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Tag Archives: Inflation

Chart: American’s Biggest Inflation Concern

Source : Statista

Chart: Food and Beverage Prices Are Driving Inflation in the U.S.

Source : Bloomberg

How Long and Deep Is Inflation, and How Close Is China to a Banking Crisis?

Bill Blain wrote wrote . . . . . . . . .

“ All that glitters is not gold…”

This morning: The immediate threat is inflation – how could a strong CPI print destablise markets, but inflation is also a question of what shocks are still to come, and investing accordingly. What if a big No-see-Em shock is still to come – a Chinese financial crisis?

Markets are all about risk – What do we know, and what do we not? That’s easy – we know what we care to learn about the past, what we think we know about today, but about tomorrow we are just making informed guesses.

Today the big front and centre issue is inflation. Does it get worse or better, and for how long?

Take a look at any inflation chart and it will typically shows a series of sharp, short-lived spikes – which makes sense: something triggers inflation, it is addressed and the economy adapts, the price shock is normalised as the economy learns to cope with the new normal.

The immediate critical risk is another new shock; that a stronger than expected US CPI (inflation) report triggers major wobbles across markets by raising expectations of aggressive central banking rate tightening – that’s given some impetus by the comments of Bank of England governor Andrew Bailey who said :“bringing inflation down to the 2% target is our job, no ifs or buts”. The market expects a 50 bp Bank hike in early August – there is little else left in the Bank’s armoury.

The market is split on where the inflation threat goes from tomorrow:

  • There are naysayers who say trying to address the multiple inflation shocks now hitting global markets with recession inducing monetary tightening is just daft.
  • There are others who say it’s all the fault of the overly-easy monetary experimentation of artificially low-rates and QE of the last 14 years: inflation everywhere is a monetary phenomenon. (Inflation is very real and it has enormous socio-economic consequences.)
  • There are some market watchers who believe inflation already peaked, and June will mark a high for this inflationary spike as the economy successfully adapts and digests the Ukraine energy shock and the end of pandemic supply chain crisis. They argue there is significant resilience built in that will ease tensions.
  • There are others, including myself, who believe inflation could yet spike higher, and could remain persistently higher for longer than central bank dot-plots suggest. The energy crisis is not over – and could get substantially worse if Putin does not reopen the gas valves to Europe (currently closed for “maintenance”) later this month. Coronavirus lockdowns in China remain a threat to keep supply chains malfunctioning, and growing wage-inflation as industrial unrest ferments across Europe is going to hit hard in Q3/4 as recession bites.

What’s a fund manager to do? Inflation hurts earnings – as this current earnings season will no-doubt show. Interest rate rises will hit stock returns, balance sheets and prices. One argument is to buy stocks in the expectation the economy will adapt while strong fundamentals re-establish themselves.

On Monday there was a fascinating intervention on the inflation conundrum for asset managers from retired bond king Bill Gross – reminding us bonds diminish risk but lower returns.. “Jim Cramer famously says there’s always a bull market somewhere but I’m straining to find one now.” Gross goes on to say investors should mitigate the pain, accept its happening and “12 month Treasuries at 2.7% are better than your money market fund and any other alternatives!” He has a point – although others say this is time to buy duration to up the return to 3%!

On the other hand, maybe there is more pain to come? Maybe it will be Europe where Euro parity to the dollar is doing precious little to boost economies heading into a new recession, where energy security is perilous, and politics looks a-dither.

And, there are growing signs all is not well in China..

There is a widely held view Paramount Leader Chairman Xi feels so secure, and the distracted west looks so riven, it’s time for a quick operation to seize Taiwan. Maybe not – the Chinese, who share tactical doctrines with the now discredited Russian steamroller, look embarrassed by its shortcomings. For all its’ military posturing and new weapons, the Chinese are not an “outward bound” empire – historically, they prefer to internalise. The spectacular growth of China over the last 30 years has come from the internal control and expansion of its domestic economy, initially through exports and now through domestic consumption.

That’s bound to have created internal tensions – which can be seen in terms of inequality, environmental damage, and the limitations on internal freedoms – all of which we know..

But, over the last 2 years of Covid, China has effectively sequestered itself from the global economy. We think we understand how it works, but in reality… do we? Look at how dramatically and swiftly Hong Kong has been spun from being the premier western entrepot into a kow-towing domestic city.

China is big and it matters. It is like and unlike the west. It has multiple growth problems and demographics that will trigger whole new issues the West has yet to adapt to. The Covid lockdowns, understanding of the Party and government, and now bursting economic bubbles and what looks like a developing banking crisis – I’m beginning to wonder if the Middle Kingdom is more trouble than we think? If so it will have enormous global consequences – it could be a massive No-See-Um that could destabilise the global economy.

I’ve been reading up on the Chinese Banking riots in Henan Province. The fact Chinese protestors wanting money back from local banks following a run were set upon is hardly unusual – the immediate suspicion is corrupt local politicians were protecting themselves. But there are two aspects to the story to consider:

The first is Chinese Surveillance Capitalism: clamping down on reporting, using unidentified security personal to beat up and break up protestors, and local officials manipulating Covid “personal health codes” to ping protestors as likely Covid carriers takes state-control to a new level. Observers are not surprised – they saw the mandatory health codes as a way in which Government could control the masses. If surveillance capitalism is so established – why is party corruption still such an issue?

The second is the scale of the domestic banking problem. Is it really just a local, one province problem? What are we not seeing? Could it be the whole Chinese banking system is teetering?

The official line is it’s a local banking problem caused by criminality, presenting the line “local gangsters” have been systematically looting some small banks after “capturing” them up to a decade ago – which sounds like bad regulation and incompetent bank inspection. But runs on banks and lines of people asking for their money back is very 2007.

I am convinced much of the UK banking crisis following the run on Northern Rock that year would have been avoided if the Bank of England had stepped in to provide liquidity earlier. It was when the plentiful liquidity that supported bank property and corporate lending suddenly dried up as it became clear just how unbalanced that lending was that the global financial crisis was triggered.

Let me ask a rhetorical question: Is it possible China’s well known hot property bubble, it’s corporate borrowing binge, plus the high degree of corruption within the system, is fuelling a very real banking crisis in China? Is China about to suffer its’ very own internalised version of the Global Financial Crisis of 2008? How much worse will it be made by the ongoing Covid bogey being used to keep the economy under control? Are Covid Lockdowns being used to disguise the scale of a massive Chinese financial crisis?

Just asking…


Source : Morning Porridge

Charts: The Annual Inflation Rate in the U.S. Accelerated in June 2022

Highest since November of 1981

Real wages fell for the 15th month in a row

Source : Trading Economics, The Big Picture and Bloomberg

Japan Real Wages in May 2022 Post Biggest Drop in Nearly 2 years on Inflation

Japan’s real wages extended a decline in May to post the biggest year-on-year drop in nearly two years, government data showed, as consumer inflation hovering near a seven-year-high outpaced nominal wage growth, reducing households’ spending power.

Higher living costs amid low-wage growth are likely to curb Japan’s consumption-led economic recovery from the coronavirus pandemic.

Inflation is also a top issue for voters in an upper house election on Sunday, although Prime Minister Fumio Kishida’s ruling party likely to increase the number of seats it holds, according to an opinion poll published on Monday.

In May, inflation-adjusted real wages, a key gauge of consumers’ purchasing power, fell 1.8% from a year earlier, the labour ministry said.

The biggest slump since July 2020 followed a downwardly revised 1.7% decline in April.

The consumer price index the ministry uses to calculate real wages, which includes fresh food items but excludes owners’ equivalent rent, rose 2.9% in May, hovering near 3.0% in April that posted the largest jump since October 2014.

Price inflation outpaced nominal total cash earnings, which rose 1.0% in May, down from a downwardly revised 1.3% rise the previous month, the data showed.

Overtime pay, a barometer of corporate activity strength, rose 5.5% year-on-year in May, which was the biggest advance in nine months and higher than April’s downwardly revised 5.0% growth.

Special payments, which include seasonal bonuses firms often cut when they face headwinds, fell 7.0% in May, yet the reading tends to be highly volatile in months other than the June to August and November to January bonus seasons.

The drop in special payments, which marked the biggest fall in 16 months, was the main reason for the slowdown of total cash earnings from April, a health ministry official said.


Source : Reuters

Infographic: Three Different Types of Inflation

U.S. Q1 GDP Revised Down

Inflation is revised up.

Source : Bloomberg

Banking Body Urges Decisive Wave of Global Rate Hikes to Stem Inflation

Marc Jones wrote . . . . . . . . .

The world’s central bank umbrella body, the Bank for International Settlements (BIS), has called for interest rates to be raised “quickly and decisively” to prevent the surge in inflation turning into something even more problematic.

The Swiss-based BIS has held its annual meeting in recent days, where top central bankers met to discuss their current difficulties and one of the most turbulent starts to a year ever for global financial markets.

Surging energy and food prices mean inflation in many places is now its hottest in decades. But the usual remedy of ramping up interest rates is raising the spectre of recession, and even of the dreaded 1970s-style “stagflation”, where rising prices are coupled with low or negative economic growth.

“The key for central banks is to act quickly and decisively before inflation becomes entrenched,” Agustín Carstens, BIS general manager, said as part of the body’s post-meeting annual report published on Sunday.

Carstens, former head of Mexico’s central bank, said the emphasis was to act in “quarters to come”. The BIS thinks an economic soft landing – where rates rise without triggering recessions – is still possible, but accepts it is a difficult situation.

“A lot of it will depend on precisely on how permanent these (inflationary) shocks are,” Carstens said, adding that the response of financial markets would also be crucial.

“If this tightening generates massive losses, generates massive asset corrections, and that contaminates consumption, investment and employment – of course, that is a more difficult scenario.”

World markets are already suffering one of the biggest sell-offs in recent memory as heavyweight central banks like the U.S. Federal Reserve – and from next month the ECB – move away from record low rates and almost 15 years of back-to-back stimulus measures.

Global stocks are down 20% since January and some analysts calculate that U.S. Treasury bonds, the benchmark of world borrowing markets, could be having their biggest losing first half of a year since 1788.

CREDIBILITY

Carstens said the BIS’s own recent warnings about frothy asset prices meant the current correction was “not necessarily a complete surprise”. That there hadn’t been “major market disruptions” so far was also reassuring, he added.

Part of the BIS report published already last week said that the recent implosions in the cryptocurrency markets were an indication that long-warned-about dangers of decentralised digital money were now materialising.

Those collapses aren’t expected to cause a systemic crisis in the way that bad loans triggered the global financial crash. But Carstens stressed losses would be sizeable and that the opaque nature of the crypto universe fed uncertainty.

Returning to the macro economic picture, he added that the BIS didn’t currently expect a period of widespread stagflation to take hold.

He also said that though many global central banks and the BIS itself had significantly underestimated how quick global inflation has spiralled over the last six to 12 months, they weren’t about to lose hard-earned credibility overnight.

“Yes, you can argue a little bit here about an error of timing of certain actions and the responses of the central banks. But by and large, I think that the central banks have responded forcefully in a very agile fashion,” Carstens said.

“My sense is that central banks will prevail at the end of the day, and that would be good for their credibility.”


Source : Reuters

Charts: Japan Core Consumer Price Index YoY Increased in May 2022

The index excludes fresh food but includes fuel costs

Source : Trading Economics

Charts: Canada’s Annual Inflation Quickened to 7.7% in May 2022

The highest since January 1983 and above market expectations.

Source : Trading Economics