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Despite Wall Street Hype, Inflation is Not Imminent

Retail sales rose a record 5.3% M/M in January after three months in a row of decline.  No doubt the $600 checks from the late December “helicopter” money drop played a large role.  The Atlanta Fed now says that their GDP model pegs the current quarter’s growth at +9.5% (Annual Rate (AR)).  In addition, Industrial Production was up nearly 1% (0.9%) in January.  So, why worry?  Infections and hospitalizations are falling.  There is talk that we could be a lot closer to herd immunity than previously thought.  And, if the $600 checks caused such a spike in retail, just consider what $1,400 checks will do!

In the two equity market days following the retail sales report, markets didn’t respond much, likely knowing that it was the “free” money and not a strong underlying economy that was responsible for the retail sales jump.  Sooner or later, the “free” money must stop.  But, not tomorrow as newly appointed Treasury Secretary Janet Yellen has championed the “let’s go big” mantra.

Labor Markets

The most important measure of the economy’s health is the health of its labor market.  And, here, we continue to be disappointed.  Initial Unemployment Claims (ICs) in the state programs were 862K (week of February 13), a seemingly slight improvement from the prior week’s 868K.  But wait!  For the second week in a row, the Department of Labor has had a huge upward revision (i.e., many more ICs) to the prior week’s data.  The table shows the original and revisions for the past three weekly releases.

                        DOL’s Original and Revised ICs (Not Seasonally Adjusted)

Week ofOriginal ICsRevised ICs
January 30816,297849,670
February 6813,145868,053
February 13862,351 

With the release of the February 6 data on February 11, the market saw a “fall” in claims of 36K (from 849K to 813K).  The real comparison should have been to the 816K number, as that was the number in the market until the release.  So, the improvement was closer to 3K than 36K.  Same for the latest number.  The 862K is slightly better than the 868K revised number, but is far higher than the 813K number the market had for the prior week.  Only in government reporting can there be such deterioration that is looked at as positive!!  In any event, the chart and table below show that there has been no progress in the state programs since August.  That’s six months of stagnation!

The special Pandemic Unemployment Assistance (PUA) programs established by the CARES Act last April expired on December 26, and was re-upped by the Congressional stimulus package at year’s end.  The PUA programs are for those not covered by state programs (i.e., for the self-employed and gig workers).  The low point in January 2021 shown on the chart below was due to the expiration of the PUA programs and the backlog of paperwork needed to restart.  Once again, the PUA table and chart shows no progress since September (5 months).

Finally, the next chart shows Total Unemployment Claims (all programs including state and PUA).  As you can see, there were more than 18 million people on some form of unemployment relief.  That’s an unemployment rate of 11.2%.  And, if you add in those that have dropped out but would like a job (7 million) the “real” unemployment rate is more than 15%!!

Certainly the “stimulus” of free money makes the GDP “grow,” but it is artificial; built on borrowed money.  It’s like paying for living expenses with a credit card.  At first, it becomes more expensive to borrow (i.e., interest rates rise).  But, eventually, you just can’t borrow anymore. 

Other Data

In my last blog, I referred to bank lending, indicating that it is a barometer of the economy’s health.  The chart below shows the Y/Y growth of bank loans and leases by month beginning in January 2019.  Note that loans and leases were growing at a 4%-6% rate pre-pandemic.  When the pandemic hit and politicians forced business closures, a significant portion of companies with lines of credit (LOC) drew those lines down and put the cash on their balance sheets for fear that the banks would rescind those lines.  You can see the spike in March/April of 2020.  Since then, lending growth has deteriorated.  No doubt, when we get March, 2021 data, it will show significant negative Y/Y results.

The deterioration of bank lending goes hand in hand with business’ outlook.  Below is an 11 year chart of the National Federation of Independent Business’ (NFIB) Optimism Index.  A big spike occurred with former President Trump’s election, and optimism stayed high until the pandemic hit. 

Optimism spiked back up, but fell dramatically in December.  Goes along with what is happening in the labor market.

Interest Rates

Rates have continued to spike upward on the Treasury yield curve (not so much in the corporate world, though they will undoubtedly follow if Treasury rates remain elevated).  Perhaps one of the reasons is the market view that the economy will soon boom and inflation will reappear with the gigantic stimulus package wending its way through Congress, and especially since there is a growing view that herd immunity is close at hand.

First trust used the following logic in their February 10 report entitled “Immunity is Closer Than You Think.” 

  • Herd Immunity is defined as 70% of the population with antibodies;
  • Official count of positive tests = 26.9 million;
  • CDC estimates that only 1 out of 4 positive cases are identified implying that nearly 108 million Americans already have the antibodies;
  • As far as vaccines are concerned, 44 million doses have been administered (now at a rate of 1.5 million/day; 10 million have received the recommended two doses);
  • At this rate, 70% of the population will have antibodies by the end of April.

Page A15 of Friday’s Wall Street Journal (February 19): “We’ll Have Herd Immunity by April,” Marty Makary, Ph.D, Johns Hopkins School of Medicine.

  • COVID cases are down 77% in the past six weeks;
  • Fatality rates are down;
  • Two-thirds of the population appear to be immune;
  • 150 million will be vaccinated by the end of March.

The Wall Street view is that, once the economy re-opens and people gain confidence that the odds of contracting the virus are low, the economy will boom and inflation will reappear because of easy monetary and fiscal policies.  Thus, the upward spike in the Treasury yield curve.  The underlying assumption here is that people will return to their pre-pandemic spending patterns.  Unfortunately, survey after survey suggests that savings (precautionary) will rise, just as it did after the Great Recession.  If true, consumption will not return to its pre-pandemic levels.  Nevertheless, that’s what underlies the rise in Treasury rates.

Surely, there can be a spike in prices, and we are currently observing that in the commodity space where transportation, not production, is the issue.  But, inflation is a process, not a single event.  The economy has a long way to go before the demand side consistently outpaces supply; that’s when inflation occurs.  Consider how far away we are from that with:

  • 18+ million un- or under-employed, and 7+ million labor force dropouts;
  • 3.4 million homeowners delinquent on their mortgages;
  • 10 million renters many months behind on their rent;
  • 20% of the S&P 500 companies showing “zombie” characteristic, unable to pay debt service at current interest rates out of cash flow.

How do these translate into a spending splurge?  No doubt restaurants, hotels, airlines and theme parks will rebound toward pre-pandemic sales.  But, given the unused capacity that currently exists in these industries, how is it that supply becomes inadequate and prices rise?

Like all Wall Street narratives, this one has legs – until it doesn’t.  As long as the narrative holds, rates can continue to move up.  But the economics of inflation are simply not there.  One of two things will happen, or maybe both simultaneously: 1) Given the weight of services (especially rents), the Consumer Price Index (CPI) won’t respond, and the narrative will die; and/or 2) The Fed will step into stem the rate rise.  At the current speed of the rate rise, the latter is likely to occur first.


  • Despite the forecast of a blockbuster rise in GDP this quarter, such a rise, based on “helicopter” money borrowed from the future, is not a healthy economic situation.  Perhaps the equity markets are starting to sniff this out.
  • There has been virtually no improvement in the labor market for the past half-year.  Truth be told, the labor market is the real barometer of the economy’s underlying health.
  • Bank data and small business sentiment lead to the same conclusion; i.e., the underlying economy is quite weak.
  • Interest rates have spiked based on the Wall Street inflation narrative.  The data show rapid declines in COVID infections.  The prospect that herd immunity is close at hand paints a picture of boom times and inflation immediately ahead.
  • But with massive unemployment and mortgage and renter delinquencies, the necessary conditions for inflation to appear are simply not at hand.

Robert Barone, Ph.D.

February 22, 2021

Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. www.fourstarwealth.com. He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO, and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of CSAA Insurance Company (the AAA brand) where he chairs the Finance and Investment Committee. Robert is the co-portfolio manager of the UVA Unconstrained Medium-Term Fixed Income ETF (FFIU)


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