Economy Starting to Trend Toward Deflation

For all the efforts of the Federal Reserve and Congress to blow up the deflated economy that the lockdown caused, this monster is getting hungry again.

To hear Donald Trump tell it, the economic recovery that we have seen over the last 6 months has been monumental. Given how fast and how unnatural the fall was, which is what happens when you lock down the economy the way we did and then mostly open it up anyway, there will indeed be a significant V as Trump has boasted about.

The second leg of the V is far from complete though, and as it moves closer toward the apex, where we started, the climb back up the mountain is really starting to lose strength, although we really should not be surprised to see this at this point.

The acceleration of the bounce back up had concerned some analysts, although it didn’t really take much foresight to realize that the top of the mountain was not in sight and it would take quite a while before we ever fully recover from this.

That’s the story that the Fed has been telling all along, and have further emphasized this outlook of late. It is not that we want to turn over our minds to the Fed, but they do have the best data, and generally outperform views from the private sector.

While many may point to the roadblock on the road to a new stimulus bill, where the Democrats still are trying to hold America hostage with their massive appetite for pork, there’s more going on than just this. The impasse is no surprise though. We’ve been telling you this since we got the competing bills passed that were $2 trillion apart, and while both sides have moved, they remain quite far apart.

It’s not even that the $1.8 trillion sized proposal by the Republicans would all go to stimulate the economy, and therein lies the biggest issue with these negotiations. Republicans want to see issues like helping big Democratic states pay off some of their debt dealt with separately and focus on the actual stimulus, and have even agreed to modestly huge state government welfare payments and other impertinent matters.

There’s no question that even a mere trillion would make a difference, but ultimately, these measures are just band-aids that cover the big wound we are still left with, where the underlying business contraction left in the wake of this unprecedented economic strangulation will draw down the economy for some time.

In order to properly repair this damage, everyone would have to be returned to their original position, with the additional debts paid off, businesses that were lost restored, lost wages paid, and so on, such that no one is worse off than when this began. This is purely a fantasy though and we don’t even know what the bill would be for this but it would be north of $10 trillion, due immediately. This is even too rich for wild-eyed Bernie Sanders’ blood, or perhaps not if his eyes get big enough.

What happens if you do not have the means to make this much money magically appear is that the deficit that was created remains. There may have been 7 restaurants on your street and now you are down to 4, with some of those 4 being at risk. There’s less people working at these places and this takes its toll. Once things shrink enough, we get production cutbacks and lost wages.

It is this downward spiral that we are trying to stimulate out of, and the original stimulus and other measures served to artificially force the wheel to spin the other way even though this downturn still served as a brake on it.

As the stimulus wanes, this has the downward forces to be less resisted, and we’re already seeing this happen in looking at the most recent economic data. It does require some observation and drilling down to see this though, but the waves have now hit our shore.

The Overall Economic Numbers are Starting to Wilt

When we look at the chart of the CPI ex food and energy, we see a nice steady rise that is continuing. A lot of things go into this index, including the sale of used cars. It turns out that it is the booming used car sales that we have seen very recently that has propped up this index, and without this effect, we’ve seen a decline in the index less these used cars since August.

Many sectors are down since then, and given that this used car craze can’t continue for all that much longer, at that point we will see the economy finally naked and be better able to measure the degree of the damage.

While the U.S. is still mostly open and has been mostly open for months now, current restrictions, including those involving social distancing, are not only still taking their toll, the wave of closures is rising. This only makes sense when you consider how many businesses have been forced to either operate at a loss or operate without any income for a time, and you can only run in the red month after month for so long before your business life gets taken.

Several states have ratcheted up their restrictions lately, and it is only when we can fully eradicate these restrictions, especially including the distancing ones, that we can even get our head above water again so that we can finally heal.

With the cries of Joe Biden to do things right in his mind and order broad restrictions ringing in our ears, it isn’t quite enough to just point out that this is one of his fantasies, as he could still stir the pot with the CDC enough to encourage more of this. The CDC doesn’t seem to need much help though in their wish to harm the economy among other things, our minds for instance, but their coming down much harder in favor of lockdowns would not be completely ignored.

We’re at least seeing the great harm that lockdowns have caused being discussed in the popular media more. Dr. Scott Atlas of the coronavirus task force shared with Fox viewers on Tuesday his utter contempt of public health officials who have ignored the science all along and caused such harm that Dr. Atlas believes may even qualify as “crimes against humanity.”

It may just be a matter of time before the fraud behind these lockdowns gets widely exposed, but if Joe Biden becomes President, you can bet that Dr. Atlas will be put on the next flight to California and Tony Fauci will get a big portrait on the wall in the White House.

The Democrats Will Try to Really Stimulate Things, For a While

Of particular interest to investors is the fact that this continuing struggle will continue to put downward pressure on inflation, and this has now caused analysts to turn well away from their previous notions of inflationary pressure from stimulus.

We need to account for the possibility of an all-Democratic government throwing massive amounts of money at this should they get the opportunity, where they pick a number that dwarfs even their Heroes Act where most of the heroism was helping rescue their Democratic governor friends who locked down too tightly.

This could really get things overclocking and indeed produce an inflationary spike of some duration. The degree depends on how outrageous the stimulus may be, but if you believe money grows on trees, there is no telling how big you might go.

This can’t be maintained for all that long though before you just hit the wall and place the country in dire straits, exceeding the demand of the treasury market and paying higher interest rates on everything the country borrowed throughout its history, plus the new deal stuff, which may even be the bigger portion by the time that they are finished.

This is the point where the lights start flashing and the economic doomsday clock moves the rest of the way toward midnight at an ever accelerating pace. Biden and his gang may bring on great economic harm by way of a devastating fiscal explosion driven by a combination of recklessness and blindness.

The economic damage that Biden’s economic plan will bring will be on top of the damage we already have, where he mindlessly kicks an already injured economy with his tax hikes and other policies that serve to diminish economic growth.

While we do not want to take our eye off of the ball as far as the current trend of the recovery is concerned, this is not the only challenge, and how well we continue to fight and heal and how long it will take to get there will depend in great measure by the outcome of the current election.

This may not be the best time to be in bonds as the trillions start flying and the cost of things start to rise once again, this time perhaps enough to make the first stimulus bill look like a junior partner. We can pretty much count on this actually, so hold tight and keep your eyes on the data as well as the polls.

Joe Biden has widened his lead in the polls over the President, up until the last few days where Joe has upped his game of self-destruction and we’re seeing this reflected in the overall polls already. Whatever the minimum standard for being President of the United States is, it surely includes candidates being aware of the fact that they are running for president and not the Senate, or know what state you are in, mistakes Biden has made before.

The clock is running out on Trump though, and there is a lot of ground he needs to cover very quickly. He is down to seeing his opponent unwind enough, to see if there actually is a threshold of a combination of dementia and radicalism that the majority cannot manage to tolerate. The fact that they do not believe Biden has crossed this threshold yet suggests that there may be no such limit as long as he can still stand and speak.

Calling this the biggest election of all time may not be an exaggeration. There is a lot on the line for the economy and for investors in particular should we wake up and find the skies red on November 4. It will actually take longer than that to get the final results and even then there may be disputes, and Trump probably already has his legal team locked and loaded on this in the likely event that it will be needed.

The same can very likely be said of Biden’s legal team, with their Molotov cocktail throwing friends riding in the back. The election itself may only be part one. It is going to be interesting no matter what.

Editor, MarketReview.com

Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

Contact Robert: robert@marketreview.com

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