Why talk about inflation?; Shoppers Surprise Retailers; Spending on Visa credit cards back to normal; Rising coronavirus cases; Social Distancing Is on the Wane; America Fails the Marshmallow Test

By Whitney Tilson

Wednesday, June 10, 2020

1) Despite our economy suffering its worst downturn since the Great Depression, some economists are warning about the dangers of looming inflation.

I remember they were saying the same thing as we were emerging from the depths of the global financial crisis… and they’re just as wrong today as they were then, as economist Claudia Sahm – director of macroeconomic policy at the Washington Center for Equitable Growth – explains in this blog post: Why talk about inflation? Excerpt:

Prices will not spike in the United States for years, maybe decades. In fact, they are falling at record pace. So why talk about inflation? Why risk an economic depression and a painfully slow recovery over the improbable?

The obsession with inflation is here again. Some members of Congress, market analysts, and economists are forcing the debate. Pure politics. They did not learn from the Great Recession. They did not learn from the Great Depression. They do not admit their past errors, and they will sink us again…

They were wrong. Inflation never exceeded the Fed’s target of 2%. The recovery dragged on for years. No surprise: they never admitted their error. They did not learn.

Fast forward to today and the inflation posse is back. They are peddling the same tired inflation fears by retrofitting them to COVID-19. They claim that with many workers furloughed and businesses closed that money from Congress will overheat our economy, causing prices to shoot up. Too little to buy and too much deficit spending. My life in past three months is nonstop shouting match, trying to convince others that we have the “mother of all demand shocks.” More deficit spending, trillions more, is all the stands between us a depression.

Inflation fears are ideology not economics.

2) Here’s a related article in the New York Times, which argues that inflation should actually be seen as a sign of success: Should We Fear Post-Pandemic Inflation? Excerpt:

It certainly could be a political problem for the Fed, and cause pain for American workers, if prices for consumer goods rise while wages are stagnant or falling. But it would fundamentally reflect an economy that was starting to heal, not one that had overheated or in which policymakers had flooded the system with too much money.

And that speaks to an irony in the inflation hand-wringing that has emerged in the last few weeks. In many ways, an inflation surge in the early 2020s would be a signal that all the efforts being taken now (to flood the financial system with cash, to prop up smaller businesses and aid unemployed people) had worked – preventing a deflationary spiral akin to what happened in the Great Depression.

Over the last several decades, globalization most likely pulled inflation downward in advanced nations as they imported goods made with cheaper labor in China and other emerging markets. Today, the potential for de-globalization is real, especially as geopolitical tension between the United States and China rises. But such trends tend to play out gradually, not through a rapid spike in prices, barring something like a world war.

In the next few years, if the Fed has to raise interest rates and Congress has to cut budget deficits to stop inflation from settling in at excessive rates, that will reflect an economy that has returned to full health.

So, is inflation on the horizon once the pandemic is contained? Maybe the answer is yes, and maybe it is no. But maybe the best answer is: We should be so lucky.

3) What makes this market so hard to figure out is the constant, conflicting data. On the plus side: Shoppers Surprise Retailers by Returning to Stores. Excerpt:

Shoppers are returning to reopened stores faster than expected, according to retail executives.

Macy’s (M) Chief Executive Jeff Gennette said sales at reopened stores are down by about half compared with before the pandemic, which is better than the 85% decline the company had predicted. At Kohl’s (KSS), stores are doing about three-quarters of their pre-pandemic sales volume, up from about two-thirds in late May, Chief Executive Michelle Gass said. The executives spoke at a virtual conference Tuesday hosted by the investment bank Cowen and Co. LLC…

“Each tranche that we’re opening up is opening up a little better,” Mr. Gennette said. “And each week that they’re open, they’re getting a little bit better.”

And credit-card giant Visa’s (V) data show that overall spending is rebounding strongly. In an 8-K filing, the company disclosed that U.S. payments volume, after being down 18% in April, rebounded to being down only 5% in May… and by the end of the month, it was flat. Take a look at the chart from the filing:

4) Offsetting some good economic news are many signs of rising coronavirus cases:

This is surprising and disappointing, given that peer countries (mostly in Europe) – including many who got hit much harder than we did – are reopening without a resurgence in cases. Here’s a WSJ article about it: As Countries Reopen, Many Avoid a Second Wave of COVID-19 Cases – So Far

5) What could explain this?

In simple terms, we’re (collectively) not behaving ourselves. As we end lockdowns, too many Americans are failing to wear masks, observe social distancing, etc.

Here are two articles about this:

New Evidence Social Distancing Is on the Wane, Bloomberg. Excerpt:

There’s growing evidence that life is returning to normal in the U.S. even though COVID-19, the disease caused by the novel coronavirus, remains a threat. These charts show that the reopening of the country’s economy has occurred steadily since early April, when social distancing was at its maximum.

The reopening, which shows no sign of slowing, makes it more important than ever for people to practice good hygiene. You didn’t need to wear a surgical mask when you were home alone with the dog and the TV, but if you’re now circulating in public, you need to take precautions against being infected with the virus – or giving it to someone else if you have it without knowing.

The problem is, some people don’t see it that way. They’re abandoning safe practices at the very time they’re increasing their exposure to one another and, potentially, to the virus. It’s happening across the spectrum, from protesters against police violence to pool partiers. That sets the stage for a fresh outbreak.

And here’s NYT columnist Paul Krugman (random trivia: I was one of the roughly 600 kids that was tested as part of the famed Marshmallow Experiment in 1972 when I was six years old): America Fails the Marshmallow Test. Excerpt:

At this point, there have been enough international success stories in dealing with the coronavirus to leave us with a clear sense of what beating the pandemic takes. First, you have to impose strict social distancing long enough to reduce the number of infected people to a small fraction of the population. Then you have to implement a regime of testing, tracing, and isolating: quickly identifying any new outbreak, finding everyone exposed, and quarantining them until the danger is past.

This strategy is workable. South Korea has done it. New Zealand has done it.

But you have to be strict and you have to be patient, staying the course until the pandemic is over, not giving in to the temptation to return to normal life while the virus is still widespread. So it is, as I said, a kind of marshmallow test.

And America is failing that test…

America in 2020, it seems, is too disunited, with too many people in the grip of ideology and partisanship, to deal effectively with a pandemic. We have the knowledge, we have the resources, but we don’t have the will.

Best regards,


Whitney Tilson

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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