The Institute for Supply Management’s June survey of purchasing managers depressed the stock market in the month’s first trading session, with good reason. More businesses report higher prices paid and slower supplier deliveries than at any time since 1979, just before a bitter three-year recession.
We’ve reviewed these numbers before, but they keep getting worse. The Biden Administration’s attempt to shove $5 trillion in demand through America’s sclerotic supply chains has produced simultaneously a demand-side shock (sudden increase of spending power) and a supply-side shock (US firms can’t produce or ship goods on order).
- Led by oil, which reached a new post-COVID record on Tuesday, the broad commodity index ticked a new high.
- Housing price inflation continues to accelerate, with a 13.3% year-on-year jump as of May.
- Used car prices jumped 50% year-on-year and 27% during the first five months of 2021.
- An appreciating Chinese yuan and 6.8% producer-price inflation will raise the cost of imported goods from America’s biggest source of manufactured goods.
A rough-and-ready measure of how busted US supply chains are is the average of the two gauges shown in the Chart of the Day – the “bottleneck index” for lack of a better word. That’s at an all-time high.
If the disease resembles 1979, what about the remedy? Paul Volcker took over the Federal Reserve, and after the dollar crashed in October of that year, raised interest rates drastically, from 7.4% in June 1978 to 20% in March 1980. That crushed inflation, at the expense of a deep recession, until the Reagan tax cuts revived growth.
That was the monetary equivalent of chemotherapy, and it worked, although it created extreme discomfort. This time the treatment would kill the patient.
In 1979 federal debt was less than a third of GDP. Now it’s more than 130% of GDP. A rise in interest rates of, say, 5% would cost the Treasury a trillion and a half extra dollars in debt service per year – almost double the defense budget.
It’s no surprise, then, that the Fed is praying that inflation will somehow fix itself and the present mess will turn out to be “transitory,” per the Fed’s mantra. Meanwhile things keep getting worse.
Ray Dalio last week said he would rather own Bitcoin than bonds. I’m no fan of Bitcoin, but I agree that almost anything is better than bonds – or the stocks that trade in lockstep with bonds – right now.