Credit deflation and the reflation cycle to come (part 2)

[sancho panza]

The headline from Wolf St says it all.It's a symptom .....

#debtdeflationcometh

https://wolfstreet.com/2021/05/13/state-of-the-american-debt-slaves-fed-confounded-as-consumers-pay-down-credit-cards-other-high-interest-debt-and-helocs/

State of the American Debt Slaves: Fed “Confounded” as They Pay Down Credit Cards, Other High-Interest Debt, and HELOCs

The fact that the Fed is trying to sort out this phenomenon of Americans actually paying down their usurious-interest debts and depriving the banks of some serious moolah shows how serious this situation is.

 

[AWW]

I don't have a whole lot of sympathy for the generation currently being stuffed into care homes. Individual cases, yes. As a cohort? They're the ones who voted for policies that made housing unaffordable, that led to their own kids becoming parents in their late thirties or even older. Their potential carers still have kids to look after - adding a couple of sick grandparents to the mix just isn't feasible.

[MrXxxx]

3 minutes ago, AWW said:

They're the ones who voted for policies that made housing unaffordabl

If we had PR that may have been the case, but we don't. Further, these `decisions` result in a larger inheritance...offspring can't `expect their cake and eat it`...on a purely moral stance its part of a social `contract` I.e. they looked after you for the first 20 years, so you should be prepared to look after them for their last 20.

[AlfredTheLittle]

16 minutes ago, MrXxxx said:

If we had PR that may have been the case, but we don't. Further, these `decisions` result in a larger inheritance...offspring can't `expect their cake and eat it`...on a purely moral stance its part of a social `contract` I.e. they looked after you for the first 20 years, so you should be prepared to look after them for their last 20.

I think you follow what you've seen your parents do themselves - my parents certainly didn't take in their parents, it was never even an option as far as I was aware, so it's been happening for a generation already and you'd need to look back if you want to find the reasons for it. Probably when people stopped living in the same town all their lives.

[jamtomorrow]

4 minutes ago, AlfredTheLittle said:

I think you follow what you've seen your parents do themselves - my parents certainly didn't take in their parents, it was never even an option as far as I was aware, so it's been happening for a generation already and you'd need to look back if you want to find the reasons for it. Probably when people stopped living in the same town all their lives.

Mentally, I'm fully prepared for an extended period with either FIL or MIL living with us because I'm determined to break that cycle in our family.

The payoff will be worth it tho - teenagers think I'm joking about having to wipe my arse for me, what a punchline that'll be.

[dnb24]

36 minutes ago, AWW said:

I don't have a whole lot of sympathy for the generation currently being stuffed into care homes. Individual cases, yes. As a cohort? They're the ones who voted for policies that made housing unaffordable, that led to their own kids becoming parents in their late thirties or even older. Their potential carers still have kids to look after - adding a couple of sick grandparents to the mix just isn't feasible.

It’s a story as old as time- cycles and all that, nothing that generation have done is different to human behaviour repeated- we will continue to repeat it as well, what’s happening now is just as bad- wokism etc- but we will repeat that- nowt you can do except look into history and see what you might have to put up with in future. 
I am not sympathetic to boomers but I also don’t blame them, I try and plough my own furrow  for my family and myself.

[AWW]

32 minutes ago, MrXxxx said:

If we had PR that may have been the case, but we don't. Further, these `decisions` result in a larger inheritance...offspring can't `expect their cake and eat it`...on a purely moral stance its part of a social `contract` I.e. they looked after you for the first 20 years, so you should be prepared to look after them for their last 20.

Offspring can't "have their cake and eat it" though. If their parents go into a home, it needs to be paid for. And you can't expect someone with young kids at home to look after a pair of dementia patients. Quite often they don't have enough time after working to look after their own kids, never mind two more.

[nirvana]

Batman gets it...

 

[wherebee]

12 minutes ago, AWW said:

Offspring can't "have their cake and eat it" though. If their parents go into a home, it needs to be paid for. And you can't expect someone with young kids at home to look after a pair of dementia patients. Quite often they don't have enough time after working to look after their own kids, never mind two more.

If I get dementia I trust my eldest is smart enough to kill me in a relatively painless way.  Better all round.

 

Or did I say that already?

[sancho panza]

There's been an excellent discussion on this thread about the inadequacy of inflation measures since it was first started by DB a few years back.Normally centred on Shaun Richards.

I think this piece by Wolf St is about teh best explanation I've read of how poorly CPI actually captures changes in the cost of living.

This is the mechanism by which the political class keep the masses on the debt treadmill -hedonic adjustments,owner occupiers housing costs etc

The only thing I'd add here is that the cost of a pension is excluded from CPI as well ie the cost of buying a dollar of pension income.

Intersting to see the spikes in durable goods/food and energy

Highlights in bold for skim readers

 

apologies to the LPP,this is too good.

https://wolfstreet.com/2021/05/12/its-getting-serious-dollars-purchasing-power-plunges-most-since-2007-but-its-a-lot-worse-than-it-appears/

It’s Getting Serious: Dollar’s Purchasing Power Plunges Most since 2007. But it’s a Lot Worse than it Appears

by Wolf Richter • May 12, 2021 • 308 Comments

Fed officials, economists “surprised” by surge in CPI inflation, but we’ve seen it for months, including “scary-crazy” inflation in some corners.

By Wolf Richter for WOLF STREET.

The Consumer Price Index jumped 0.8% in April from March, after having jumped 0.6% in March from February – both the sharpest month-to-month jumps since 2009 – and after having jumped 0.4% in February, according to the Bureau of Labor Statistics today. For the three months combined, CPI has jumped by 1.7%, or by 7.0% “annualized.” So that’s what we’re looking at: 7% CPI inflation and accelerating.

Consumer price inflation is the politically correct way of saying the consumer dollar – everything denominated in dollars for consumers, such as their labor – is losing purchasing power. And the purchasing power of the “consumer dollar” plunged by 1.1% in April from March, or 12% “annualized,” according to BLS data. From record low to record low. Over the past three months, the purchasing power of the consumer dollars has plunged by 2.1%, the biggest three-month drop since 2007. “Annualized,” over those three months, the purchasing power of the dollar dropped at an annual rate of 8.4%:

Folks in the business of dealing with inflation, such as economists and Fed officials, such as Fed Vice Chairman Richard Clarida, came out this morning in droves and said they were “surprised” by the red-hot CPI inflation.

There was nothing to be surprised about. We have been documenting red-hot inflation boiling beneath the surface for months, with “scary-crazy inflation” in used vehicles and in commodities, such as lumber, and surging factory input costs that are getting passed on because the entire inflation mindset has now changed.

The infamous Base Effect which I discussed over a month ago in preparation, and that now everyone is trotting out to explain away this red-hot inflation reading, was not at all responsible for the 7% annualized rate of CPI inflation over the past three months, or the 8.4% annualized drop of the purchasing power of the dollar. The Base Effect has nothing to do with it.

The Base Effect applies only to year-over-year comparisons. In April last year, CPI had dipped, and comparing today’s CPI index to that dip (the lower “base”) would include the Base Effect. On this year-over-year basis, CPI inflation rose 4.2%. But this has now become a useless number for two reasons: The sharply accelerating inflation in recent months, and the Base Effect that now mucks up the conversation.

That’s why I now use the past three months “annualized.” It gives the current pace of CPI inflation and bypasses the base effect.

But actual inflation is a lot worse.

Two-thirds of the overall CPI is for services. They include many of the big things that are surging in prices, such as housing, healthcare, and insurance. Housing costs – rent and homeownership costs combined – weigh one-third of overall CPI. Housing inflation is the biggest category in CPI.

The rent component of CPI, called “rent of primary residence” (=7.8% of total CPI) ticked up only 0.2% in April from March, and has been ticking up at the same rate all year, for an annualized rate of 2.4%.

The homeownership component, called “Owners’ equivalent rent of residences” (=24.0% of overall CPI), also ticked up only 0.2%, for an annualized rate of 2.4%. But this is based on surveys of homeowners’ estimates of how much their home might rent for. It is essentially a measure of rent, as seen by the homeowner.

But the Case-Shiller Home Price Index, which is based on the sales-pairs method, comparing how the price changed over time for the same house, and is therefor a good measure of house price inflation, soared by 1.1% for the month, and 12% year-over year (purple line).

In other words, nearly a quarter of the CPI is based on this fabrication of “Owners’ equivalent rent of residences” that suggests 2.4% annual homeownership inflation, when in fact, it’s more like 12%.

CPI by major category.

Services CPI. This fabrication of “Owners’ equivalent rent of residences” is also the reason why CPI for services is grossly understated. But still, the CPI for services (less energy services) jumped by 0.5% in April from March (=6% annualized), based on the increases in the other components (purple line in the chart below).

Durable Goods CPI. Prices of durable goods – cars, appliances, consumer electronics, etc. – spiked by 3.5% in April from March (=42% annualized… the “scary-crazy inflation I’ve been talking about). Compared to April last year, durable goods CPI is up 7.3% (red line)

Nondurable Goods CPI. This largely covers food and energy, including gasoline. It jumped 0.6% in April from March, or 7.5% “annualized.” Year-over-year, it was up 6.5% (green line);

But it’s still a lot worse: hedonic quality adjustments.

These three major Consumer Price Indices – CPIs for services, durable goods, and nondurable goods – over the long-term show how much of a twisted political instrument CPI has become.

We already mentioned the economic freak show of the housing component in the services CPI.

For durable goods, there is another mechanism being applied that also makes sense on a conceptual basis: hedonic quality adjustments. But they too have been abused to force down the CPI, thereby turning the durable goods CPI into another economic freak show.

As goods, such as vehicles, are being designed with more features and improvements – such as the move over the decades from a three-speed automatic transmission to a 10-speed electronically controlled transmission – the price increases based on those “quality improvements” are removed from the CPI. The idea is that inflation measures price changes of the same item over time; and when the price change is based on improvements, it is not inflation because you’re getting more as you pay more.

But in practice, these “hedonic quality adjustments” have been stretched to obviously ridiculous levels, as you can see in the chart below, where long-term inflation in durable goods (red line) was actually, you guessed it, negative, when in reality prices have skyrocketed.

The chart shows the three indices set at 100 for 1985 to show how they have diverged since then. That massive spike in durable goods in recent months barely registers in the long-term decline and will soon be whittled back down by hedonic quality adjustments, even if you have to pay 50% more for the product are few years from now:

Used Vehicle prices blow out, despite hedonic quality adjustments. A big driver in the durable goods CPI spike was the CPI for used vehicles, which exploded by 10.4% in April from March, a scary-crazy increase that we have seen for months in used-vehicle wholesale prices, which have blown out.

This chart shows the CPI as an index, not year-over-year percent-change, and so the Base Effect does not apply. Hedonic quality adjustments are heavily applied to used vehicles, as you can see from the astonishing fact that the index in 2020 was below where it had been 20 years earlier, even though actual prices of used vehicles have soared over those 20 years. It took this massive spike in April to put the index above where it had been in the year 2000:

 

[DurhamBorn]

9 hours ago, Bobthebuilder said:

Ah see, I knew this was on the cards.

Shopping at Lidl/ Aldi is fine for the bottom feeder but if you want to really cook you need good ingredients. A meal is only as good as the quality you put in. THE INGREDIENTS ALWAYS WINS.

Sold all my Tesco a while back but Sainsbury's I will hold. Flight to quality and all that.

Sainsbury's have a small section selling Lee Kum Kee products now i noticed when in.Their soy sauces and other jars of pastes are superb for chinese cooking.Small jar of chilli and garlic paste £1.80 for instance,but you would get 7 to 9 meals for two out of that.I made us a chilli chicken mushroom onion stir fry,takeaway standard for £2.30 last night.They also have 5kg bags of Jasmine rice in for a fiver.Bargain,the takeaways tend to use that mixed with some quality long grain.However i try to eat wholegrain rice most of the time.Home Bargains sell a brand called Himalayan at the moment and its top quality,almost exact to Tilda's,but £1.29 instead of £4.99.

[DurhamBorn]

2 hours ago, AWW said:

I don't have a whole lot of sympathy for the generation currently being stuffed into care homes. Individual cases, yes. As a cohort? They're the ones who voted for policies that made housing unaffordable, that led to their own kids becoming parents in their late thirties or even older. Their potential carers still have kids to look after - adding a couple of sick grandparents to the mix just isn't feasible.

I had my first daughter at 21,her mam was 18 by two days,beautiful looking girl,still a fab looking woman now.I had my next two at 25 and 29 .Any one of my kids would move my dad in with them tomorrow as would i or my brother and i know my kids would do the same for me.I dont think people did vote for these policies at least up here.I dont know anyone up north who gave a shit about how much their house was worth up until 2004 and southern BTL moved in buying up all the terrace houses up here. .However,down south my uncle was forever going on about how much his house was worth.Now his two daughters cant afford to buy.

The people who did vote for where we are were welfare scroungers and a large chunk of public sector workers.The worst part is,for now they are the groups protected from rising inflation with inflation linked benefits and pensions.

[Bobthebuilder]

21 minutes ago, DurhamBorn said:

Sainsbury's have a small section selling Lee Kum Kee products now i noticed when in.Their soy sauces and other jars of pastes are superb for chinese cooking.Small jar of chilli and garlic paste £1.80 for instance,but you would get 7 to 9 meals for two out of that.I made us a chilli chicken mushroom onion stir fry,takeaway standard for £2.30 last night.They also have 5kg bags of Jasmine rice in for a fiver.Bargain,the takeaways tend to use that mixed with some quality long grain.However i try to eat wholegrain rice most of the time.Home Bargains sell a brand called Himalayan at the moment and its top quality,almost exact to Tilda's,but £1.29 instead of £4.99.

I think it is really good you are getting into cooking, making your favourite take away for the family must be satisfying as well as saving a decent amount of money you know exactly what's in the meal, quality and healthy.

I had to learn to cook early, left home, and I was skint. Did a brief spell working in kitchens and I learnt a lot fast.

Processing food is where the money is, bacon for example, expensive to buy, but you can make your own easy. Put a pork belly chop in a tub, cover with salt, 24 hours in the fridge, and it's done. Not easy to slice wafer thin, but great chopped up and fried.

Save chicken bones to make stock etc, teaching you to suck eggs I'm sure.

Just want to take this opportunity to thank DB and all other posters. I started my SIPP end of 2019, its looking pretty healthy so far, (last March and October was testing times).

PS. One of my mates told me last week that he is selling up in London and moving to County Durham, it's happening.

[DurhamBorn]

@Bobthebuilder we are on the edge of a boom up here its incredible whats flowing in.My dad was saying we should really buy 3 houses to rent out to leave to the grandkids and i must admit im thinking aout it.Only thing is id have to manage them and do the repairs etc.

I really wish what is coming up here wasnt in a way,our fantastic quality of life is going to go down some,loads of southerners etc.We are getting more and more immigrants and southern benefit scroungers as well because their housing benefit gets them a house up here.Already you can see the cheap ex pit villages being flooded with southern welfare claims and the locals up in arms about the anti social behaviour etc.

Irony if those southern HPI gains and my house is my pension etc transfers instead to the north and southern highly leveraged are left holding the baby.

[Hancock]

8 minutes ago, DurhamBorn said:

@Bobthebuilder we are on the edge of a boom up here its incredible whats flowing in.My dad was saying we should really buy 3 houses to rent out to leave to the grandkids and i must admit im thinking aout it.Only thing is id have to manage them and do the repairs etc.

I really wish what is coming up here wasnt in a way,our fantastic quality of life is going to go down some,loads of southerners etc.We are getting more and more immigrants and southern benefit scroungers as well because their housing benefit gets them a house up here.Already you can see the cheap ex pit villages being flooded with southern welfare claims and the locals up in arms about the anti social behaviour etc.

Irony if those southern HPI gains and my house is my pension etc transfers instead to the north and southern highly leveraged are left holding the baby.

It's going to be much worse than that, it'll result in the many 1000s of Teessiders scattered around the planet, who work in heavy industry coming back home for a job.

 

[AWW]

Shows how much things have changed DB. Not many having kids that young these days - most still getting themselves into life changing debt for a soft degree at 21. And not many in their 40s with spare rooms for parents, at least in my social circle.

[MrXxxx]

3 hours ago, AWW said:

Offspring can't "have their cake and eat it" though. If their parents go into a home, it needs to be paid for. And you can't expect someone with young kids at home to look after a pair of dementia patients. Quite often they don't have enough time after working to look after their own kids, never mind two more.

So why are they working so many hours?..to pay an overstretched mortgage?...whilst their parents are rattling about in a four bed house?...so why not combine households, reduced outgoings, and then reduce hours to allow time to care for family?....life is about choices, unfortunately a lot of people now put `things` before relationships, the difference being years after the former has gone in the dustbin you still have the latter (or the memories), it shouldn't be the other way around I.e putting your parents in the dustbin because you can't be bothered with the hassle, and a little personal sacrifice.

[reformed nice guy]

2 hours ago, sancho panza said:

Used Vehicle prices blow out, despite hedonic quality adjustments. A big driver in the durable goods CPI spike was the CPI for used vehicles, which exploded by 10.4% in April from March, a scary-crazy increase that we have seen for months in used-vehicle wholesale prices, which have blown out.

This chart shows the CPI as an index, not year-over-year percent-change, and so the Base Effect does not apply. Hedonic quality adjustments are heavily applied to used vehicles, as you can see from the astonishing fact that the index in 2020 was below where it had been 20 years earlier, even though actual prices of used vehicles have soared over those 20 years. It took this massive spike in April to put the index above where it had been in the year 2000:

 

I have seen this first hand.

Sheep farmer friend had an L200, about 10 years old, only 150k miles, sheep shit in every possible crevice. The chassis was fucked and held together by bodge weld jobs. He put it on Facebook market expecting £500, someone gave him £2600. They offered him £3100 but negotiated down when they saw it because the engine warning light was on and it had a light out.

They sent him a video a few days later because the chassis collapsed, middle of the truck touching the ground.

[AWW]

14 minutes ago, MrXxxx said:

So why are they working so many hours?..to pay an overstretched mortgage?...whilst their parents are rattling about in a four bed house?...so why not combine households, reduced outgoings, and then reduce hours to allow time to care for family?....life is about choices, unfortunately a lot of people now put `things` before relationships, the difference being years after the former has gone in the dustbin you still have the latter (or the memories), it shouldn't be the other way around I.e putting your parents in the dustbin because you can't be bothered with the hassle, and a little personal sacrifice.

I agree with you. If only it was that simple though. How many people live round the corner from their folks, who themselves are in a house with enough spare rooms and which aren't full of old crap that they won't get rid of? Uprooting kids from schools and leaving jobs to move in with those who need care is a bit more than a "little" sacrifice.

[AWW]

I guess the overarching point, which is more relevant to this thread than the discussion we're currently having, is that it was never sustainable for people to work for 35 years and then take a 35 year long retirement, with the last 10-15 years dependent on others for care. Even moreso when the generation providing support have to deal with the real terms wage decline, both parents having to work, and competition for housing that results from mass immigration of cheap labour.

It's the result of a litany of government and central bank policy failures stretching back many decades.

[Noallegiance]

55 minutes ago, DurhamBorn said:

@Bobthebuilder  

Irony if those southern HPI gains and my house is my pension etc transfers instead to the north and southern highly leveraged are left holding the baby.

Bring it on I say!

I'm very thankful that folk down here, instead of moving, are spending on extensions and kitchens.

Saves me doing it when I take it off them for a snip.

[MrXxxx]

27 minutes ago, AWW said:

How many people live round the corner from their folks, who themselves are in a house with enough spare rooms and which aren't full of old crap that they won't get rid of?

The parents are `dumped` in an old peoples home, followed within a couple of years by their crap being dumped in a skip...can't help but see the irony there, the `joys` of disposable societies in Developed countries...what price `progress` eh?!...next we will be told we can't show them affection for fear of spreading a deadly pathogen! :-)

[AlfredTheLittle]

1 hour ago, MrXxxx said:

The parents are `dumped` in an old peoples home, followed within a couple of years by their crap being dumped in a skip...can't help but see the irony there, the `joys` of disposable societies in Developed countries...what price `progress` eh?!...next we will be told we can't show them affection for fear of spreading a deadly pathogen! :-)

I've worked in old people's homes.... By the time somebody gets to that stage, they are in all honesty far better off dead, I hope neither my parents or me ever end up in a home.

The fundamental issue is probably the fact that so much money is made in keeping people alive as long as possible, whatever the cost in pain and suffering. Very similar to the whole covid thing of course. 

Of course people are still, just about, free to do what they choose, but as a general rule I can't see that much quality of life is gained overall through somebody sacrificing the years 50 to 70 in order to care for their 80 to 100 year old parents, I don't intend to do that myself.

[BWW]

On 11/05/2021 at 20:20, Castlevania said:

 

A. Fray Bentos comes in a tin

B. Hindu’s don’t eat beef

C. Indian food is excellent

D. Fray ....

[Talking Monkey]

6 hours ago, wherebee said:

If I get dementia I trust my eldest is smart enough to kill me in a relatively painless way.  Better all round.

 

Or did I say that already?

My dumbass nephews will have to have it spelled out with diagrams and detailed instructions.