“This inflation stuff is getting out of control.
Who’s responsible for all this?”
“Me?
The government?
No…
no, I don’t accept that.
Now, your one job - drop everything you have - your one job now is to figure out who we
can blame for this!”
“Come up with something catchy so that people get it stuck in their head and they can’t
think of anything else.
Blame someone or something else!”
Welcome back, you intelligent 17,000 subscribers.
I really appreciate you.
And those you showing up every time…
I can’t thank you enough!
So… inflation.
You heard of it?
It’s a big problem.
Right?
And there’s been a lot of finger pointing.
So, who’s right?
What’s actually going on here…?
Well I’m sure you’re familiar with the most recent CPI print reading an 8.5% year
over year increase.
If you watched my videos from the past, I’m sure that news did not come as a surprise
to you.
And hopefully you were well positioned to profit from it.
Or at the very least, you’ve been insulated from this issue by heeding some of my warnings.
And if you’re new here - well, welcome - this video’ll get you up to speed as to what
exactly is going on with inflation - and then you’ll probably wanna check out the other
videos I’ll cite throughout (I’ll link out to them in the description).
It’s not until you understand what’s causing our current precarious situation that you
can even hope to come up with the best strategy to combat it.
Right?
So anyway, that 8.5% print… that’s the highest in 40 years - as you’ll hear reported
in the mainstream media and from many YouTubers.
But remember, you know better, the way they report this number is very different from
how it was reported 40 years ago.
So, it’s really not a fair comparison.
If you want to understand the details behind all the changes the Bureau of Labor Statistics
made - you really should check out this video that I’ll link out to directly at the end.
In short, today they use substitution, hedonics, and owner’s equivalent rent - all of which
have the effect of making this number today smaller than it would be had they not changed
their methodology.
Again, if you don’t believe (that’s fine), be sure to check out that video where we explore
documents from the BLS - from the government - addressing those changes.
And it makes a big difference.
Take that last one for example - owners equivalent rent - it’s probably the most obvious difference
here.
I mean, in March they said “shelter” is up only 5% year over year.
And this shelter figure is important as it makes up more than 30% of the total CPI calculation.
5%, really?
As I explained in that short I put out a couple of weeks ago, rising home prices coupled with
rising mortgage rates have actually led to a mortgage payment increase for new home buyers
of more than 55% year over year!
That’s insane.
And even though I’m not suggesting the “shelter” number should be 55%, the government’s 5%
is clearly understating the real problem here.
Maybe instead we should look at actual rental rates.
According to Apartment List’s National Rent Report, year over year rent growth is up a
staggering 17.1%.
And just for fun, if you changed that government reported “shelter” number from 5% to our
low end number here of 17%, the overarching CPI would jump to more than 12%.
At 55%, eh… you don’t wanna know!
Add back those adjustments from substitution and hedonics, and it’s not crazy to think
that we’re experiencing inflation like never before - even higher than that 15% or so CPI
calculated in 1980.
And this isn’t just an “oh hey, we’re making up for lost ground here, post pandemic.”
We’ve actually surpassed the pre pandemic trend for rental rates at this point.
Check this out.
This is not surprising in the least given the unprecedented amount of money that has
been pumped into our supply over the last couple of years.
It’s the reason I made that video helping you read between the lines of the government’s
CPI figure and the media’s spin of that data - to help you understand what’s really
going on - (...) how precarious the situation really is and (…) how you could profit from
it.
And this isn’t an isolated issue.
It’s not just the cost of housing that we’re seeing skyrocket.
It’s … pretty much everything.
Check out this breakdown of the CPI changes over the years:
It’s not just goods - due to supply chain issues.
It’s not just energy - you know, due to Putin.
The government wants a scapegoat.
They would love to blame anybody or anything other than their own bad policy decisions
or the Fed’s policy of kicking the can down the road…
Unfortunately, that seems to be politics 101.
They can’t admit when they might have been wrong.
It’s sad, but that just seems to be our political reality right now...
So we just have to be aware of that and not buy into any of the BS they’re trying to
feed us to distract us from the real culprits.
I’d love to know whose job it is in the government to come up with the catchy little
alliterative phrases that they hope will catch on to distract you and me from the real issues.
For example, from the perspective of trying to be able to blame someone else for an inflation
problem that has come from your policy decisions and the Fed’s actions, the government was
quick to try to rebrand inflation as the “Putin Price Hike…”
It’s catchy - and no doubt the war in Ukraine is exacerbating our inflation problems world
wide - especially food and energy, considering the exports that come from those countries
- but it’s also laughable!
Our problems absolutely existed before.
Let’s take a look at that Putin Price Hike shall we:
Russia invaded Ukraine toward the beginning of 2022.
Inflation - as measured by the government’s own CPI - has been screaming ever higher for
more than a year prior to that.
So, it’s not just a supply chain issue, because the price of pretty much everything
individually is climbing at a relatively alarming rate.
Not just those goods affected by the supply chain.
And it’s even more obvious that this is not a Putin problem.
Man, I wish they didn’t act like we’re that stupid.
The final major scapegoat I’ve heard thrown around by politicians is corporate greed.
Elizabeth Warren tweeted, “Everyone is talking about inflation & giant corporations have
figured out that’s an opportunity to not only pass along their own costs, but also
do some price gouging to pad their profits.”
First of all, corporations have fiduciary responsibility to their shareholders.
Right or wrong, the idea is to maximize profits.
That being said, there are some natural market controls that keep prices from getting out
of hand.
For example, Bernie Sanders blames the rising cost of a Wendy’s frosty on corporate greed.
And maybe - probably - there is some of that going on.
It’s true that corporations are always trying to maximize value for shareholders.
Yes.
But… nobody NEEDS a Wendy’s frosty.
And certainly, nobody is entitled to a Wendy’s frosty.
And if the price of the frosty gets too expensive for you… you should not buy one.
And if enough people stop buying their frosties because they’re too expensive…
Wendy’s will either have to lower the price - IF they can, IF their margins will allow
for that - or they’ll discontinue it.
That’s how our free market works.
And it’s not like Wendy’s has a monopoly on fast food.
There are plenty of competitors in that same space … all equally greedy.
So, if they saw an opportunity to steal business from Wendy’s because they were charging
too much for their frosty… well, you better bet they’d do it!
If, instead, all the fast food companies are able to increase their prices together, and
that’s not really leading to less customers, that would imply that all their customers
just have more money…
more money competing for the same goods.
Don’t worry, we’ll circle back to that concept in a second, but if you want to argue
that prices aren’t going up for businesses at the same rate as they are for consumers,
you should probably check with the government reported Producer Price Index or PPI…
It’s been skyrocketing similar to the CPI.
And I only say similar in that it too has been shooting almost straight up.
But where it’s not the same is that it’s actually been going up by more than the consumer
inflation figure.
And today, the gap between the two is larger than it has ever been since they started recording
this back in 2009.
This PPI figure is effectively inflation as experienced by businesses.
It’s their rising “cost of goods” - of their inputs.
If companies were really gouging or profiteering, these lines would (at the very least) be flipped.
Say, for example, if the red line here (the PPI) were flat - you know still around 2.5%
or so - but the CPI (the blue line) was shooting up like it is, sure… yeah, then you definitely
have more of a case.
If the costs of running a business have stayed the same yet consumer prices keep soaring
across the board…
yeah, it very well may be that corporations are just taking advantage of inflation fears.
But that’s clearly not the case here.
In fact, in 2021, it looks as though large corporations may have bought into the official
narrative (or at least hoped) that inflation was “transitory.”
Because that’s when the gap between their costs and consumer costs really expanded.
Put yourself in the position of a corporate CEO.
If you raise prices and your competitors don’t (perhaps because inflation really is transitory),
you look bad.
Some of your customers get angry and turn to your competitors.
If Wendy’s is raising their rates but McDonalds is not… they will lose some business.
You better bet, politicians needing something to rant about will call you out for taking
advantage of the “transitory” inflation and only making the problem worse.
You see, you have a lot of incentive to NOT do that - to not risk that negative press
- to keep your customers happy.
And if that inflation you were experiencing actually turned out to be transitory, then
sure, you could eat that added expense for a quarter or two.
That seems to be a more likely story of what’s happened here given this data we have in front
of us - from the government…!
Unless - to be fair - you want to agree that the CPI is being manipulated - suppressed
- not showing us how bad it really is… then, yeah, maybe that blue line should be way out
ahead of the red one here… which would tell a different story.
Man, if only we had just clean straight forward data so we could piece together the full story.
Regardless, they’re obviously both going up dramatically.
The inflation is obviously real for both consumers and businesses.
And it’s clearly, at least not all, due to corporate greed.
So it’s not our supply chain issues causing all our inflation problems.
It’s not Putin.
It’s not corporate greed.
Those are all playing their part in the equation, sure, but I believe they’re far from the
primary contributor to our problem today.
And I’m sure all of you (at least regular viewers) already know who the real culprit
is.
We have been pumping an unprecedented amount of money into our country’s money supply.
In fact, 80% of all of the currency in US dollars that has ever been created was created
since the start of the pandemic.
We flooded our system with cash despite warnings from people of the Austrian economic persuasion
who could see the writing on the wall.
Instead, The Economist (of all publications) had the nerve to claim that this was the inflation
that NO ECONOMIST SAW COMING!?
I mean, I’m a nobody in this space (here with my brilliant 17,000 subscribers), but
I’ve been warning about this for a while - making videos about how to profit from it
- and definitely talking to my clients individually since early pandemic days about how they could
position themselves for this INEVITABLE inflation.
And there were absolutely people with audiences WAY larger than mine sounding the alarm.
Sorry… this stuff is frustrating.
The politics.
The media.
It’s all so infuriating.
I get worked up.
I wanna help.
And I was thinking about this… how can I make this clearer - that just throwing money
at a problem is only a short term fix and will cause worse (especially inflationary)
problems in the future.
You know, Milton Friedman posits his Quantity Theory of Money - which is what people are
pointing to when they say that “more money chasing the same basket of goods will make
the prices of those goods go up.”
But as I try to conceptualize this myself, I’ve heard a lot of analogies that just
don’t do it for me.
You know, you have 10 people in a room, they all have $100, they’re all buying the same
goods, all the sudden you give them all another $100 - so a 100% increase to the money supply
- but now the price of all the goods would go up effectively cutting the value of their
money in half (leaving them in relatively the same place they started)...
But that doesn’t quite do it for me.
I know an analogy needs to be simplified so that we can better conceptualize the point,
but I feel like I could do better here for you.
I’m gonna give it a shot…
Let me know what you think.
Here’s my simplified version of a big reason why when you just give everyone money - the
same amount of money - it can easily result in ALL the money just being worth less - in
other words…
inflation.
Here it is…
Say, for example, you have an economy that’s made up of 5 people.
Person 1 has $100, Person 2 has $80, 3 has $60, 4 $40, and finally the last person - Person
5 - has $20.
There is this one widget that everyone wants.
But the manufacturer, for whatever reason, only has 3.
Now, for this example, let’s ignore his costs (that is, of course, a very important
factor here as previously discussed, but we don’t need it to understand this concept).
If you’re the manufacturer - and you want to sell all your widgets (that’s why you
made them, to sell them and profit from them) - and so you want to maximize your revenues
- at what price should you set the three widgets?
Well, if you price it at $20, you’re going to have all 5 people in your economy fighting
for it - think Black Friday, pounding on your door, trampling each other.
Maybe even the wealthier ones shouting higher bids as far as what they’re willing to pay
you to get it.
And so maybe in the end, you wisely ultimately settle on $60 anyway.
$60 was the right answer (if you had to sell them all at the same price…)
So, Person 4 and 5 just didn’t have enough to out bid the other interested buyers.
Well hey, so what happens if we bring the money printer into the equation?
We give them all 40 extra dollars.
Now they all have enough to buy the $60 widget!
Right?
Well… no.
If you - the manufacturer - weren’t savvy enough to adjust your price up by $40 ahead
of time, the same chaotic scene is going to play out - where Person 4 & 5 just can’t
keep up with the bidding.
And once all the dust settles, the new price of these highly-sought-after, rare widgets
is now $100 - exactly $40 higher than it was before.
I know there are so many more variables here - SO MANY - than I’m illustrating in this
simplified scenario.
But I did think it does a better job at illustrating why (1) just giving people money may not necessarily
result in guaranteeing that they’ll be able to buy what they might have been able to before
you just gave EVERYONE money and (2) (in the same vein) that pumping more and more money
into the system can easily have the effect of increasing prices all around.
In fact, if we were exploring this analogy further and including the cost of making the
widget - those costs would likely go up as well as - since the same sort of market based
(all that bidding that took place) that same sort of market based system would take place
with the raw materials - with the inputs, the “cost of goods sold.”
If that’s the case, maybe it’s not crazy to consider that perhaps selling the widget
at $60 is no longer even profitable for the manufacturer.
And that their price hike to $100 could have even kept their margins the exact same.
Maybe we should flesh this out a little further.
I’m just spitballing here.
Let me know what you think.
At least say hey in the comments.
(...) This video is going to help you understand all those CPI adjustments I was talking about
at the top of the video.
I look forward to seeing you around.
Take care!