Up!
David Haggith

This week very plainly expressed a number of the reasons inflation is going to continue to fight the Fed, underscoring everything stated in last week’s Deeper Diveabout the reasons inflation would continue to rise. One of those reasons was housing:

Housing up, up, up

US home prices, for example, hit a record high in today’s report for May, even though sales are cooling. They have been going up, up, up for a long time now. That is not priced into CPI. Therefore, it is virtually impossible that housing costs are going to keep cooling off in the Consumer Price Index. Because they price through to CPI with a long lag, we know there is a lot of upward pressure to come in CPI down the road due to today’s astronomically soaring home prices. The Deeper Dive explained why CPI housing costs have been soft in the index lately, how long that lag is likely to be and when we can likely expect to see CPI rise just due to home prices. 

The Fed knows all of that, which is one reason it’s said it needs to see several more months of cooling CPI before it will think about cutting rates. It’s going to have to see that overall CPI and PCE measures of inflation are coming down in spite of the known upward pressure that will be coming soon from housing … because the rise in housing costs has already happened but hasn’t been reported.

All oiled UP

Oil certainly did all that was expected of it for the summer with today particularly putting in a strong show for the return of rising oil prices for all the reasons the last Deeper Dive and previous editorials in The Daily Doom have laid out. Here is how today underscored that:

Summer Demand Finally Kicks In, Lifting Oil Prices Out of Contango

The summer rally of the oil markets might finally materialize as ICE Brent crept up to $85 per barrel, even higher than it was before the OPEC+ meeting, and contango in the North Sea….

Since a brief decline in oil was the reason the last CPI report fell a little, it would have been foolish to expect CPI to fall anymore when highly volatile oil was clearly likely to rise for so many reasons, especially the obvious one of summer travel, but that is exactly what markets did. Someone has to try to bring some common sense to this. So, that is why we gather here.

One major factor in the price of oil that I’ve warned of a number of times kicked up in a big way again today, too: The Houthis went and sank another very large ship—this time a coal transport ship. This proved that some of the most powerful navies in the world have, so far, been incapable of stopping the damage the Houthis are doing to shipping.

Then, as though to clearly prove that the damage the Houthis are doing is raising prices, insurers announced a price increase today for insuring anything shipping around that area:

Iran-backed Houthi rebels have been intensifying missile and drone attacks, targeting commercial vessels in the southern Red Sea, critical Bab el-Mandeb chokepoint, and the Gulf of Aden. The rebels have even threatened to extend their reach to the Mediterranean Sea. The recent sinking of the Tutor dry-bulk carrier by a kamikaze drone boat marks a significant escalation. The ongoing turmoil has sent containerized freight costs soaring, along with insurance costs back on the rise.

Surely, there was never any doubt that the rise in inflation that has been coming from the Houthis would continue. I mean, they aren’t going away for as long as Israel is engaged in Gaza, and that isn’t going away, and the West’s navies are not managing to stop their mayhem from happening. So, why would anyone think shipping and insurance costs throughout that region would not continue to rise? That would be a bad bet, but that seems to be what US markets did the second they saw a minuscule dip in CPI.

Bloomberg spoke with two individuals familiar with the maritime insurance market. They said the price of covering a commercial vessel for transit has jumped from .3% to .4% of the ship's total value to .6%. In other words, a vessel worth $50 million must pay upwards of $300k of insurance for one sail.

OK, so we’re up to almost a third of a billion dollars just to insure each major ship that sails through that region. And then all rerouted ships, of course, keep costing a lot more than they did because they have to travel further.

If Houthi attacks persist through summer, the rate will likely increase further. 

OK. Well, persist is what they are likely to do. There is not much rational reason to think otherwise.

The sinking of the commodity-hauling bulk carrier this week by a drone boat was a real eye-opener for the shipping community and commodity industry as President Biden's Operation Prosperity Guardian fails to counter endless Houthi attacks on commercial ships in the critical shipping lane.

In all, it’s not a good show for the US navy or those navies that are joining it in this operation. I’m not saying they are not doing the best they can, but this is a rag-tag bunch of ruffians that are going to keep terrorizing the streets, so to speak, until someone figures out how too more seriously lay down the law, and I’m not sure how you’d do that with a band of hide-and-seek players, short of taking over Yemen and conquering their main supporter, Iran, and that would add considerable additional longterm perilous dimensions to all of this that would drive prices much higher and would seriously start hurting the US, what with all the other wars it is juggling.

"It's another indicator that the Houthis are stepping up their attacks on those vessels that were warned not to pass through the Red Sea," Dirk Siebels, a senior analyst at Risk Intelligence, said of the drone boat attack on Tutor, who Bloomberg quoted. 

This is one of the big forces I’ve said we could count on to ramp inflation up higher. So, betting that the Fed is nearly done fighting inflation when the Fed is being held to the fight by things so far out of the Fed’s control is a fool’s bet. It’s not in a place to just give up because other things are not cutting it a break.

In addition to the rising insurance costs, the diversion of vessels from the Red Sea around the Cape of Good Hope is causing containerized shipping costs to skyrocket.

That was a force of inflation I laid out months ago, and we’ve certainly seen inflation start to rise since then. It’s also not hurting everyone equally:

Considering Houthis are mainly targeting Western-linked vessels, not all insurance costs have soared. Bloomberg said Chinese vessels continue to receive significant discounts. 

I’ve also warned that this conflict will likely create supply-line-caused shortages again:

This shift is straining the world's containerized capacity, leading to a significant increase in shipping costs for 40-foot containers. Logjams are also forming at some of the world's top ports, including the Port of Singapore.

Now, all these longer routes mean it takes more oil to transport every one of those ship loads of goods and resources, so more demand for oil, but it also takes more oil and time to transport all the oil that normally goes via the Red-Sea route. So, the Houthis are creating additional demand pressure on the price of oil as well as direct pressure on the shipping costs of oil, itself.

I don’t know why you'd bet against rising inflation with all of that going on, especially when oil prices into everything, but for some reason many markets did.

That said, increasing insurance premiums and freight costs contribute to the sticky inflation story. 

Of course, they do! Yet, it has to be said because so many don’t get it. They looked at the last CPI report and said, “Hey, the battle is being won.”

Thanks, Iran, which is just causing turmoil on the maritime lane via its proxy group, Houthis.

"Iran is defeating US deterrence and counterstrike in the Red Sea. The stage is set for a similar fight in the Gulf," David Asher, a senior fellow at Hudson Institute, stated, as war risks are only rising. 

Of course, they are. It’s not like it is hard to see that increased cost pressures from a number of ongoing wars and potential new ones is coming or hard to see that this will raise inflation. And there is nothing the Fed can do about it because it doesn’t even have a navy.

So, when I hear people speculating that our inflation troubles are winding down, I wonder what is wrong with their heads. How do they not see more inflation coming?

Then, of course, there is hurricane season in addition to the summer travel season and the pressure cooker in the Middle East and Putin’s invasion of Ukraine and China’s quick rise in tension around Taiwan and the Philippines. 

Oil prices surged this week as hurricane season began, demand improved, and both U.S. crude and gasoline inventories fell. Rising geopolitical risk around the world only added to bullish sentiment.

In summary:

The onset of hurricane season in the US, improving demand [summer travel season] figures that are corroborated by shrinking crude and product inventories, and more visible Chinese buying [gotta sail that navy and fly those planes] have come together to lift oil prices to their highest since early May. The market was also reminded of the dysfunctional Red Sea navigation with the Houthis sinking another bulker this week, adding upward pressure to oil prices.

So, that minuscule nip downward in CPI that US stocks and bonds so greatly rejoiced over seems entirely insignificant when you think that it was largely made from a temporary reprieve in the price of oil, especially when you size up all the forces on the other side of the equation for oil and inflation of anything that normally travels by ship through that region and inflation of anything that normally travels by ship through anyregion as all regions compete for available ships and containers. Then you consider the lull in CPI’s housing prices against the huge mountain of actual price increases that has come since the time that CPI is currently pricing through to its reports, and you lay there wondering if inflation is ever going to come back down in a world with this much trade turmoil.

I had a conversation with Chris Waltzek of Goldseek Radio just last weekend about why the dip in CPI meant nothing, giving some of the reasons we’d see inflation continuing to rise:

GoldSeek Radio Nugget - David Haggith: Gold's Long-Term Potential vs. Short-Term Struggles

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