By Michael Every of Rabobank
What a day on so many fronts! Let’s start with the staid world of bond markets. The last 24 hours have seen huge swings in yield curves: in Australia, due to a slight overshoot in two of three official CPI measures (all the way to 2.1% y/y!); then the UK, due to the Budget, more on which later; then Canada, due to the BOC winding down QE and talking about a rate hike; and then the US, on further filleting of the Biden fiscal proposal: at this stage, so much has been taken out of the “$3.5 trillion” package we are no longer sure what is in it.
Short yields up, long down sharply, and curves flattening like a pancake is a reminder that raising rates against a structural inflation supply-shock and high energy prices, and without fiscal support in the US, is not a good idea. At least not for an asset-based, financialized ‘economy’. (Indeed, Q3 US GDP today is expected at only 2.6% q/q annualised.) You can make a valid argument it’s time to raise rates: just not do that and prop up our current idiotic system. As such, expect further market swings on a scale that are capable of wiping out those with strong, levered views on matters. And wait until we see a real central bank surprise!
On which note, the RBA did not step in to protect their yield curve control Maginot line today, which is being taken by the market as a sign that next week’s rate decision will see the policy dropped or altered. Once again, “None Shall Pass” becomes “Terms and Conditions Apply” on the back of a minor CPI overshoot in one quarter, when none of the socio-economic equality issues they pledged to address have been addressed? If so, I look forward to the post-policy error “whocouldanooed” RBA explanations in an economy that enjoys property asset bubbles more than any other. If not, the curve is waaaay wrong.
On inflation, some point out that after the surge in prices this year, and perhaps next on the energy and supply-chain front, price rises will level off. Hence, inflation will still be “transitory”, with a lag. Mathematically, that is true. But it is also price-of-everything-value-of-nothing logic. If the price of a consumer staple goes up 40%, for example, and then levels off, how much of a success has central-bank inflation fighting and price-stability really been in the public eye? Are central banks really claiming that anything short of an EM/1970’s-style wage-price-spiral into Weimar territory is victory for them?
Relatedly, China announced it will cap coal prices until May 2022, and will subsidize coal imports. Recall the surge in coal had forced its electricity producers to make losses, and stop producing. That was resolved by allowing costs to be passed on; and now by pushing up output and pushing down the price of the most polluting energy to a just-profitable level. Yes, we have seen opposite-of-green policies from many countries, and even the EU is looking to subsidize energy bills (for gas). However, the ‘environmental VaR shock’ here is larger due to the scale of the Chinese economy and its carbon output: and what if global energy prices are still high in May 2022? Meanwhile, China will have low-cost, high-carbon power as the rest of the world faces higher energy prices as part of a green transition about to be pledged at COP26. At a time of protectionism, and environmental activism seeing Brits glue their faces to roads, what will the ESG/“resilient” response be if China makes its carbon-intensive industries even more cost competitive? Of course, it can still pledge to peak in 2030 and be net zero by 2060 as part of a larger quid pro quo deal, given it repeatedly refuses to decouple green issues from others.
Back to that UK Budget. Chancellor Sunak went for a more Build Back Boris budget than some had expected, with an increase in the minimum wage, more green state spending…yet less gilt issuance due to projections of higher 2021 GDP growth. Raining on the parade, and on the long-end of the gilt curve, the Institute for Fiscal Studies tweeted that UK real wages are expected to remain stagnant for 20 years, and in 2026, wages are forecast to be £11.70 lower than if the pre-2008 trend in wage growth had continued. And saddle up! As the Guardian puts it, “A major trade dispute has broken out between the UK and France after Paris banned British fishing boats from key ports, vowed to impose onerous checks on cross-Channel trade, and threatened the UK’s energy supply over a row over post-Brexit rights to UK waters…Boris Johnson said the UK government would retaliate over what was described as a potential breach of international law.” Somebody wants to steal the thunder of right-wing populist Zemmour ahead of the looming presidential election, n’est-ce pas?
Europe is now fighting a two-front war, with the European Court of Justice (ECJ) imposing a daily EUR1m fine on Poland for snubbing it. Wolfgang Munchau has warned such escalatory tactics run the risk of exacerbating the situation to the point where Polexit is something we all learn how to pronounce.
If all of this craziness wasn’t enough for a Wednesday, yesterday also saw epic swings in crypto. ‘Shiba Inu’ --to quote Zero Hedge, “the Ethereum-based Dogecoin copycat altcoin which has a total circulating supply of 1 quadrillion”-- saw a surge in orders so large that it dragged down other crypto assets. Let’s unpack this, shall we? A *copy* of an altcoin --so, self-printed electronic ‘money’, on a platform full of other self-printed ‘monies’-- which is mimicking an ‘original’ altcoin openly self-printed as a *joke*, and which has a ridiculously large volume in circulation as a *double joke* about scarcity value, suddenly saw its price surge to give it a ‘market cap’ larger than many multinational corporations. And, in doing so, it took down the price of ‘establishment’ crypto jokes like Bitcoin – which Wall Street and the White House now appear to want to embrace as part of our ‘financial system’. (“Mr. Smith, your Bitcoin ETF fund is down 10% today, because somebody launched a William Shatner-based Shatcoin. You understand, of course, that this is just how normal markets work. Prices of self-printed jokes can go up or down.”)
I have a few crumpled-up pieces of paper here in front of me. On each, in uniquely ugly handwriting, I have scrawled “IOU Chicken”. I await bids to make me a millionaire. I expect Wall Street to come knocking to ask if they can set up an ETF to track it. I am sure major retailers will add “IOU Chicken” functionality to their diverse, eco-friendly websites so minimum wage workers can deliver me products made with the energy produced from subsidised coal. That *is* how the world works, isn’t it? It certainly seems to be.
Anyway, today we get to hear from both the BOJ and the ECB, where they can show us how much they are following what is going on re: inflation, curves, coal, and crypto. There will, of course, be a great deal of their own version of IOU Chicken.