We must be vigilant! The US inflation problem may trigger a new round of global financial crisis

Data released by the U.S. Department of Labor showed that the Consumer Price Index (CPI) in May rose 0.6% month-on-month, jumping to 5%, the largest annual increase since August 2008; the core consumer price index rose 0.7% month-on-month and 3.8% year-on-year, the largest annual increase since 1992. This far exceeded economists' expectations and further exacerbated people's concerns about U.S. inflation.

Deutsche Bank's research team recently released a report warning that the Federal Reserve's pursuit of a full recovery while ignoring the risk of inflation will have dire consequences, and the outbreak of inflation will put the global economy on a "time bomb." "This could lead to a severe recession and trigger a series of financial crises around the world."

The root cause of the rapid rise in inflation in the United States lies in the irresponsible monetary easing and fiscal stimulus plans of the US government. After March 2020, the impact of the epidemic caused the US stock market to suffer four unprecedented "flash breakers". In order to save the US capital market from collapse, the Federal Reserve used the "killer weapon" of unlimited quantitative easing. In March 2020 alone, the Federal Reserve issued an additional $3 trillion, and then maintained a monthly bond purchase plan of $120 billion, continuing to release money to the financial system. The Biden administration not only continued the loose monetary policy of the Trump era, but also launched several economic rescue and stimulus plans in one go, with a total expenditure of 7-8 trillion US dollars. Some scholars pointed out that the growth scale of Biden's government spending has far exceeded the previous US economic stimulus plans such as Roosevelt's New Deal, the 2008 financial crisis, and Reagan's military expansion in the early 1980s.

Such a huge scale of monetary and fiscal stimulus has caused a flood of money in the United States. American families, businesses and individuals are holding a lot of cash, and personal savings alone have surged from $1.6 trillion a year ago to a staggering $4.1 trillion. Bank deposits are so large that banks cannot bear them and require depositors to withdraw or spend them.

Under the pressure of continued inflation, the Fed's current attitude has changed from denying the existence of inflation to acknowledging the reality of inflation but insisting that "high inflation is only temporary", indicating that it has firmly chosen the former on the balance between supporting rapid economic recovery and controlling inflation. However, although the Fed still loudly calls for "maintaining stability", it has to face the fact of inflation internally. In April, the Fed's monetary policy meeting discussed the possibility of tightening its monetary policy stance for the first time since the outbreak of the COVID-19 pandemic.

All signs indicate that the inflation in the United States is by no means simply “temporary”.

5 signs that the US inflation crisis is accelerating

Americans begin lining up to stockpile Chinese goods

The speed with which conditions affecting U.S. inflation data have changed has caught many people off guard. In the U.S., we have been in a low inflation environment for most of the past 40 years, so many Americans don't even have a reference frame to understand what a high inflation environment looks like.

But now Americans are facing an inflation crisis unlike anything they’ve seen since the 1970s. To combat the impact of the ongoing coronavirus pandemic on the U.S. economy, the Treasury Department and the Federal Reserve have been borrowing, printing and spending vast amounts of money, flooding the financial system with new cash.

Although these measures were taken to stimulate the US economy, a terrifying inflation monster has been created in the process, which will not be tamed easily. In fact, looking ahead, things look very bleak. For example, here are 5 signs that the inflation crisis is accelerating, listed by senior economist Michael Snyder in his report.

The first sign is that inflation tends to hit people at the bottom of the economic income ladder the hardest, but at this point, now, even the majority of American millionaires say they are "very worried about inflation," according to a CNBC online survey of 750 millionaires on June 8, with as many as 65% of millionaires worried about inflation caused by recent fiscal spending. Of those, 34% said they were very worried.

The second sign is that the world’s largest banks are now also warning of an inflation crisis. This week, a team of analysts at Deutsche Bank warned that “ignoring inflation will leave the global economy, including the U.S., sitting on a ticking time bomb” as the Federal Reserve continues its ultra-loose, unlimited monetary policy and explicitly believes that current inflationary pressures are largely temporary.

The third sign is that US housing prices continue to soar to record highs. During this period, the BWC Chinese International Finance Team has noticed that investment funds, wealthy people, and foreigners are all snapping up US properties, making life very difficult for ordinary homebuyers.

According to multiple data released by the U.S. Department of Commerce a week ago, as of April, house prices across the United States are soaring. The S&P Shiller House Price Index rose 13.2% in March from the same period in 2020, the largest increase since December 2005. Data show that 90% of U.S. cities, including New York and San Francisco, have hit new highs. However, as rising prices have suppressed demand, the decline in new home sales in the United States has exceeded expectations. Data show that new home sales in April fell 5.9% from March because buyers could not afford housing costs.

According to the latest forecast by Redfin, a national real estate brokerage company, U.S. home sales will reach a record $2.5 trillion in 2021, a year-on-year increase of 17%. This will be the largest annual growth since 2013 and far higher than the peak of any week during the collapse of the subprime mortgage financial crisis in 2008. This has also increased Wall Street's concerns about the U.S. real estate market. According to NAR, among the 183 metropolitan areas it tracks, house prices in 89% of the U.S. regions have seen double-digit jumps in the first quarter of 2021.

According to data from the Mortgage Bankers Association, an industry organization, the total value of the U.S. real estate market was $25.6 trillion before the subprime mortgage crisis (2006). Currently, this figure has jumped to $33 trillion.

The fourth sign is that used car prices in the United States are now officially entering "incredible" territory. This week, we learned that the used car price index has soared 26% so far in 2021. According to the Used Car Value Index released a few days ago by the largest US auto auction operator, the prices of used cars auctioned across the United States in May were 4.6% higher than in April, up 26% so far this year, and up 45% from April 2019.

The fifth sign is that food prices in the United States continue to soar. For example, we continue to see reports of food shortages across the United States, and the severe drought currently occurring in the western United States will only exacerbate the situation in the coming months. There is no doubt that under the pressure of inflation and supply chain, the United States will face a serious food deficit in 2021. To make matters worse, rising raw material, labor and transportation costs are also prompting it and other food producers to raise prices.

For example, in Florida, Papa Bee owner Lorie Hamm said restaurants in her area are offering only a limited number of wings. She also said that the price of such wings has nearly doubled since the beginning of 2021. At the beginning of the year, a box of chicken wings cost $70-90 a box, and now it costs about $150 a box.

According to a list of some of the most serious shortages the United States is currently experiencing published on its website by the US media Business Insider, these products include computer chips, palm oil, chicken, bacon and hot dogs, imported foods (such as cheese, coffee and olive oil) and corn, among dozens of other supplies closely related to the US economic life.

It is worth mentioning that according to a Bloomberg report, 9 out of 10 goods purchased by Americans are made in China. Earlier, Magnus, head of the U.S. Customs Brokers and Freight Forwarders Association, found a few weeks ago that more than 250,000 merchants in the United States have stockpiled a large variety of Chinese-made goods, including microwave ovens, vacuum cleaner filters, swimwear, furniture, etc. Some merchants have stockpiled goods in warehouses that are piled up to the height of the ceiling.

Asian American Guo Hong said a few months ago that almost all stationery in children's school bags, including thumbtacks, glue, stickers... are without exception. Some American consumers said that we cannot do without hand sanitizers made in China, masks made in China, and we cannot do without Made in China. Only China has a complete industrial chain, and American consumers like this Chinese product. Another development is that the New York Times reported three weeks ago that Americans are buying up Chinese goods and lining up to stockpile Chinese goods, and the scale of their transactions has increased significantly.

What happened when the US CPI broke 5 over the years?

Since the beginning of this year, the inflation rate in the United States has begun to accelerate. After the CPI exceeded 5.0% in May and the core CPI rose by 3.8% year-on-year, the global capital market paid close attention to the Federal Reserve's June interest rate meeting (Beijing time June 15-16). At this point, let's review what happened when the US CPI broke 5% year-on-year four times since 1960?

1968/06-1971/09: The economy fell into recession, but the afterglow of previous large-scale government spending and fiscal stimulus remained, and inflation continued to rise. The Federal Reserve tightened monetary policy in 1970 to curb inflation.

1973/03-1982/11: Under the double blow of the food crisis and the oil crisis, the US economy fell into stagflation, and supply shocks and costs pushed up inflation. Government price controls failed, and monetary policy lacked independence and was too lagging, failing to successfully curb inflation.

1987/08-1991/07: After emerging from stagflation, the U.S. economy experienced rapid growth, but the economic growth rate began to slow down in 1987, and there was pressure for wage and price increases, and the Federal Reserve tightened its monetary policy.

2007/11-2008/09: Soaring oil prices pushed up inflation and the financial crisis broke out. The primary task of the Federal Reserve’s monetary policy was to rescue the market, and inflation was not its main focus.

Soochow Securities' macroeconomic research believes that the causes of current inflation and inflation from 1973 to 1982 are similar, both of which are cost-driven. The main reasons are the base effect and supply shortage under the epidemic. In May this year, the US CPI recorded 5.0% (the highest level since August 2008), but from the perspective of the CPI index, the compound growth rate in May 2021 relative to May 2019 was only 2.5%.

"The incompetent Fed will not be able to curb inflation like it did in the 1970s"

Peter Boockvar, chief investment officer of Bleakley Advisory Group, said on Wednesday that monetary policy has begun to be powerless in the face of inflation.

Boockvar warned that the problem is particularly evident in the housing market, as that sector is most sensitive to changes in interest rates. The total number of U.S. residential mortgage applications fell 3.1% last week, according to reports.

For Boockvar, the bigger issue is the long-term trend change of the refinancing rate. He pointed out that the refinancing rate level is at its lowest level since February 2020, and there is no more room to lower interest rates to stimulate the market. And the rise in nominal interest rates will lead to a rebound in expected inflation.

So, what can be done now to control inflation?

Boockvar said the Fed knows how to fix it, but whether they have the guts is unclear.

In addition, Boockvar also expressed doubts about whether the Federal Reserve can be as tough as Paul Volcker in the 1970s and end quantitative easing or raise interest rates earlier than Wall Street expects, after all, this may have a significant impact on the stock market and the economy.

Boockvar said he believes inflation will last longer than others think and that rising prices will hit every corner of the economy.

How to fight inflation?

The so-called inflation for the rich and deflation for the poor.

Taking the United States as an example, the Federal Reserve actively released money to save the market, but the liquidity released by the loose monetary policy did not increase the wealth of the middle class. Instead, it flowed into the stock market and property market and into the pockets of the wealthy. Capital tycoons made a fortune easily by relying on equity assets.

But the majority of working-class people are not so lucky. A survey by the Wall Street Journal shows that the epidemic has forced a large number of middle-class American families into poverty. AFP also reported that the epidemic has hit the American middle class hard, causing 8 million people to return to poverty!

In the face of inflation, how to protect assets from being eroded and how to fight inflation have become common problems faced by global investors and investment institutions.

For the vast majority of China's working class, since the outbreak of the epidemic, they have generally faced the embarrassing situation of no wage increase and rising prices. How to preserve the value of assets and fight inflation must have made many people scratch their heads.

It is worth noting that at yesterday's Lujiazui Forum, Chairman Guo Shuqing talked about how those who speculate in foreign exchange, gold and other commodity futures will hardly have the opportunity to get rich, just as those who bet that housing prices will never fall will eventually pay a heavy price.

This passage is worth pondering.

The Chairman specifically mentioned real estate speculation, foreign exchange speculation, gold speculation, and futures speculation at such an important meeting. It can be understood that these are risky behaviors and those who persist in doing so will eventually pay the price.

So what other investment channels do residents have? The answer is self-evident.

In fact, after the directive correction and gradual release of risks after the Spring Festival, the recent strong rise of the A-share market has shown its healthy status independent of the U.S. stock market.

Wu Xiaoqiao, former vice president of Renmin University, once said in a program that it is unsustainable to rely on the current increase in house prices to realize the returns of existing assets. To solve the problem of the single structure of residents' existing assets, it is very important to develop the capital market.

Historically, the rate of return on investing in the stock market is higher than that on investing in government bonds. From a broader trend perspective, the rate of return is even higher than that on investing in real estate.

So here comes the question. We often hear people complaining about not making money in the Chinese stock market, and even losing money in a bull market. Wu Xiaoqiu is deeply skeptical about this: "People who make money don't talk, but people who lose money talk, so this phenomenon is caused."

How to make good use of securitized financial assets such as funds, bonds, and stocks?

Wu Xiaoqiao said that from a professional perspective, institutional investment may be a more correct direction.