Inflation, Debt Ceilings, Trump.. Oh no.. here we go again.

Blain’s Morning Porridge – May 11th, 2023: Inflation, Debt Ceilings, Trump.. Oh no.. here we go again.

“Curiously, the only thing that went through the mind of the bowl of petunias was; Oh no, not again..”

This morning: Inflation is what inflation is.. Prices are still rising, Central Banks are watching, the US debt ceiling crisis will distract us all, and Donald Trump remains… “extraordinary”. All feels a bit unstable.

Busy Morning. Dog. Swim. Drive wife to Station. Appointment at GP to give them blood… all of which sadly means a short Morning Porridge…

As I survey the markets I am concerned at a sense of instability and the madness of it all… I suspect nothing is really fixed and the world is heading for greater uncertainty.. It all feels very unclear and glimpsed through a glass darkly. Hey ho! Dealing with unknowns is what we do. Smile, pack some extra sandwiches and a flask of extra hot tea…..

Y’day we learnt US headline consumer price inflation rose by 4.9% year-on-year to April. A lower rise than expected – joy unlimited (Sarcasm alert). However, the really important thing hidden in the long grass is US Prices (core inflation components) are still rising year-on-year around a steady 5.5% – around the same level since January. The key message is the pace of rising prices has fallen slightly, but prices are still increasing. Steadily. A lower headline inflation number – and I can’t say this often enough for the numpties – does not mean prices are falling. Just they are rising less quickly.

Will someone please fill up this half empty glass of economic doom’ngloom?

The market reads the inflation report exactly how it wants to read it. Some people perceive signals in yesterday’s data that chime with their expectations prices are now set to fall quickly, thus allowing the Fed to pivot, start easing rates, and trigger upside. The reality is a single set of “encouraging” numbers do not a summer make – the Fed will want to see a longer run of numbers and a clearer trend.

I will stick with my comments from Tuesday: inflation will likely prove stubbornly sticky due to ongoing supply chain issues, despite rising corporate and consumer concerns on the back of the developing credit crunch, while the tight labour market means upwards pressure on wages is set to increase. I am going to stick to my expectation we will be well into Q2 or even Q3 2024 before the Fed, or any other central banks, feel confident to start easing rates.

Economies are complex beasts. The components all interreact and each are consequential on the rest. The way inflation insinuates itself within an economy is far more complex than any of us can fathom, but let me try using rents as an example. (Sorry, this is basic Economics for Numpties 101, but please bear with…)

A simple example of Inflation is rents. Rents are bounded by supply – which is slow to change in terms of number of units, but prices are flexible. When rents spike in the US, the scale of the large and mobile economy means citizens have the option to consider moving elsewhere. Landlords anticipate labour mobility, and thus moderate rent increases to achieve a new equilibrium level; successful persuading renters to stay, but pay a higher rent. It’s a simple optimisation – how much can you charge before you kill the market?

That is not true in the UK. Rents are through the roof in London, and only going higher as the supply of rental property contracts (a consequence of policy decisions). There is nowhere else in the UK for London workers to consider moving to for work. They are stuck looking for accommodation in a city facing decreasing supply.

It becomes consequential. UK rental inflation looks unsolvable – thus rents rise to red-line levels. UK rent inflation will likely remain higher for longer than the US – a spurious incentive for young workers to clamber on board the property ladder, which increasingly looks ponzilicious in terms of new entrants paying higher and higher prices. The only way to resolve the property crisis is to sort the supply imbalance and build more flats. But new accommodation will cool the home market, resulting in lower prices for the last entrants, and nothing hurts UK confidence as much as a housing crash…

Crashing minor chords – it’s a no-win situation. If London wages rise, they will simply chase rents higher. If wages remain below the rate of rent inflation, London loses workers, grinds to a halt and the rats take over… (Oh, they have?)

The next crisis is the US debt ceiling negotiations – what negotiations? It’s a stare-off between two parties who seem to have forgotton what politics is about: the people, not them.. At some point something will break.. It won’t be the dollar, because there is frankly no alternative to the Greenback and Treasuries (yet), and after a bit of noise there will be an agreement leaving everyone still angry and annoyed, and the spikes in US rates will mellow – but confidence will be cracked.

I’ll cite my Virtuous Sovereign Trinity analysis: Nations with stable currencies, sustainable bond markets and competent politics will tend to thrive. Break any of these legs, and the rest inevitably follow.

And if you really, really want to scare yourself on the prospects for the US economy than I suggest watching Donald Trump on CNN last night.

The courts might have found him/will find him, guilty of everything he’s been charged with (pretty much kitchen-sinked in terms of his proven and alleged misdemeanours) but you would not know it from his interview.  That is man who expects to win the next election, and will throw and enormous, noisy toddler stop when he doesn’t, throwing the US into greater political polarisation. On CNN Trump denied the 2000 election result, demanded the Jan 6^th insurrectionists/patriots are pardoned, and called a woman who won a court case against him a liar. Many believe him. He practically pulled out a little list of Americans who will suffer his righteous indignation, fire, brimstone and torment when he is restored to his rightful throne.

Another Trump interregnum will not be pretty. I was assured by Republican friends, including many quite senior ones, it could never happen again. But, it might. If it happens.. then.. be very very concerned about the Western Alliance, global geopolitics and everything in between, including markets.

Full Service tomorrow..

Out of time,
Bill Blain

Strategist Shard Capital