Inflation vs deflation. The true economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in wealth output. Inflation is monetary in nature. Rising prices are the manifestation of inflation. Someone I follow on Twitter posted an ingenious example from which to conceptualize the true concept of inflation using the game of Monopoly:
The players all start out with reasonable amounts of money to speculate on real estate. As the game proceeds, players collect $200 by simply passing Go and use this money to speculate on real estate. By the end of the game, only $500 dollar bills are worth anything, the whole thing blows up, and most players end up destitute. In a twist of irony, an original game board sells for about $50,000.
A fixed amount of real estate and continuously increasing money supply, with “passing Go” functioning as the game’s monetary printing press. The monopoly analogy is readily applied to the current real estate market. The Fed tossed roughly $2 trillion into the mortgage market, which in turn has fueled the greatest U.S. housing bubble in history. The most absurd example I saw last week is a 264 sq ft studio in Los Angeles listed on 10/26 for $550,000. The seller bought it a year ago for $335,000. This is the degree to which Fed money printing and easy access Government guaranteed mortgages have distorted the system.
Here is monetary inflation as it is showing up in the stock market and housing markets:
The graphic above shows rampant credit-induced monetary inflation. On the left, home prices nationally are measured by the Case Shiller index going back the 1980’s. On the right is the S&P 500 going back to 1930. According to the Fed, real median household income has increased 5% between 2008 and the present. In contrast, based on Case Shiller, home prices nationally have soared 34% in the same time period. Expressed as a ratio of average price to average household income, home prices are, at all-time highs in the U.S. This is the manifestation of rampant inflation in credit availability enabled by the mortgage “QE.” This growth rate in money and credit supply has far exceeded the tiny growth rate in average household income since 2008.
The stock market reflects the monetary inflation of the G3 Central Banks, primarily, plus global Central Bank balance sheet expansion. Please note that “balance sheet expansion” is the politically polite term for “money printing.” The meteoric rise in stock prices have never been more disconnected from the negligible rate of growth in nominal GDP since 2008. Real GDP has been, arguably, negative if a realistic inflation rate were used in the Government’s GDP deflator.
Inflation is not showing up in the Government CPI report because the Government does not measure inflation. The Government’s basket of goods is constantly juggled in order to de-emphasize the rising cost of goods and services considered to be necessities. In addition to the increasing cost of necessities like gasoline, health insurance and food, inflation is showing up in monetary assets. This is because a large portion of the money printed remains “inside” the banking system as “excess reserves” held at the Fed by banks. This capital is transmitted as de fact money supply via the creation credit mechanisms in the various forms of debt and derivatives. The eventual asset sale avalanche grows larger by the day.
Do not believe for one split-second that the U.S. has reached some sort of plateau of economic nirvana that will self-perpetuate. To begin with, it would require another round of even more money printing just to sustain the current bubble level. Read the inflation example above if that idea is still not clear. In 1927, John Maynard Keynes stated, “we will not have any more crashes in our time.” In the October 16, 1929 issue of The New York Times, famous economist and investor, Irving Fisher, stated that “stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.” Two weeks later the stock market crashed.
The above commentary is from last week’s Short Seller’s Journal. Speaking of the housing market, admittedly my homebuilder short positions are crawling up my pant-leg with fangs as the housing stocks have entered into the last stage of a parabolic “Roman candle” apex and burn-out. The homebuilders appear to be cheap relative to the SPX on a PE ratio basis – approximately an 18x average PE for homebuilders vs a 32x Case Shiller PE for the SPX. However, in relation to their underlying sales rate, earnings and balance sheet, the homebuilder stocks are more overvalued now than at the last peak in 2005.
While the homebuilders are are squeezing higher, I presented two “derivative” ideas in recent issues of the Short Seller’s Journal: Zillow Group (ZG) at $50 in late June and 
Redfin (RDFN) at $28 in late September. ZG just lost $40 today and RDFN is down to $21 (25% gain in 6 weeks). Both ZG and RDFN are “derivatives” to homebuilders because they derive most of their revenues from housing market-related ads, primarily real estate listings. Their revenues as such are “derived” from housing market sales activity. These stocks are overvalued outright. But as home sales volume declines, the revenue/income generating capability of the ZG/RDFN business model will evaporate quickly. With home sales volume rolling over, the decline in the stock prices of ZG and RDFN relative to the “bubble squeeze” in homebuilder stocks validates my thesis.
If you want to learn more about opportunities to exploit this historically overvalued stock market and access fact-based market analysis, click here: Short Seller’s Journal info.
Wait a second, Janet Yellen just said a couple of months
ago that we will never see another market crash again.
Mark Twain once said, “History does not always repeat
but it sure does rhyme “.
LOL
Today, the world sits on its ear, deaf and dumb
‘History no longer rhymes but it does retweet’
Mark Twain’s brother from another mother
It’s all OK Dave.
God [the Fed] has a plan. God’s agents [other central banks, the U.S. Treasury, CME, Commodities & Exchange Commission, SEC, The too big to damn banks, Goldmans, the media puppet mouthpieces] are all at work. Pray to the Fed. Sleep well at night.
Additionally Wages not going up and unemployment figures are far from accurate , people simply have less money to spent , that ‘s why Inflation is not showing up , but believing them with their statistics !??% you have to be very blind or stupid.
Agreed, but just to clarify, inflation exists when the money-stock is artificially created from nothing. Whether prices go up or down is hardly an indicator of inflation, since ultimately supply and demand determine those things. Nonetheless…WHENEVER the money stock is manipulated in any way, it creates distortions in the economy that eventually prove unsustainable. In the case of inflation (as in money printing), it props up prices above what they would otherwise be…even in a situation where prices are falling.
Hence…the prices are probably not falling FAST ENOUGH given the level of money-printing that we know…or don’t know! The economy desperately needs genuine, and painful, corrections in order to veer off the track of ultimate destruction…but the PTB have other plans. For now, at least, the population remains asleep in willful ignorance…
I believe it was Tocqueville who said, “sire we are dancing on
a volcano”.
Good call there
wife and I sold 90% of our crypto a few days ago… first they cancelled the bitcoin fork, and now there’s a consensus war going on between bitcoin (falling) and bitcoin cash (BCH – rising fast)… too chaotic for our taste… back to gold, save some dry powder too in case the baby gets thrown out with the bathwater during the coming crash
Who is this “they” that could cancel a fork on a system that is supposedly de-centralized? Can’t anyone create a fork of BitCoin? I’m confused.
Bankers are moral lepers, the financial equivalent of hookers and blow. You can never get enough of the moral debauchery in that world.
When a shit box tiny house, half the size of my man cave, goes for $50,000 less than my entire home in Reno, the end is nigh. $2,000 a square foot for a studio? What effing moron would pay that. Don’t answer. We know someone did. I pity the fool.
Bitcoin 7000, DOW 23,500, studios for $550,000 are all a result of the Greenspan/Bernanke/Yellen QEpocalypse.
The flood of faux FIAT creates the same Cantillion effect as the flood of gold and silver from the new world that inflated the values of assets in the old world and decimated those outside the ring of prosperity created by that effect.
And that was when gold and silver were real money. But do you think gold and silver can catch a break today? Nope, not a chance.
There’s a reason that the Fed pursues these actions and it’s not a conspiracy theory. When unlimited cash hits a limited supply of assets, whether paper or hard, this inflationary deluge boosts taxable asset values by 100-1000%, fattening the coffers of the tax collectors. No accident there.
You would think this might solve some fiscal woes at the local and state level by boosting tax receipts by a few hundred percent.
Nope, not happening there either.
The states and cities created their own PONZI schemes with underfunded overly generous pension plans. Even a moron could get a better return in those funds but now they are out there with their begging bowls.
The County of Maui just raised it’s property taxes 42% to pay for pension plan deficits. A senator from Ohio wants to use funds from treasury bonds to bail out their public pension deficits.
As we see asset prices sky rocket, the demands from the public sector grow even faster than tax revenues and asset inflation will handle.
Gresham’s Law meets its Minsky Moment and none too soon.
And don’t even get me started about Social Security. Just let me get mine before the whole shit show collapses
Craig, how do you really feel? LOL – great commentary
When did Zillow lose $40 in one day?
Trader’s jargon meaning, “Zillow lost the $40 level”