Rabo: Sorry, Boy And Girl Geniuses, But How Does Inflation Go Down If Commodity Prices Keep Going Up
By Michael Every of Rabobank
Fed 50 vs. Fedoggy#4292
The Fed went 50bp. I will come back to this in a moment, but I need to set the scene properly.
Back in 2020, I was expounding that “-isms” were soon going to be back in vogue. Our conflating structural problems --caused by global neoliberalism-- were going to see clashes over what our system should be, which would involve ideology, and understanding liberalism, capitalism, socialism, communism, and fascism. That was before common prosperity, and today we can add imperialism. Indeed, from “-isms” we have moved to a related clash of “-cies” – democracy vs. autocracy. Markets do not yet fully understand this implies not just war in Ukraine but economic war, from commodities to supply chains to technology to finance to FX.
Now to the Fed. As Philip Marey summarises here, “As widely expected, the FOMC decided to raise the target range for the federal funds rate by 50bps. The Fed also decided to start balance sheet reduction. More interesting was the press conference, where Powell said that there is broad consensus in the Committee that 50bps are on the table in the next couple of meetings, but 75bps is not something the Committee is actively considering.”
The fact that the 75bp weapon last seen in 1994 is off the table was enough to smash the dollar (DXY down from 103.5 to 102.5), see stocks soar the most on a Fed day in decades (S&P +3.0%), and bond yields plunge, and the yield-curve steepen (US Treasuries -14bp in 2s and -4bp in 10s). In short, the Fed not being as hawkish as some had feared is being taken as super-dovish.
Sorry, boy and girl geniuses, but COMMODITIES WENT UP SHARPLY. Tell me how inflation goes down if commodity prices keep going up? And, in the clash between democracy and autocracy, Russia wants higher commodity prices and the US lower: do you think a dovish Fed is a good thing to be cheer-leading in a Balkanizing world economy that is about SUPPLY not DEMAND? You can celebrate your belief that the Fed is going to pumping assets again imminently just like you did in 2020-21 – right before inflation ripped markets to pieces.
Watch India threaten to curb wheat exports after a surprise RBI inter-meeting 40bp rate hike; see Brazil hike rates 100bp to 12.75%, as expected; and observe if China indeed launches another huge infrastructure push today.
Listen to Maersk say they see structural global stagflation. And consider the impact if the EU pushes ahead with its proposed end-year Russian oil embargo (here is ours), which is likely to include banning EU vessels and insurance, and some commentators say uses language that could lead to secondary sanctions on *anyone* trading Russian oil. That, as OPEC underlines there is no spare capacity anywhere globally, and the US finally realises that there might not be an Iran deal after all due to Tehran ('US says it is now preparing for a world both with and without an Iran nuclear deal’) with serious geopolitical implications; and as Hamas representatives go to Moscow just as Russia-Israel diplomatic relations tank over very undiplomatic Russian statements.
If stocks *and commodities* won’t go down, and autocracy won’t back down, then rates may keep going up and *stay* up. The Fed were not dovish – just not super-hawkish. Yes, they didn’t go 75bps because they know who will pay them $250,000 for an after-dinner speech when they retire. But if they had they might not now have to make as many 50bps hikes as they will be forced to both by markets and geopolitics. (As the US today launches its revised Indo-Pacific Strategy aimed at China.)
Don’t think that yesterday’s weak ADP employment data mean rate hikes will slow either. Philip adds that while overall employment growth dipped to 247K, it showed a sharp contrast between large and small firms: in large firms it was up to 321K, but at small firms it fell by 120K. Small firms seem to be losing the competition for workers against large firms, who have more pricing power, higher profits, and more scope for higher wages. So, we do have a wage-price spiral – at larger firms, and small businesses are going to be decimated in trying to compete.
Yes, yes, ‘Buy the rumor, sell the fact’. But The Street sees these facts and thinks it’s time for a huge ‘new normal’ market rally, and that democracy, meritocracy, and capitalism win: I am thinking kleptocracy, idiocracy, and aneurism. It ironically thinks of itself as an ‘apolitical’ technocracy and diverse meritocracy – yet it champions paying small money to people with big common-sense talent stacks, and big money to people with some of the lowest functional intelligence. Look at the reaction to the Fed: and look at how we got into this mess in the first place.
And if you want another example from an endless list, the Wall Street Journal just bewailed that: ‘The NFT Market is Collapsing’, as issuance is down 92% from its peak of last September, and many NFTs are now worth less than they were bought for. The truly classic quote was:
“An NFT of the first tweet from Twitter Inc. co-founder Jack Dorsey sold in March 2021 for $2.9m to Sina Estavi, the chief executive of Malaysia-based blockchain company Bridge Oracle. Earlier this year, Mr. Estavi put the NFT up for auction. He didn’t receive any bids above $14,000, which he didn’t accept. Mr. Estavi said failure of the auction wasn’t a sign that the market is deteriorating, but was just a normal fluctuation that could occur in any market. The NFT market is one that is still developing, he said, and it is impossible to predict how it will look in a few years. “I will never regret buying it because this NFT is my capital,” he said.
Another NFT buyer purchased a Snoop Dog curated NFT, titled “Doggy #4292,” in early April for about $32,000 worth of the cryptocurrency ether. The NFT, an image of a green-skinned astronaut standing on what looks like a Hollywood Walk of Fame star, is now up for auction, with an asking price of $25.5m. The highest current bid is for 0.0743 ether—about $210.”
Who on Wall Street peddling these things could possibly have known that a new asset class of ‘unique’ objects with an INFINITE cost-free flow of supply might not be the best foundation for one’s savings, or the global financial system? I am shocked --shocked!-- that the “-ism” and “-cy” we were all looking for was not Doggy #4292! (Nor Fedoggy#4292.) Yet Fortune magazine is still running a counter-story saying, ‘‘Revolutionize Wall Street’—$85 Billion Giant Pushes Into NFTs As Price Of Ethereum, Bitcoin, BNB, XRP, Solana, Cardano, And Dogecoin Soar’ and asset-managers are going *deeper* into NFT-ville.
Oh, there is a revolution brewing alright. Just not the one they are thinking of.
Rising commodities and national security concerns forcing the Fed into new ideological thinking for one. The Fed entering into Joe Public’s ideological thinking for another.