Oh. My. God. The headline figures in Friday morning's producer price index report from the Bureau of Labor Statistics were once again depressingly high. Per the release:
Final demand prices moved up 1.0 percent in July, the same as in June. On an unadjusted basis, the final demand index rose 8.3 percent for the 12 months ended in August, the largest advance since 12-month data were first calculated in November 2010.
As always, though, the devil is in the details. A few paragraphs lower than those headline figures, the BLS dropped the following two nuggets:
For the 12 months ended in August, the index for processed goods for intermediate demand climbed 23.0 percent, the largest 12-month increase since jumping 23.6 percent in February 1975.
For the 12 months ended in August, the index for unprocessed goods for intermediate demand surged 50.1 percent.
What we are seeing here is like a snake swallowing a pig, or what economists like to call, "pipeline inflation." The intermediate step in the production chain is so bogged down -- by shipping delays, higher energy costs, semiconductor shortages -- that the prices to actually produce final goods, like the ones you order from Amazon (AMZN) are being inflated from within. These costs do not exist in a vacuum. They will be passed onto consumers. There is no other alternative. The BLS will release consumer price index data for August next week.
If you can picture some guy in a greasy t-shirt with a half-eaten egg salad sandwich hanging out of his mouth running a warehouse and frantically barking at suppliers on one line, while frantically trying to pacify customers on the other, that's exactly what the U.S. economy looks like now. But "that guy" doesn't exist anymore. His job was disrupted by computing power years ago.
So, now we have a bunch of computers trying to fix everything, and that's a recipe for gridlock. Here are the bullet points to describe this extraordinary wave of inflation in intermediate goods pricing in the U.S economy.
Who loses? Grab a mirror: You lose. I lose. We all lose. The U.S economy loses, because we are, with the exception of energy (thanks to the hydraulic fracturing boom) a net consumer of basically every other good on the planet. We buy it here, we use it here, but we don't make it here. That economic transformation is biting us in the butt right now, and there simply is no short-term solution to higher prices.
Who wins? This is a much more nuanced question. Energy players are winners from higher commodity prices, and as I Mentioned in my column yesterday, the spike in natural gas prices creates a windfall for the pioneers of hydraulic fracturing -- Range Resources (RRC) , Cabot (COG) , Antero Resources (AR) , Southewestern (SWN) , EQT Corp. (EQT) -- and majors like Exxon (XOM) , as well. Other winners are more difficult to identify, but I will give Warren Buffett a shout-out and say that today's supply situation is good for freight forwarders like the railroads. Companies like FedEx (FDX) and the truckers will benefit, as well, although that benefit is eroded by higher energy costs.
Whose fault is it? It's tempting to write, "well, it's nobody's fault," but after 8 years, and God knows how many Real Money columns, I hope readers have come to expect more candor from me. This hyper-inflation is Fed Chief Jerome Powell's and Treasury Secretary Janet Yellen's fault. Full Stop. The money with which they have flooded the economy is not flowing evenly -- it never does -- but getting caught in discrete pockets -- and certain pocketbooks -- and the Democrat-led orgy of spending emanating from Washington only makes the problem worse.
To position your portfolio, play stocks in the energy, agriculture and ag-tech, and industrial metals sectors, and crypto. Fade anything that is purchased by the U.S consumer, because, at some point soon, we just won't be able to afford these prices anymore.