What to watch in 2022
#3. Inflation and the cost of living. Kazakhstan is but a preview of what’s to come.
"Inflation is transitory." Of course “We” all knew “They” were lying because… well… we leave our house from time to time to buy stuff.
My Starbucks coffee is up 10% (I’m very close to adding them to my Google and Amazon boycott in 2022).
Food items at restaurants are up as much as 25%, they have started including 20% base tip, a 5% COVID recovery tax and then asking for additional tips. Subway sandwiches defaults to an 18% tip on the payment console.
Houses? An average families biggest asset? They are up 40% in 2 years in many markets and those houses that are available are getting multiple bids and selling well over asking price.
And finally close to home, energy prices, the topic for tomorrow, are going through the roof. The reasons are two fold. First. The “energy transition.” Substantial global over investment in intermittent energy sources to meet "net zero" objectives have destabilized the grid and created false security in replacing legacy energy sources of coal, oil, natural gas and nuclear. Second and simultaneously, the globe is feeling the impact of 18 months of under investment in oil and natural gas production.
Ironically, core inflation calculations excludes food, energy and owning houses, so maybe that’s why it didn’t look that bad to economists (he says sheepishly)? Sadly, what we are seeing in Kazakhstan is the canary on the inflation issue globally and it doesn’t end well.
The median income in Kazakhstan is ~$3,300 USD per household, roughly 5% of the United States. However, when it comes to energy consumption, the average person uses 46,000 kwh per year in Kazakhstan versus the 79,000 kwh we use in the United States which means the share of income that goes to energy is much higher in poor countries.
With natural gas prices in Europe 6x higher than they are in the United States, and with the continent producing only 10% of our daily natural gas production, LNG imports are extremely expensive. LPG, the fuel most Kazakhs use in their vehicles, is created from 60% natural gas and 40% from the refining process for crude. So high feedstock prices mean high LPG prices, and the Kazakhs are pissed. They can't afford to heat their homes and “heat or eat” is not a choice I would like, either.
I predicted months ago this winter would see millions of European's die as a result of their green energy transition plan and lack of access to power and additionally, 10s of millions would go bankrupt. What we are seeing in Kazakhstan is just the beginning. And when death is a real outcome, when losing everything you have is a real outcome, well, that leads to a real insurrection.
Stepping back to inflation, the factors that have led to us here are well understood. Central banks have printed money for 2 years, rather than acknowledging what I wrote about in March 2020 but here we are. Post paying people not to work, post giving businesses free money, post vaccination, post boosters, post mandates, post travel restrictions, post data.... mask mandates are still standard and the virus is still here and we have to learn to coexist. Which is too bad because it was an expensive mistake to make and has led to inflation running "officially" at 6.2%. The answer, the only answer, is to hike interest rates, cut entitlements like social security and Medicare, cut spending, raise taxes and restore the balance sheet, but the political cost will be immense. It is, after all, an election year, and nothing is done without considering the politics of winning.
Here are a few data points that might explain the reluctance. Bureaucrats are largely democrat- the DC population, where all the government workers and lobbyists live, voted 92.2% for Biden in the 2020 elections. The media has a massive liberal lean, which explains why they didn’t challenge “inflation is transitory”. 90% of professors at top US colleges are democrats, and they are responsible for educating much of the workforce. So the academics, back office and propaganda machine see the writing on the wall, the impact on 2022, and don’t have a clue what to do about it.
They know, as we do, that if interest rates were 3-4%, the stock market comes back- what?- 40%- and all the tech Ponzi stocks come back 75-99%.
House prices come down 25-30% because mortgages are much more expensive.
Economic activity slows dramatically and worse, the debt service cost on $30 trillion of the national debt jumps to $900+ billion. The US debt to GDP is currently at 127%, up from 35% in 1980 and 60% in 2000. If you want to be scared, I suggest checking out this link.
At the end of the day, there is no such thing as a free lunch, and at some point, the piper will have to be paid for the intakes of 2020 and 2021. To reign in inflation is going to crush those that survived COVID and many will be asking “what the hell did we do that for?” Look for inflation to be the third key issue of 2022.
#hottakeoftheday
Food inflation is so cruel. I see folks-often older folks like me crusing the meat aisle. They pick up steaks and then put them back down. I want/should offer to help pay, I am lucky, I can afford it...but I don't. They aren't ready to check out and I am usually just blasting through for a couple items on the way to the gym. I don't look back as I head to the carbonated water section, as I know they are picking over the day-old stuff. Seniors got a lousy 5.9% in S.S. this year, and then Part-B went up $30 bucks leaving many (some rely on SS entirely) less well off. Sleazy Joe and his gang have done a number on the economy in just a year. Some of this would have happened regardless, but the messaging (if you can call it that) from Biden and ham-handed rollout of this policies have exacerbated it no end. CHeers and keep up the good work.
Your comments are all cogent. Focusing on the housing market, I follow several, and prices have gone up considerably due to low mortgage interest. Most realtors I speak with think the real mortgage rate should be 4-6%. Just run a mortgage calculator on a $200,000 house at 2% then run it again at 6% and lower the buying price to match the monthly payments on the 2% $200,000 house and you get a picture of how much lower prices may go. A couple of subjects the housing market also reveals is the enormous widening of the gap between the weathy and poor. First the second home market in resort areas has exploded in price and sales. Finally here in Houston home sales are way up, but that is not the whole story. Below is a list of home sales in Houston for the year published in November 2021
Houston Home sales (from the Houston Chronicle)
By segment, year-over-year November single-family sales performed as follows:
• $1 - $99,999: decreased 23.9 percent
• $100,000 - $149,999: decreased 27.1 percent
• $150,000 - $249,999: decreased 33.5 percent
• $250,000 - $499,999: increased 26.2 percent
• $500,000 - $999,999: increased 49.1 percent
• $1M and above: increased 23.4 percent
Home sales below $250k were way down. This highlights the disparity in wealth in the US and this is going to be a major issue in 2022 and beyond