Market Outlook

Inflation Rages While The Fed Prints

#CK Strong

The CPI came in hot, hot, hot for January at 0.6 percent, exceeding expectations. Yet the Fed is still pumping, adding a total of $123 billion into the economy in 2022, which should end soon.

What the heck? Has the Fed morphed into the old Banco Central de Argentina?

It’s not the supply chain, Stupid!

The supply chain has been swamped and overloaded with too much demand. Ports are overwhelmed by too much traffic.

Sure, some price inflation results from real supply shocks, but this is primarily driven by excess demand, instigated by the overstaying of too much stimulus. We certainly agree that the initial stimulus package was needed, but it was very poorly structured. Come on, man, Wall Streeters taking PPP loans while many small businesses were shut out?

Semiconductor Shortage

Market wide semiconductor shortage? Think again.

Look at worldwide semi revenues, up 23.7 percent year-on-year in November. Some of that is inflation, but the quantity of semis produced continues to expand quite rapidly.

No doubt, in a few sectors there is a real supply shock where the quanity of certain semiconductor products are falling. Talk to most any semiconductor CEO and he/she will say the same.

Why Is The Fed Dragging Their Feet?

I think the Fed fears what we fear.

The U.S. economy is way too dependent on the asset markets with a stock market capitalization north of 2x GDP the last time we looked, which the Fed is mainly responsible for, by the way. That puts the U.S. economy in an unstable equilibrium.

If the Fed slams the oven door too hard, the soufflé collapses in on itself..

This is illustrated in the following chart, which we have posted several times.

The Fed needs to reach for the Draino, and fast, like several months ago.  

Stay tuned.  

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