Blain’s Morning Porridge, April 12 2022: We worry about the wrong things – its Energy, Food and Commodities that matter!
“There are things money can and cannot do.”
This morning – Why do we worry so much about debt, the dollar, inflation and growth, when the only really, really important things are Energy, Food and Commodities and how we pay for and get them?
Are we worrying about all the wrong things? That’s my conclusion after playing a game of email catch-up following my trip down the Nile. (Remember: Denial is not just a river in Egypt.)
A billion years ago at the end of March, I wrote 2 pieces; one about how energy insecurity as a primary factor driving across-the-board inflation, and the other about inflation in bond markets as a market concern. I’ve previously described the energy and commodity driven inflation now destabilising markets as the ultimate “no-see-ums”.
(For irregular readers: a No-see-um is something so blindingly obvious and dangerous your mind refuses to acknowledge the likelihood it’s actually happening. Also important is the concept of how an SEP (Someone Else’s Problem) makes us blind to the consequences of what’s occurring around us.)
Following my inflation comments, one of my proper-economist chums called me in Egypt to remind me of monetarist theology: “inflation is everywhere a monetary phenomenon”, blaming excessive government debt and monetary creation for the current inflationary woe and sense of crisis.
I take the view inflation is driven by real events – which trigger difficult to predict cascading inflationary consequences. Way back in March 2021 I warned the day the Evergiven grounded about how a container ship blocking the Suez canal could exacerbate the Covid supply chain and inflation crises. Today it might be Walmart paying truck drivers more to ensure supplies – triggering wage inflation across the retail sector.
Consequences beget consequences.
I love it when my monetarist chum calls. I tell him to wake up and smell reality; monetarism is too proscriptive, largely bollchocks, and he should stop frightening small children and silly politicians. Austerity in times of financial crisis is just stupid – financially sovereign sound nations can borrow to finance growth. The trick is maintaining currency confidence. More difficult for nations without monetary sovereignty – Italy being a classic example.
And all this talk about how weaponizing the dollar to fight Russia spells the end of the global dollar economy is just… talk. There is not an alternative – yet.
But, I do agree that “Monetary Experimentation” in the form of sustained criminally low interest rates and Quantative Easing did little to boost growth, it created extreme financial asset inflation – driving inflation into the bond and equity bull-markets of the last 12 years.
Thus far, I’ve taken the view Financial-Asset inflation remains largely trapped within inflated financial asset bubbles in stocks and bonds. There it behaves as a very different market beast from the very real energy and commodities driven inflation we’re now seeing hit economies.
Is there a risk all that inflationary pressure generated since QE took hold is now transferring into the real economy? I’ve been trying to work out how such a transfer mechanism might work – based on the relative returns from distorted stocks and bonds vs real assets like property, planes and trains. Maybe I’ve been looking in the wrong places…
Going back to simple monetary tenets: if money supply rises, inflation follows. What is very interesting is how the massive amount of liquidity created by low rates and QE could be linked to what we are seeing now in terms of that real commodity and energy inflation. Dang… its not returns that matter… its liquidity itself… !!
DING! DING! DING!… Very loud alarm bells crashing inside my head… Klaxon! Klaxon!
That’s the Eureka moment – excessive liquidity creates non-monetary risks….
Ouch! It’s one of these blindingly obvious financial connections hidden in the complexity of the Global financial plumbing system! Commodities, Food, Energy – basically the building blocks of everything in the global economy – are as much distorted by the last 12 year of monetary experimentation as every other kind of asset….
That expression “Global Financial Plumbing” should trigger a resonance moment for well-read market experts.
I spent yesterday evening reading recent notes by Zoltan Pozsar – Credit Suisse’s well-respected head of rates. His writing triggered something of an epiphany as it gelled with my inherent sense of just what a dangerous moment the global economy is caught up in.
Let me stress, this Morning Porridge is not a condensed edit of Pozsar’s comments, but my takeaways. Go read him for yourself! He is a proper famous, clever and accepted economist. I am just an capital markets artisan, a teen-age scribbler in his 60’s with a hobby of writing about markets each morning…
Here’s just part of the problem… As soon as you spot a no-see-um its effects become very real. As soon as you realise a “someone else’s problem” is also yours, the consequences magnify and become reinforcing. That’s why the moment you spot a crisis is when it gets more dangerous. That moment has occurred. So when folk start to compare what is happening today to 2008 – pay close attention. There are parallels.
What Pozsar has recognised is how abundant liquidity distorts not just rates, but the real economy also. Pozsar and others are now looking very carefully at how the “global financial plumbing” of money is changing to cope with the effects of inflation. It’s more complex that just monetary theory. It means understanding money – hence his comments on Bretton Woods III. He’s looking at how shipping, transport, logistics – the key factors in getting food on tables, building anything from commodities, and providing the energy to do so, underlie the real economy.
And, he’s spotted two big fundamental and interlinked risks:
- First: if central banks remove the easy liquidity driving the commodities markets, you risk not just a market crash, but a real-world economic crash.
- Second: you can solve a monetary crisis, like the 2007-08 Global Financial Crisis, by throwing money at it, but you can’t throw money at a real problem like European energy insecurity and solve it overnight.
There is a limit to what money can do. I would recommend this podcast from Bloomberg’s Odd Lots for a more indepth discussion from Pozsar: Zoltan Pozsar sees a World of Problems That Money Can’t Solve.
This morning, I’ve stripped down Pozsar quite ruthlessly. There is much more to it in terms of what this means for the dollarized global economy, the weaponization of the dollar, and how it all works.
Years ago on a particularly dull day in bond markets, I discovered a daily report on Bloomberg measuring the depth of the River Rhine as it flows through Germany. Interesting… but also critical. The Rhine remains a primary route to move goods through Germany – if it’s too shallow… the economy grinds to a halt. Every so often it happens.
When I was a very young banker one of my early mentors told me to watch the Baltic Dry Index (which roughly equates to shipping costs). It spiked in May 2008 at 11500 as the Global Financial Crisis crescendoed, tumbling to 270 in 2016 as the global economy flatlined.
Why bring up the depth of the Rhine and the Baltic Dry? Because these are the kind of real world factors we need to understand in order to figure out how the global economy actually works…
Five Things To Worry About Today
Out of time, and a month’s worth of Admin to look forward to…
Strategist – Shard Capital