By Michael Every of Rabobank
We Need Some Serious Remodelling
Yesterday’s Daily saw me float the model hypothesis that the Fed would like everyone to have all their money in stocks, so they would have a practical mechanism for inflating and deflating the economy above and beyond the need to mess around with interest rates or QE. Of course, this was a huge over-simplification. In particular, it overlooked housing: why bother only inflating stocks when not everyone holds them, when you can do the same to housing, which everyone needs? Lo and behold, yesterday’s S&P/CoreLogic 20-city prices were up 11.9% y/y. (A figure the RBA will look at with smug contempt: “That’s all you got?”)
Presumably the matching rise in US consumer confidence was driven more by stimulus checks in the mail than rent checks going out the door, or chats with realtors about affording a home in a country not exactly famous for its lack of available land. Yet surely the Fed is still missing a trick? Just switch to a digital currency, like China, and assets can be turned on and off at will, and there is no need to go through with the pretense of inflating asset markets in lieu of the general economy.
Yesterday’s Daily was also a vowel-less attempt to emphasize what is missing from the macro-models the Fed uses to form the view it will share with the world later today - in-between pushing up stock and house prices:
Functioning banks and credit are not part of it. Professor Steve Keen’s ‘Minsky’ software is unlikely used in the Eccles Building to spit out hockey-stick recoveries; or, if it is, the users really don’t understand what it implies is going to happen next;
There are no political considerations. These are now mentioned by the Fed – but I haven’t heard “labour vs. capital” from them, or what is needed to do something about it, when they are happy to expound on so many other areas - in-between pushing up stock and house prices. Yet politics and labour and capital are the only real games in town right now; apart from.
Supply chains, which also don’t exist. Trade just ‘happens’ in a frictionless manner.
Now I am not going to pretend to be a supply-chain expert, but I do understand that lines on charts and numbers on spreadsheets reflect a real world, and I have even been to see some of these facilities in person. Years ago, I visited a hot, dusty Vietnamese port. The main warehouse was elevated so the largest trucks could pull up next to it, and cargo slide in. Except half the ground below had subsided a few inches, as South-East Asian soils do after rainy season, and so the truck floor-bed and warehouse ‘lip’ were no longer flush, and each truck had to be filled far more slowly by manual labor. While there were plans to level the ground, I was told, for now only the cargo they liked got to use ‘the good end’. Luckily much of the time we can get away with just presuming trade ‘happens’, rather than accounting for the above anecdote.
But not during Covid, and not today: actual supply-chain experts are saying they have never seen anything like what is currently happening. There is a total, global log-jam; goods cannot be shipped in some cases; and supply-side inflation on a scale we have not seen for a long, long time looks imminent. And that is on top of weather-related disruption edging us closer to the Biblical agri-commodity price increase scenario we discussed back here. It also sits alongside geopolitical problems, with Saudi Arabia claiming an attempt was made to ram a ship filled with explosives into its Yanbu oil port, the latest tit-for-tat episode in that region.
As such, it is going to be even more surreal than usual to have to listen to the Fed warble on about unemployment projections today, and then the market warble back about clues as to which particular month of which particular year might flag the potential start of a gradual process of perhaps not pushing up stock and house prices quite as fast as at present (in the flawed theoretical assumption the economy does not then topple over as a result).
In-between, homes are becoming unaffordable; rent is becoming unaffordable; food is set to become far less affordable; and many other goods too. Not just in the US, but everywhere. The first two problems central banks clearly won’t do anything about until pushed; and the latter two they can’t do anything about even when pushed. But, hey, enjoy Fed day, folks!
Meanwhile, in a more general round-up of pre-Fed developments, Bloomberg reports ICBC was the lucky bank obliged to stump up $600MM to help struggling Chinese asset-manager Huarong pay off-shore debt due yesterday. So risk on and risk off. The only difference is timing: on which, Fitch has cut Huarong’s credit rating three notches, and that as its 4.5% perpetual bond(!) is trading at 64.5 cents on the dollar. One wonders what model was used for the original rating, with Bloomberg concluding: “it’s unclear whether Chinese authorities have decided on a plan to resolve the company’s longer-term challenges.” So East and West still have much in common then.
One being an awful demographic profile, with suggestions that China’s population may have actually shrunk in 2020 for the first time since 1949: “The pace and scale of China’s demographic crisis are faster and bigger than we imagined. That could have a disastrous impact on the country,” in the words of one expert quoted. It’s unclear if this really is the case, but there are claims of regular over-reporting of population at lower administrative levels, and a very sharp decline in fertility rates overall that is now generating a marked shift on the political/policy front. (As other countries show, likely to little effect, however.)
The EU is suing Astra-Zeneca for not supplying them with sufficient vaccines for them to then not use; 20 ex-French generals have penned a letter threatening military rule(!) if the country cannot sort itself out; and Finland is the latest to delay the €800bn Recovery Fund planned for an economy that was already supposed to be back to normal by now rather than still locked down.
In the UK, Boris Johnson is under attack even in the Tory press for saying he was willing to see bodies piled high to avoid a Covid lockdown that happened anyway; and for not coming clean on who paid for his GBP58,000 wallpaper in No. 11 Downing Street. What an Eton mess this all is – and I am also referring to the wallpaper. It may seem unrelated to the arguments and news above, but the fact that a British Prime Minister leading the country through the largest crisis since WW2 would allow his partner to spend twice the average UK salary on gaudy wallpaper in a property they don’t even own says a great deal about the need for some *serious* global remodeling.
Lastly, Australia, which literally has a prime-time TV show based on remodelling property for crazy profit margins no matter how badly the contestants manage the process, just released Q1 CPI data. In q/q terms it was up just 0.6% vs. 0.9% consensus and in y/y terms 1.1% vs. 1.4%, and all the core measures are also still far closer to 1% than 2%. That’s nice for the RBA: now they can get back to a policy of benign neglect allowing 30% y/y house-price inflation, in-between ignoring fellow Australian Steve Keen and his ‘Minsky’ software pointing out how this all ends.