Central banks, inflation and recession are the visible risks, but what if we are looking at all the wrong things?

Everyone is balancing inflation, economic numbers and this week’s Jackson Hole Central Bank smooze-a-thon to guess markets. What if we are looking at the wrong things – and economic divergence, income and wealth inequality and unravelling domestic politics are the critical factors?

Blain’s Morning Porridge, August 22 2022 –  Central banks, inflation and recession are the visible risks, but what if we are looking at all the wrong things?

“Look not to the Sword waving around to your front, but the Stiletto threatening your kidneys..… “

This morning: Everyone is balancing inflation, economic numbers and this week’s Jackson Hole Central Bank smooze-a-thon to guess markets. What if we are looking at the wrong things – and economic divergence, income and wealth inequality and unravelling domestic politics are the critical factors?

This week will apparently be all about inflation and deciphering new economic data to predict the path of the Global Economy and Stagflation risks. The big event will be the Jackson Hole central bank gabfest – anticipating what Jay Powell will say about the US Economy and the Fed’s perception of the required pace of rate hikes to counter inflation. His comments will have massive implications in terms of perceptions of bond markets, currencies, and company outlooks.

The ongoing battle vs Inflation has more than a few market watchers warning the July/August rally feels premature! Among the points that worry them is the reality of inflation numbers – even though the number (in the US) is apparently declining, it means prices are still rising and inflationary tension are still being stoked! It’s still unclear just how solid the short-recession rally is, or is it just a bear-trap?

More and more investors believe its policy mistakes – from the ultra-cheap interest rate policy of the 2010s, QE and government pandemic policies, to government failures to address critical responsibilities like energy security, that have created the best market opportunities in recent years. And they are absolutely right! The right way to have read markets is to game what central banks and governments are doing, and place your chips accordingly!

From 2010-2021 the simple trade was to buy everything and anything because money was mispriced by central banks, making even the most schizoid stock sound look relative value. Level 2 was to buy coal, oil and gas because ill-thought out polices and ESG wokery was creating chronic energy insecurity. What is Level 3? Work out what the next big series of policy mistakes are going to be… and I suspect it will mean playing central bank recovery policies – ie when real economic and wage inflation, global recession and economic unrest require them to press both monetary and fiscal easing.

When? Sooner than we think…

And to make it even more confusing… What if we are watching all the wrong things?

  • Perhaps it’s the not the US economy we should worry about this week?
  • While everyone is focused on inflation as the prime economic danger driving instability – what if it’s something else?
  • What if the major risks remain political miscalculations?

Economic Divergence

The UK, Europe and the US – the Occidental West, and China are all headed on different economic trajectories. While we can probably be relatively confident the US economy will bounce out of recession pretty quickly, allowing the Fed to normalise interest rates and look to stabilise its growing economy in what will be recessionary global economy (Buy Dollars), the outlook for Europe is dire. The UK? Let’s not even go there.

And China? Its easing rates. Change is coming. A rising economic crisis is brewing:

  1. The jobs compact appears to be unravelling; the party quelled dissent and held power by providing everyone with well paid jobs – now the rising standard of living has plateaued, and young adult unemployment is rising.
  2. The economy is overly grounded on the thin foundations of the unbalanced property market – over 30% of the economy is vulnerable to wealth-effect reversal, and
  3. The Demographics are moving swiftly against the Middle Kingdom. We can discount China exporting deflation around the globe (as it did from 2000-2020).

As for Europe… As Gas prices threaten outages and crisis, Germany is still going to shutter its Nuclear plants this winter. That makes a ton of sense. Not.

Wages and Inequality

Meanwhile, back in Blighty…  UK dockers have just started a potentially crippling container port strike that could exacerbate supply chain, logistics, and inevitably trigger empty shelves and a run on bog-roll. Damn these 1900 striking dock workers! How very dare they complain… Revolting just because they will see their post-tax disposable income cut by £2000 (say 10% of income) this year by rising energy bills… How dare they ask for more….! Ungrateful tykes, having being offered an exceptionally generous £500 one-off bung and an effective pay cut?

I don’t hear many folk outraged by news the average take-home pay of FTSE100 bosses has hit £3.4mm, up nearly 40%, according to the High-Pay think tank reported in the Times of London this morning. The top 224 FTSE executives earned £720 million in 2021. The Chief Exec of a mining firm trousered £23 million for CEO-ing its mining operations in havens of wealth like Burkina Faso – where I hear the local miners’ private health care packages are exceptional. (US readers – Sarcasm alert.)

Some folk clearly haven’t been listening to Bank of England Governor Andrew Bailey’s calls for pay restraint!

Much to my surprise, I was reading Young Conservatives (all six Tory party members under the age of 50), are disappointed Liz Sunak and Rishi Truss utterly failed to address the crisis in income inequality and the dearth of opportunity for young people in the Tory leadership whatever it is… coronation parade/contest?

Readers will not do doubt be surprised Dock Workers are unhappy with their pay cut offer. How can the nation possibly afford to give inflation busting wage rises to all key workers? If you pay the dockers, then the railwaymen will demand more! Even barristers are threatening strike action in pursuit of higher pay.

Unfortunately the drivers of wage inflation – be it FOMO, or relative income, or the perceived income injustices now perceived between older and younger workers – have already infected the whole economy. They are socio-economic forces that don’t give a fig for conventional political economy approaches. Solving them – will get messy.

How to solve or address out-of-control pandemic wage-inflation? I have simply no-idea – except that extraordinary times require extra-ordinary measures.. Hence I expect Governments will be forced to change tack and look at reflation in an inflationary environment.. Hang on to your hats…

I warned months ago the real danger of inflation is not just rising prices, or the difficulties it causes for both production costs and consumer affordability, but the unpredictable and potential chaotic social effects it could trigger. Rather than nations being able to grow their way out of a stagflationary crisis through job creation, an unexpected consequence will be worker scarcity: “why should I struggle into work on minimum wage, pay £1000 in monthly rent, have no savings, no holidays and no security, just so the bosses can have a great time?”


UK, German, Italian and US politics – watch them all. They all have a strong likelihood of spoiling your day in coming weeks. Bad politics have immediate and long-term consequences.

I am repeatedly told Donald Trump will not be the Republican Candidate in 2024, that too many Republicans now see through him, and the dismal showing of his candidates in US mid-term poling mean The Donald is set to cost his captured party potential majorities in the US Senate and Congress. The more I hear it, the more I fear it will happen – and the consequences for global trade, alliances, the environment, war, peace and everything will evaporate..

Yet, Trump is just another highly visible market risk. The issue is who and what is hiding in his coat-tails? Who are the US political names we don’t yet know who will emerge on the back of his philosophy in coming years to further bend and confound the US political process and its place on the world economy? Donald Trump may yet prove to have been a brilliant political figure, but only because he opened the door to legions of political wanabees much worse than himself!

My earnest hope is a return to sanity in Washington – but, as said so many times before – Hope is Not A Strategy. But Chaos is also opportunity!

Five things to read this morning to ruin the rest of the week.

Politico – What Washington thinks about the next Queen Liz

Torygraph – Republicans are undermining democracy for the sake of a whining, self-pitying narcissist.

FT – A new strain of avian flu s decimating wild birds. Humans should worry.

BBerg – Central Banks Won’t Spark Major Economy Recessions, Goldman Says

WSJ – Warren Buffet Not Expected to Bid for Control of Occidental Following Appproval for Bigger Stake

Out of time, and back to the day job

Bill Blain

Strategist – Shard Capital


  1. And against the surging UK yields, the pound is still foundering. The Powers of the World are at war, and the Ukraine is just a side show. The Federal Reserve is raising rates in a war against the EU globalists. Because Jaime Dimon wants to be God Boss, not watch someone else rule. And when the US pays 3, soon to be 5% interest? Capital flight from Europe. Why would you pay a negative rate, or if the ECB goes all in receive 1 to 2%? And Europe’s “Green” obsession means their cost of manufacturing will be higher than everyone else’s in the world. The ESG fiasco only works when everyone plays the game. When China and Russia do not? Who do you sell your virtue flavored, highly expensive goods to? And as Mr. Blain exquisitely points out, in disaster, there is money to be made. But the old paradigms are not in play. This is not economics. This is a battle for control of the world.

    • Or maybe not..
      Maybe its just the usual political/centralbank clusterfeck that so discombulates markets…. Folk take over the world in fiction. In reality they make mistakes.
      Standby to standby..


    • Your opening sentence states that the £ is floundering, but clearly this is only against the US$ and certainly not the €. My focus would be on the stability of the € in the face of stresses between Rome, Berlin and Frankfurt.

  2. Speaking of politics, you sir are one of the most informed commentators that I follow regularly. Pray tell what will happen if the Brothers of Italy win a majority in parliament and Italian Euro deposits flee North to Germany and the Netherlands.

    Could you please give us an explanation of the TARGET2 real-time gross settlement (RTGS) system run by EU banks? How will TARGET2 fare if Italy threatens to officially revive the Lira?

    • oh dear…. I only have 24 hours in the day, but I will try to draw something together.
      On the other hand, my experience watching the ECB since its foundation is that it may be ponderous, undemocratic, and bureaucratic – but it actually works in a curious kind of way. No one told Bumblebees they can’t fly. Same kind of thing with ECB.

  3. And Mr. Blain, as the above have stated, excellent blog. I consistently recommend you to friends. I always look forward to your next post. Thank you!

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