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Inflation Blowout – A look at Asset Bubbles and the Shifting Job Market

With stock markets at record levels, help wanted signs everywhere, a hot housing market – everyone should be happy – right? Unless you have been living under a rock, everyone is talking now about our biggest economic worry going forward – inflation. The recent data shows it is a blowout. Let’s discuss this recent economic inflation phenomenon and provide some analysis of what we are seeing in the economy today. For the record, here is what was said on this topic last month.

BofA forecast headline and core CPI prints to come in hotter than expected (and they’ve nailed every print this year), and they were right again with a massive beat – Headline CPI rose 0.9% MoM (against expectations of +0.5%), the biggest MoM CPI jump since June 2008. This sent YoY headline CPI soaring to +5.4%.

CPI June 2021

Following the hotter than expected CPI, expectations were for another rise in producer prices this morning, and just like CPI, the headline PPI soared past expectations, up 1.0% MoM (rising 7.3% YoY vs. 6.7% exp). That is the highest print on record (back to only 2010), but for context, that is the highest since a CPI print in 1982. The PPI numbers are important because these input prices will have to be eventually passed to the consumer and will show up in the CPI at some point.

PPI Jube 2021

These blowout numbers are eye-popping, leading some people to believe that the Fed must act to handle the rising inflation with higher interest rates – and very soon. As of to date, the Fed seems to be still asleep at the wheel. The Fed feels that the current higher inflation will be transitory, as it stems from temporary deficit spending and stimulus checks – because of Covid19.

So where has all the money gone? Some of this stimulus money has gotten to the people, but nothing compared to money going to big business and other special interests to prop up the economy. But most of the money handed out has led to asset inflation – e.g., real estate, stocks, etc … This, creating a gigantic asset bubble that some say will eventually have to pop. Just what do we mean, bubble? According to Investopedia, a bubble is:

“A bubble is a market cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. Typically, what creates a bubble is a surge in asset prices driven by exuberant market behavior. During a bubble, assets typically trade at a price that greatly exceeds the asset’s intrinsic value. Rather, the price does not align with the fundamentals of the asset.“

This definition is suitable for our discussion; there are three components of a bubble. The first two, price and valuation, parts of a bubble get dismissed or rationalized by inflation. The third component of bubbles is investor psychology, greed, and the “fear of missing out.” This is when prices can explode irrationally.

The following chart of 40-years of price bubbles in the markets. During the initial phases, each got rationalized that “this time is different.” The red line below is dubbed the “Disrupter” bubble, representing the technology stocks that have been feeding the meteoric stock market rise for the past 11 or so years. It overshadows any previous bubbles we have seen in the last 40 years. How much farther will it go, and will it end in tears like many past bubbles?

Asset Bubbles

The “third” component of “bubbles,” which is investor psychology, is most interesting. Are people racing into real estate and stocks because they believe irrationally that prices will go even higher – way beyond any real intrinsic value?

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Is a two-bedroom fixer-upper worth millions of dollars in California when you could buy the same thing in a small town in the Midwest for $10,000? What if everyone logged off Facebook forever? Is an iPhone worth $1,000 when you can get something that works for a tenth of the cost? You may say it’s worth what someone will pay for it. This is true but assumes that people’s perception of value does not change. Has anyone bought a Polaroid camera recently?

The only thing that can realistically support the current price bubble of assets is for people to be able to pay these higher prices with higher wages.

How are wages keeping up with this inflation? Average hourly earnings for all employees on US private nonfarm payrolls rose by 10 cents, or 0.3%, to $30.40 in June of 2021, following a downwardly revised 0.4% rise in May and slightly below market expectations of a 0.4% gain. Average hourly earnings of private-sector production and nonsupervisory employees rose by 10 cents to $25.68 in June. See chart below (source:

This brings us to another interesting phenomenon that is developing in the economy. Given the trillions in stimulus, job wage growth has not responded – far below the inflation of products and services we are seeing. In terms of jobs, looking at the last jobs report, we still are far below pre-covid levels – see here.

With all the job vacancies open today – why are people not racing out to get those jobs? 

Many will say that people are sitting at home because the government is paying them to do so. There is some truth to this, but this has or will be ending soon – see here.

  • Anyone getting state unemployment has been getting the federal money since the CARES Act passed in March of 2020. But the federal bonus was $600 in that original COVID-19 relief package. That expired in July of 2020 and was replaced by a $300-a-week federal bonus. President Donald Trump signed a bill in December that extended that program through March 14, 2021.
  • The $300 federal benefits will continue through Sept. 6, 2021.  Another extension is not out of the question.
  • In April 2021, $4.11 billion were paid out in unemployment benefits in the United States. This is a large decrease from April 2020, when $18.33 billion were paid in unemployment benefits. These figures are largely due to the effects of the coronavirus pandemic. This is to further decline in the coming months.

Removing the unemployment benefits has not seemed to get people out to get those jobs. The question remains – why?

There is another dynamic some are unwilling to entertain with this current economic phenomenon. Take another look at the last month’s “Goldilocks” jobs report. Most of the jobs created are low-paying waitress and bartender jobs, often taken up by the youth. Still, fewer job openings are high-paying but require advanced STEM university education and lots of student debt.

Many simply have no confidence in the future. For decades, most Americans have been able to climb the economic ladder by earning higher incomes than their parents. These improving conditions are known as upward mobility and form an important part of the American Dream. However, each consecutive generation is finding it harder to make this ascent. See chart below.


The unfortunate solution for many? Zone out and don’t participate in the economy. For either the good or the bad, people’s perception of value is changing. Better to live in your parent’s basement or even in a tent under an overpass, light up a joint, play games on one’s smartphone, and zone out as a grifter. Feed off a local food bank, steal when you need to – maybe even sell drugs, is preferable to going to work at a Mcdonald’s for $10 or $15 an hour – having some manager whine about putting too much ketchup on someone’s burger. Besides, what is their future prospect for a better life?

For many, this is not a future they desire – they have lost any motivation to aspire to do better. Covid19 taught them that they could live just fine on almost nothing – minimalist living off-grid. Even when all the unemployment benefits stop – so what? It used to be that only 5 to 10% of the people were like this. Now, this population has grown to perhaps about 20 to 40% – see an example of their plight here.

For the rest, the issue is that these people can vote. And where they can’t vote, election systems allow others to vote for them – useful pawns. Maybe even go out to riot – it will give cover to steal more. Of course, they will want to vote in socialism to feed their new value system. For the economy, this will be disastrous.

Despite Biden painting the economy as a Goldilocks economy, it is only Goldilocks for those on the upper end of the social-economic class. Economic storm clouds are building that will be followed by social dis-cohesion – see more here. It is only a matter of time.

 RWR original article syndication source.