Every now and then, Standard Chartered has a knack for coming up with that one report that is miles ahead of the competition and promptly becomes the definitive guidebook for the industry. Its most recent one: "Inflation: illusionary, inflammatory" is arguably one of the most detailed and comprehensive reports to come out from an institutional entity in a long time, dealing with the ever so sensitive topic of, you guessed it, inflation. And while it is guaranteed that the Fed will read neither this report, nor today's earlier announcement that food prices hit another all time high in January, we urge all readers to at least familiarize themselves with the contents herein. In addition to providing a case by case geographic atlas of which the next riskiest Tunisia-like countries are, the report includes a unifying thematic overview that explains not only why the global liquidity glut is long overdue to be pulled back, but what the next (and last) steps available to central bankers are before a wave of global unrest undoes 100 years of failed Federal Reserve policies. An absolute must read.
The key points in the report:
- We see three broad themes over the coming months: (1) a burst of strong US growth near-term followed by renewed disappointment; (2) periodic waves of concern over European debt as austerity bites; and (3) rising inflation in emerging economies that threatens to bring sharp monetary tightening and socio-political instability.
- Of these three themes, rising inflation in the emerging markets (EM) - especially countries in the Middle East and North Africa - complicated by political and demographic challenges, could risk inflaming socio-political tensions and destabilising growth.
- Even in Asia, where fundamentals are strong and consumer price inflation should be contained below 2008 highs, the risk is that governments may act too late – or worse, mis-diagnose and make the situation worse. Among those running higher risks are Vietnam, China, South Korea, Indonesia and the Philippines.
The report conviently lists the types of countries that will suffer the most:
- Economies with large food and energy components in their consumer price baskets, such as the Philippines, China, India, Indonesia and Vietnam
- Those that suffered less in the Great Recession or rebounded strongly afterwards, and therefore have small or even negative output gaps and little spare capacity to buffer growing demand. In addition to the five countries mentioned above, which all escaped recession during the crisis, Singapore and South Korea – both of which enjoyed quick and sharp recoveries – are high on the list.
- Countries whose central banks are slow or late to act – such as Indonesia and the Philippines, where policy rates are still at their post-crisis lows – are running an increasing risk of falling behind the curve, or at least of being perceived that way.
- Governments that focus on addressing the symptoms rather than the sources of their problems, or put emphasis on the wrong places.
Our advice: call your broker tomorrow, and load up on as much CDS as you can for each and every liquid name that conforms to these criteria.
And most notably, why non-core really is core, especially in Asia:
- An obvious source of the recent acceleration in CPI inflation is higher food and energy prices, driven partly by improving demand amid the global recovery and partly by supply disruptions due to poor weather. While the West treats food and energy prices as ‘non-core’ given their volatile nature and relatively small weightings in consumer baskets, for Asian consumers, a much larger 30-55% share of expenditure goes towards food and energy. Non-core inflation in the West is core inflation in Asia. It is therefore risky to focus too much on conventional ‘core’ inflation as the yardstick for policy action
In other words, when Bernanke is waving his hands in the air screaming "non-core" like a delirious imbecile, while Asia is burning, it really won't help anyone...