Core Inflationary Pressures At A Decade High – Populism And Authoritarianism Are Rising

By: Kent Engelke | Capitol Securities

Are inflationary pressures accelerating? The core CPI rose to 2.4% in July, the highest level in a decade. The Fed is anticipating that core inflation will level off soon with core PCE ending the year at 2.1% up from 1.9% in June.

A primary driver for the rising core CPI rate is rental rates, perhaps the result of a growing housing shortage. Moreover, what about tariffs? Are they not inflationary? Against this backdrop, I think the core PCE will end the year around 2.3%.

In my view, inflationary expectations are pivotal in discerning potential market direction. As written ad infinitum, interest rates are a dominant factor regarding equity valuations. In order to justify greater valuations in a higher interest rate environment, profits must accelerate.

Second quarter earnings were great. However, they must continue to accelerate if inflationary pressures continue to accelerate from current levels.

At some juncture, greater inflation will begin to affect consumer spending given the anemic pace of wage gains. I will continue to argue a major reason for the lack of wage gains is the massive pool of available workers that is not captured in the data. At some juncture, wages will begin to accelerate as this pool shrinks but the question is when.

Radically changing topics, Turkey was the dominant headline news Friday. Most believe Turkey will not be a major issue, doubting any type of contagion risk.

Many times I have commented about today’s tectonic changes. According to Bloomberg, when one totals the GDP of the G-20 plus Spain, the combined GDP is $64 trillion. Populists — who emphasize economic nationalism over multiculturalism — now control 41% of GDP. By contrast, in 2007 the figure was only 4%.

Mainstream democratic parties preside over only 32% of G-20 output. In 2007, they accounted for 83%.

Authoritarian regimes — China, Russia, Saudi Arabia and Turkey — manage 24% of G-20 GDP. China controls almost 19%, up from 8% a decade ago.

In other words, 65% of G-20 GDP is controlled by either populists or authoritarian regimes. Ten years ago it was around 15%. G-20 GDP accounts for 85% of global production and 75% of world trade.

What are the consequences of this massive change? In my view, failure to manage the forces that globalism unleashed created conditions for populism and authoritarianism to rise.

The establishment, which is defined as the globalists and bureaucratic/big business elitists, is desperately fighting to return back to yesterday’s rules, a fight that I believe is fruitless given the massive failures of globalism and multiculturalism towards the common man.

As stated, we do not know the consequences of this tectonic change, a change the will impact the markets.

This week’s economic news is focused on housing, retail sales, and various manufacturing indices. Will the data impact trading?

Last night the foreign markets were down. London was down 0.54%, Paris was down 0.21% and Frankfurt was down 0.59%. China was down 0.34%, Japan was down 1.98% and Hang Sang was down 1.52%.

The Dow should open moderately lower as the ongoing economic crisis in Turkey bled into global markets. The 10-year is up 4/32 to yield 2.86%.

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