Blain’s Morning Porridge – August 24th 2021: Inflation, Covid, Central Banks and Politics – about half the things to really worry about…
“How many divisions does the Pope have?”
This morning: As markets shake off their summer slumbers, what should we be worrying about? Lots..! From real vs transitory inflation arguments, the long-term economic consequences of Covid, the future for Central Banking unable to unravel its Gordian knot of monetary experimentation, and the prospects for rising political instability in the US and Europe.
Same as, same as….
Not an Apology
I’ve been told I should apologise for yesterday’s Porridge. A reader unsubscribed because I don’t treat Tesla seriously. (Shock, horror.. somehow I shall live with the pain of rejection…) Another commented: “hating Tesla must be a very difficult way to make a living.” Sure. I agree – it is. In my private Jihad versus Elon Musk I have missed massive market upside… but then again, it’s not my job to pump up illusory market valuations. It’s to paint the picture as I see it, and caution foolish markets about their gullibility. I will continue to characterise Tesla as an unjustifiably overpriced automaker, pretending to be something else, run by a narcissistic show-boater.
What should we really be worrying about?……
- US Politics in the wake of the Afghan Skedaddle?
- Overpriced Markets and Asset Bubbles?
- The future of Tech and ESG?
- Central Banks trapped by the consequences of their own monetary experimentation?
- Boom or Bust post Covid Economies?
- Inflation, Deflation or Stagflation?
Oh, so much… I probably won’t get round to them all this morning as I’ve got a conference call to jump on… but let’s see…
Let’s start with the big one – inflation. Many market players reckon the slow-down in recent data and growth estimates being scaled back means there is little to worry about. Fears of an inflation spike are already receding – say these pundits. Wrong. That’s far too simplistic a perspective – inflation is not just about immediate and reversible supply and wage factors as the global economy re-opens after Covid.
The central banks are all plugging this “transitory” inflation story – but I don’t think they particularly believe it. Producer and Consumer prices are all expected to edge higher. What are they trying to hide….?
Inflation is also a long term consequence. It has been very much present since 2010. It’s been hidden in financial assets – where the bulk of monetary creation has been hiding – till now. Now it is spreading into the real world.
They say inflation is always a monetary consequence. Not quite, as Covid demonstrates, but let me illustrate the monetary consequences of central bank policy: in the real world ultra-low distorted interest rates makes homes more affordable, but that’s resulted in impossibly high home prices triggering pay demands and wage inflation. It’s happening at a time when unfilled job vacancies have never been so high – further fuelling wage inflation. It’s not a virtuous circle.
Meanwhile volatile oil prices, the hoarding that led to commodity spikes earlier this year, and the general rise in building materials we’ve seen across the west are partially a result of the peculiar politics of OPEC, broken supply chains, Covid and a host of other factors. It’s a simple fact of business that prices to the consumer are remarkably frictionless as they rise, but sticky as they fall. Lumber prices may have fallen… but you’d never know that if you try to buy wood.
There is also a massive element of previous credit creation now creeping into the real economy. Alternative investment firms in Private Debt and Private Equity have ridden the last 11 years of financial asset inflation higher. They are now rebalancing that money out of bubblicous stock markets and putting it to work acquiring real assets – look at the current feeding frenzy in the UK supermarket sector. That pushes up the price of real assets – inflating them. Real economy inflation derived from financial assets is just one long-term factor why we need to fear inflation more!
Former Bank of England MPC member Andrew Sentance summed it up well in The Thunderer y’day. My fear is we’ve already got the inflation burner turned on, but the global economy is still recessionary (effectively deflationary), meaning the prospects for a devasting bout of Stagflation are potentially that much higher.
Why would the global economy remain recessionary? Look at the stories this morning from Malaysia where Chip distributors are on short-time because of Covid lockdowns. Covid is just another factor to add to the ongoing trade disputes, the trend towards isolationism, closing borders due to refugee fears, etc.. The latest data on vaccines is sort of positive: if you get vaccinated you can still catch it, but you are unlikely to die. You will spend a couple of weeks ill. Just like flu, the virus is now endemic in vaxxed nations like the UK.
But around the world some nations are still fooling themselves with lockdowns – prolonging their economic detachment. Others have failed to get vaccine programmes off the ground – some simply can’t afford it. Covid has become an inconvenience in the rich west, but still a killer in second and third tier nations.
The second order effect on struggling nations is soaring and building unsustainable debt loads in the developing nations as they try to buy their way out of economic catastrophe. Strong nations with strong currencies and established debt management teams raising debt in their own script will survive. Nations that have to borrow dollars to pay Covid costs are heading towards a new series of sovereign debt crisis points.
The result is the global economy stays fractured for longer, and likely to diverge between strongly recovering Prime Economies able to bear their debt burdens, and Second Tier Economies struggling with potential default – perhaps yet another emerged and emerging market crisis in the making?
Lots of commentators have already pointed out the inconsistency of the US Federal Reserve holding its symposium on “Macroeconomic Policy in an Uneven Economy” in one of the richest counties in the US, Jackson Hole. Perhaps Laredo, where 21% of residents are below the poverty line would have been a better choice this year? It’s an Academic question – it’s a virtual conference.
The key will be whether the Fed gives any real policy steer on when the Taper will start. I expect they will stay stum – worried about what the negative market impact of withdrawing $120 bln of T-Bond purchases, and what it will do the Treasury market, which has looked weak and illiquid through August. When Treasuries sneeze the rest of the financial asset markets will have a stroke! And, whatever Presidents and the market would like to believe – the Fed does not yet have a market stability mandate.
In Europe all eyes are on Germany – who will lead Germany, and by default set the tone for Europe.
Meanwhile, todays markets mean Democrats face a difficult 2022 mid-term election cycle. The Fed Taper will be underway roiling markets, rising interest rates will be starting to impact Zombie debt-bombed companies and reversing declining unemployment numbers, plus all the negativity surrounding the Skedaddle from Afghanistan – resulting in even deeper Washington Gridlock, a navel-gazing fractured civil war as the Dems try to pick a Biden successor to fight Trump or his anointed heir.. Messy and the Chinese will be laughing.
And meantime… a burst in housing market as rates rise, and massive pension and saving disillusionment among voters could be in the offing. Apparently the percentage of US household assets currently invested in the stock markets is at a record high.
Never forget Blain Mantra No 1: “The Market has but one objective – to inflict the maximum amount of pain on the maximum number of participants.”
Well… I made it half-way through my list of topics this morning. I might get on to the ESG backlash tomorrow…. (There won’t be a Porridge on Thursday/Friday due to a family bereavement.)
Five Things to Read This Morning
Torygraph – Dire delays and staff shortages hold back economic recovery
WSJ – Fed Chairman Powell Navigates the Inflation Debate
FT – El Erian: Why Jay Powell should be bold at Jackson Hole
FT – Scientists warn of increased frequency of extreme weather events
Bloomberg – Mervyn King: Central Banks are Risking Their Independence
Out of time, and back to the day job…
Strategist – Shard Capital
Shame on the person who unsubscribed. I don’t necessarily agree with all of Bill’s views and opinions but that’s the whole point of subscribing. Reading the blog stimulates thought and discussion. How can you get a balanced view if you only read the things you agree with?
Sorry to hear of your family’s loss.
I think we’re in the central bank endgame, Bill. Diseases have vaccines and politics have elections but I’ve not seen anything that could cure the hubris of a central banker.
A very nice Porridge today; it gave a useful framework for a long session of ‘ sit and think’.
For what it’s worth, I agree with your view of Bro Elon and Tesla. As PT Barnum said, “There’s a sucker born every minute”. and I think some people get more and more strident defending Tesla because otherwise they would have to face the fact that they’ve been played for suckers. Some things never change.
This is one of your best Posts ever for one simple reason – you didn’t mention Climate Change.
Want to be famous a 100 years on then put a message in a bottle “Climate Change is a Chattering Class made up problem.” Your great, great, great grandchildren will be showered with praise based on your foresight with no issues humans can’t solve.
Today you spoke of real issues that effect all on the planet that we will deal with in our lifetimes. Just great writing.
What I also sensed in today’s blog was optimism and hope that things will get better.
On that I wanted to recommend you watch a brilliant TV show on Apple TV called Ted Lasso. Hat tip to Scott Adams for giving away the head-fake that the show is all about persuasion and optimism in growing better at everything. It takes place in England with the Richmond Football team with an American coach. I watched the first episode and then bing watched the 15 or so episodes and can’t wait for the next one. They do drop the F-bomb a lot (hide the kids) but what an overall positive show in what is still sadly a lot of gloom. I think you will enjoy if you have not seen.
My condolences to you and your family in this time of loss and may your family find peace.
Ted Lasso – its brilliant. Been watching it and recommending it for a while.
Do think its now trying a little to hard to cram in American Metaphors – thats one of the jokes of the piece; how we Brits and the Septics (Septic Tanks – Yanks) are two peoples divided by a common language..
I am aftaid i will talk about ESG and climate change today..
We thoroughly enjoy your writings Blaine and I have gained a lot of insight into how the world of finance works from your blog. Thank you for all your writings. If someone unsubscribed because of Tesla, it is there loss. The fundamental principal of investing is, listening to divergent opinions.
I am sorry for the loss in your family. Stay safe. Looking forward to your next post.
Comments are closed.