Add David Rosenberg to List of Those Who Believe Inflation is Transitory

There's not many of us in the transitory camp, but add economist David Rosenberg to the list.
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A Debate Over Transitory

Inflation is Transitory

On April 28, I posted Don't Worry, the Fed Says the Recent Jump in Inflation is Transitory.

The title sounds sarcastic, and it is in a way, but my huge disagreement with Powell is not in his transitory message but rather in the amount of current inflation.

Inflation Consensus is Wrong 

Advisor Perspectives noted on May 6, that economist David Rosenberg says the Consensus is Wrong about Stocks, Bonds and Inflation

The “fiscal juice” from stimulus checks and the re-opening of the economy are outstripping supply, creating temporary inflation. Supply will catch up when demand subsides as the effect from the stimulus wanes, according to Rosenberg. That will happen before the end of the year.

We don’t and won’t have a trend of inflation, Rosenberg said. Fed Chairperson Jay Powell will be right that inflation will be transitory, he said, just as deflation was a year ago when the pandemic began.

“The worst thing anyone can do is to extrapolate to the future,” he said.

Rosenberg recalled one of Bob Farrell’s classic market rules: When all the experts and forecasts agree, something else is going to happen. The consensus has never been more lopsided, he said, and that is reflected in asset allocations that heavily weight stocks relative to bonds.

“We are basically 80% reopened,” he said. There will be no more incremental growth from re-opening.

The economy is booming not just because of the re-opening. The critical piece was the government’s $3 trillion in fiscal support. There has been no organic growth, he said. “It has been largely a fiscal stimulus story.”

“How could we not have a recovery?” Rosenberg asked rhetorically.

When you strip out the government transfers, real personal spending is on a downward trend. The share of personal income from government spending is 28%; it has never been that high, according to Rosenberg. That is today’s “soup line,” he said, and it is temporary, based on borrowed money. Approximately 10% of the labor force is receiving government support.

I made many of the same comments and observations.

Personal Income Soars Over 21% on Third Round of Free Money

PCE, Personal Income, personal PCTR 2021-03 Detail

The above chart is from my April 30 post Personal Income Soars Over 21% on Third Round of Free Money.

"Personal income excluding PCTR is barely above the pre-pandemic level. The rest is free money."

PCTR stands for Personal Current Transfer Receipts, free money or money equivalents from the Federal government.

Is the Covid-19 Recession Over? 

Real GDP in Billions of Dollars 2021 Q1 Preliminary A

Rosenberg noted we are 80% reopened and there will be no more incremental growth from re-opening.

What Happens When the Stimulus Efforts Stop?

Recall my April 30 post Is the Covid-19 Recession Over? A Comparison to the Great Recession.

What Happens When the Stimulus Efforts Stop? That is the key question. Millions make more being unemployed than they did employed.

Also long-term rates have risen and that will impact housing. 

The Fed inflated assets which have also propped up spending. Yet, despite a massive boom in housing and the stock market PCE [personal consumption expenditures] barely recovered. 

What's Ahead For Year-Over-Year Consumer Price Inflation?

A bigger jump in measured inflation is on the way. For details, please see What's Ahead For Year-Over-Year Consumer Price Inflation?

Indeed, accurately measured, and based on home prices, I believe inflation is well over 4%. I will have a better number once I crunch the latest Case-Shiller Home Price data.

The Fed cannot see the current inflation, nor the huge bubbles or speculation.

Majority View

Nearly Everyone Looking the Wrong Way

Here's the ending of my Don't Worry, the Fed Says the Recent Jump in Inflation is Transitory post.

Nearly Everyone Looking the Wrong Way

With nearly everyone looking for stronger inflation and higher bond yields please consider The Fed Wants to Stimulate Bank Lending, Charts Show the Fed Failed

Yes, It's transitory!

The above discussion pertains to CPI measures of inflation not monetary inflation which is 100% certain to continue. 

Expect Something Else

Let's discuss Bob Farrell’s classic market rule: "When all the experts and forecasts agree, something else is going to happen."

To that, Rosenberg added "The worst thing anyone can do is to extrapolate to the future.”

Today's jobs report was a classic example. Everyone was looking the same way.

Expectations of a Big Jobs Boom Fall Flat

Please note the Huge Jobs Disappointment 732,000 Under Consensus With Big Negative Revisions Too

What a Difference a Month Makes

Last month I reported Economy Adds Over 900,000 Jobs Beating the Consensus By a Mile. That was for March.

For April, economists extrapolated March forward predicting 998,000 jobs, private payrolls of 893,000, and 55,000 manufacturing jobs.

Let's discuss what happened.

Econoday Jobs Expectations vs Actual

  • 998,000 jobs estimated, 266,000 jobs actual
  • 893,000 private payrolls estimated, 218,000 actual
  • 55,000 manufacturing jobs estimated, -18,000 actual

What a hoot.

Who Else Is in the Transitory Camp?

There are not many of us, but Lacy Hunt at Hoisington Management is in the small group.

On April 9, I commented Expect Inflation to Accelerate? Here's 8 Reasons to Expect Decelerating Inflation

In that post I quoted Lacy Hunt at Hoisington Management as follows.

"Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation."

It's Transitory

Not counting Fed parrots, Lacy Hunt, David Rosenberg, and I are firmly in the "It's Transitory" camp. 

I am sure there are others I am unaware of, but that's excellent company in a very small room.

Mish

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