I’m writing a bit earlier than usual, as it’s still Saturday morning. After a long, but productive week at the Investment U conference, I’m looking forward to returning home this afternoon. Actually, the LPGA Kia Classic is being held at our hotel and I kid you not, Michelle Wie just walked past me, here in the lobby. Television doesn’t do justice to how tall and strong she is and the funny part is, I’ll forever remember her for walking up to the reception desk because she lost her room key.
Anyhow, I would have waited until my typical Monday morning sequestration to write, but I’m literally bursting with information, after a week in one of the world’s worst top “inflation hotspots.” Yes, just days after the BLS reported 1% year-over-year CPI growth – compared to a real CPI closer to 9%, according to John Williams of ShadowStats – I experienced what Americans are really experiencing particularly those in its largest state.
California, with its 38 million citizens, is 50% more populous than Texas and 100% more than New York. In and of itself, it is the world’s 12th largest economy – with a “national debt” of $420 billion, plus $200 billion of municipal debt and nearly $100 billion of “unfunded liabilities.” As of a year ago, California shared the nation’s worst credit rating – according to Standard & Poor’s – with notoriously insolvent Illinois. And given what we now know of the ratings agencies – which to this day, receive the majority of their revenues from the companies, municipalities, and nations they “objectively” rate – California’s “A-minus” rating is likely, for all intents and purposes, is the equivalent of ultra-junk status for anyone else.
In 2000, the Red Hot Chili Peppers released the fantastic song “Californication”; which after a week of experiencing California’s horrific inflation, inspired today’s article. I have traveled to San Diego at least a dozen times over the past decade – plus, other “inflation hotbeds” like San Francisco – and thus, believe my opinion of the area is quite grounded. In which is, that in the next decade, California will experience a dramatic economic implosion – yielding broad civil unrest, political chaos and ultimately, hyperinflation.
For decades, California’s climate has attracted tens of millions of people – including 43% of who speak English as their second language – and with them, the nation’s worst management skills. Frankly, it’s difficult to use the word “management” to describe the show that California’s political process has become. The cacophony of opposing views – and seemingly unstoppable power of its uneconomic environmentalist culture – has created an utter monstrosity of political failure and with it, systemically destructive inflation.
To wit, taxicab prices were just increased by 20%, to the point that my 20-minute ride to the airport cost $125; and given a combination of unique, irreversible factors, California gasoline prices are second only to Hawaii – nearly 15% above the national average – in a state where people drive more than in any other. Among the continental 48, only New York, New Jersey, and Connecticut have higher “expense rankings”; but excluding property taxes, California is #1, a particularly ominous situation given that California’s unemployment rate is higher than every state except Illinois, Nevada, and Rhode Island. And oh yeah, California’s nearly 11% top income tax rate blows away all others, at more than 50% above the national average. Frankly, given its enormous population, social and political dysfunction and rampant inflation rate, I wouldn’t be surprised if one day California is categorized in the same “fragile five” nations like India, Turkey, and Brazil.
The list of variables working to destroy California is multiplying rapidly; and ultimately, I have little doubt it will cause a national security issue. Just as the citizens of Catalonia no longer want to finance the rest of Spain – or Venetians the rest of Italy – at some point California will be shunned by large American “population blocks” that no longer want to support the gargantuan debts of its most irresponsible state. Not that countless other states don’t fit that description as well; however, none come close to being the national money pit California has become.
As we recently discussed, California was never meant to be so heavily populated, as Mother Nature long ago decreed most of it to be desert. However, due to its seasonable climate and natural beauty, man has attempted to circumvent her with vastly expensive irrigation schemes – which have not only created a permanently high cost of living, but made millions of Americans vulnerable to the vagaries of weather. Recently, Mother Nature has decided to take revenge, as California is mired in its worst drought in centuries – which has already started to wreak catastrophic economic damage. Worse yet, the horrific California drought coincide with an equally cataclysmic – if not worse – drought in Brazil. Per the below charts, a significant portion of the world’s food is produced in these regions; and thus, if you think inflation has been bad to date, you “ain’t seen nothing yet.”
A major strength of human nature is its ability to ignore negative realities as long as possible. However, this trait can be just as much a weakness; and right now, ignoring the potentially cataclysmic impact of such generational natural disasters could, for many, represent the difference between financial “life and death.”
Yes, average U.S. food prices are up a whopping 19% year-to-date, per the above graph. No category has been left unscathed – with milk, meat, and coffee among the largest contributors. We discussed surging food prices in last week’s “Deflation and Recovery,” but even we are shocked by just how broad the increases have been. California, of course, is not the only area to experience this price tsunami. However, given its fragile economic condition, and stratospheric cost of living, the impact on its citizens is particularly dramatic – especially as the food price surge has coincided with rocketing gasoline prices.
As Egon von Greyerz recently noted, such inflation has occurred whilst the dollar’s international purchasing power has largely retained its international purchasing power. However, given the recent, accelerating foreign selling of U.S. Treasuries, rapidly multiplying non-dollar trade agreements – such as those signed last week between China and both Germany and the UK and heightened shunning by more and more nations, it won’t be long before America’s ability to “print its way” out of problems will be a thing of the past. And oh yeah, did I mention that the propaganda of Ukrainian “de-escalation” – you know, the lie utilized to justify the past two week’s Paper PM blitzkrieg – has absolutely ZERO connection to reality?
America’s cumulative debt load is now rising exponentially; and sadly, the entire world is stuck on the same, catastrophically destructive treadmill. China’s unparalleled construction bubble – per this bone-chilling article by David Stockman – is the “most massive mal-investment of real economic resources— labor, raw materials, and capital goods—ever known.” And it’s collapsing – NOW. Simultaneously, Japanese inflation has surged to multi-year highs as consumer spending has plummeted into oblivion, and Europe’s economy has weakened so significantly, its “leaders” are stepping up deflation propaganda to justify the imminent ratcheting up of the printing presses. In fact, the ECB is widely expected to formally launch QE – and/or negative deposit rates – at this Thursday’s meeting; while “Abenomics” is clearly destined to be expanded in the coming months. Currencies worldwide continue to plunge as the “emerging market crisis” expands; and thus, it’s just a matter of time before the winds of change shift to the United States of Lies. And we assure you, once speculation of a reversal of Fed “tapering” heats up, you’ll be kicking yourself for not having bought PHYSICAL gold and silver when supplies were still plentiful, premiums modest, and delivery times short.
Well that’s enough for today, as I have to board my plane. However, I’ll leave you with one final fact, to show you that inflation is not only rampant in California. In this case, Michigan – where a 30-year old baseball player, with a history of injuries, was just given a nine-year contract extension for $292 million. In fact, Miguel Cabrera – ironically, from the world’s current hyperinflation capital, Venezuela – is projected to earn more than $49,000 per at bat for Detroit’s Tigers over this period, compared to the $48,000 median annual income of all Michigan households. How’s that for “the 1%” getting richer, and “the 99%” more destitute?