from 1.568%. Yields move inversely to prices.

In Asia, indexes were mixed as Japan’s Nikkei 225 index climbed 0.3% after falling as much as 1.2% during the session and China’s benchmark Shanghai Composite rose 0.8%, whereas Hong Kong’s Hang Seng declined 0.7%.

Source: Stock Futures Point to Losses for Tech Shares – WSJ

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