Aug. 16, 2021 1:19 PM
Written by Austrolib
Author of The End Game Investor. A gold-based approach to protecting wealth and profiting off Fed inflation
Summary
Consumer sentiment collapsed 13.5% since July, the third biggest fall on record next to October 2008 and April 2020. The current read of 70.8 is below the April 2020 trough.
Mainstream financial media is trying to paint this as pandemic fears, but that makes little sense. If it was pandemic fears, inflation expectation would be falling, but they're not.
Historically, collapses in consumer sentiment immediately preceded spikes in official price inflation statistics, which means a big push higher in the inflation rate may be imminent.
The Fed may be about to lose control of the inflation narrative, and commodities - led by the precious metals, should start to lead the market rather than second guess any possible tapering moves lower.
Is it the third pandemic wave, or is it price inflation bringing consumers down? The University of Michigan just released preliminary data for August consumer sentiment last week, and they were shockingly bad, falling 13.5% from July. According to the University itself, "…the only larger declines in the Sentiment Index occurred during the economy's shutdown in April 2020 (-19.4%) and at the depths of the Great Recession in October 2008 (-18.1%).
The University is pushing the narrative that the sudden collapse in consumer sentiment has to do with fears of a new pandemic wave. This is what the survey's chief economist Richard Curtin is saying publicly at least.
Consumers have correctly reasoned that the economy's performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end," Curtin said. "In the months ahead, it is likely that consumers will again voice more reasonable expectations, and with control of the Delta variant, shift toward outright optimism.
I question this interpretation. Thinking about it logically, it makes little sense. I believe the collapse in consumer sentiment has much more to do with higher consumer price inflation, and much less to do with fears of another Covid wave. First of all, deaths per day in the United States are still lower than they were during the September trough between the first and second waves, so it is a bit premature to say consumers are dreading a third wave and that's why sentiment is so negative.
Second, if we look at the actual survey, there are zero questions about a pandemic. Most of the questions have to do with prices and buying conditions. True, pandemic policy response was probably mentioned where survey respondents could freely write out answers, but the consumer sentiment survey is much more tightly focused on consumer prices and buying conditions than it is about a virus. To interpret sentiment as a response to pandemic fears would require artistic license. Plus, how could consumer sentiment be even lower now, with the US mostly open for business, than it was during the depths of the pandemic lockdowns in April 2020 when Covid fears were very justified? That makes no sense.
Third, if fears of a third pandemic wave and lockdowns were really what is driving this extreme negative consumer sentiment, shouldn't that come with an expected fall in consumer price inflation rates? After all, that's what lockdowns do. They bring down consumer prices, just like they did in April 2020. But we know that year-ahead inflation expectations are at their highest level since just prior to the 2008 financial crisis, from this chart compiled by the same University of Michigan.
Fourth, it is consumer prices that are specifically spiking much higher now, not a third pandemic wave, at least not yet. In the chart below also from University of Michigan, we can see that net attractive prices are at an all time low for the survey, and that they have been in freefall since around April 2020 as well.
If prices are not attractive by record margins, wouldn't this be the very thing that brings consumer sentiment down? Negative consumer sentiment literally means consumers not feeling good about their consumption prospects, which means they are negative about higher prices, which is what is happening.
Historically, It's Always Price Inflation That Brings Down Consumer Sentiment
Looking into the history of the index and its movements, it also becomes clear that consumer sentiment is very responsive to movements in the consumer price index. The index and the CPI inflation rate pretty much move inversely. And, from the charts below, we can see that whenever the CPI climbs by over 5% annually, as it is doing now, consumer sentiment does indeed collapse, again as it is doing now. We can see this pattern all the way back since the 1970s.
Below is the CPI inflation rate in blue versus the University of Michigan Consumer Sentiment index from 1978 to 1984. Consumer sentiment bottoms out when CPI inflation maxes out in 1980.
Sentiment collapsed again in 1990 as the CPI inflation rate topped 6%, followed by a quick recession.
Below we see that sentiment once again took a nosedive as the CPI again broke 4% and then 5% just before the 2008 financial crisis. The key being before - consumer sentiment collapsed before the 2008 recession took hold, and it collapsed precisely when the CPI was at its peak. We see the same collapse in sentiment in 2011 when price inflation once again climbed to an intermediate top at around 4%.
Finally, taking a look at the last section of this chart from 2015 to 2021…
We see that the only time that consumer sentiment fell with price inflation was during the first wave of lockdowns. If sentiment was falling because of fears of a third wave, inflation expectations and the CPI would be falling as well. But they're not. They are climbing still.
Price Inflation is on the Cusp of a Runaway Move
My conclusion from this data is that consumer price inflation is on the verge of a runaway move hinted at by the collapse in consumer sentiment just released. The Federal Reserve can do precisely nothing about this. Consumer sentiment doesn't just collapse in a vacuum. A collapse like this almost always directly precedes a spike in the reported price inflation statistics. The singular exception was during the first wave of lockdowns, when inflation expectations and consumer sentiment collapsed together. That is not what's happening now.
Once the Fed obviously loses control of the inflation narrative, markets will expect more than a measly taper. They will expect significant interest rate hikes on top of a taper and they will try to price this in on the long end of the curve. The Fed will be unable to follow through for fear of collapsing the financial system and may even have to increase its bond buying in order to keep long term interest rates pinned.
I expect at that point, once bond traders call the Fed's bluff on inflation, for major holders of US Treasuries all around the world to sell what they have to the Fed, and then to use the dollars the Fed prints for them, to buy real assets, which will only push consumer price inflation even higher.
One More Gold Flush?
True, gold and silver are in a precarious technical position right now, and a break of the lows for gold at $1,675 could trigger a quick flash crash like we saw in March 2020, followed by what was a record slingshot.
I will be buying heavily if those stops are hit. And as a send off, below is a chart comparing the logarithmic gold price with this same consumer sentiment chart. The correlation is clear. Four peaks in the gold price corresponded with the four lowest reads in consumer sentiment, which makes sense precisely because these troughs in consumer sentiment corresponded with spikes in consumer price inflation.
The clock is ticking on the US dollar as a viable currency.
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This article was written by AustrolibFollow 6.43K Followers Author of The End Game InvestorA gold-based approach to protecting wealth and profiting off Fed inflation https://calvinayre.com/author/rafi/ Gold, monetary trends, Biotech, gaming industry Contributor Since 2012 I invest in the light of Austrian Business Cycle Theory and cover monetary trends for the purpose of timing the credit cycle. My marketplace service The Libertarian Investor helps subscribers manage the risks of, and profit from the ongoing fiscal and monetary crisis precipitated by the COVID-19 pandemic. I use gold, silver, and associated stocks and investment vehicles in a low-risk high-return setup.
Disclosure: I/we have a beneficial long position in the shares of OUNZ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I own gold, silver, and various mining stocks.