By Michael Every of Rabobank
SPLAAAAAAAAAT! That sound was the pure slapstick of a giant custard pie to the face. Which is what the US inflation numbers yesterday were to oh-so-many people. Massively higher than expected; the highest m/m headline since 2009 and the highest y/y since 2008; the highest core m/m print since 1982; much of this on the back of imputed and guessed prices; and not even properly accounting for what is now happening in energy and housing.
It was the kind of report, like Friday’s payrolls, that Make Data Great Again. One that also shows the whole economic number forecasting business is a silly game when it really matters. Yes, you can tell me what a number will be when that number doesn’t change anything: you just can’t tell me what the number will be when it changes everything. Perhaps the most telling part of the report was that used car prices are surging. As any economist will tell you, as soon as you drive a car off the dealer lot, the price goes down because of the “lemon” factor. Well, a giant lemon meringue custard pie just hit them all in the face. “Forecasters are struggling to get a handle on the economy,” says Bloomberg charitably. You think?
If so, add them to a list that includes the Fed and the Treasury. The Fed’s Clarida noted “I was surprised. We have pent-up demand. It may take some time for the supply to rise up to demand.” Ah, supply vs. demand! I’ve made clear on many occasions that I find the neoclassical view of aggregate supply and demand curves fantastical - because they don’t exist, as economics itself shows. But right now, the unrealistic models are even *worse* at assuming what the real world looks like than ever: nothing is magically produced or magically supplied, as we see.
For example, second hand car prices are surging because there aren’t any new ones; there aren’t any new ones because there aren’t any semiconductors; and there aren’t going to be any semiconductors. Model that lack of new models. For another example, the Mississippi river has closed to cargo because a bridge over it has a massive structural crack: that means agri exports can’t move via water and will have to make the trip to the Pacific north-west at a time when the entire logistics chain is already strained to breaking point. Inflation surprises you, you say?
How about if we put a few USD trillion more into that economy too? Are we modelling that? Well, it depends where it’s spent. More consumption = more inflation. Yet without massive investment in infrastructure, the US economy is going to struggle with supply-side issues as things fall apart. Are we modelling what a lack of stimulus means on the ground (or water)?
Importantly, the US won’t be able to easily boost local production without infrastructure either. Today, gargantuan cargo ships carry imports in full 40-foot containers to US ports, to a stripped-down train network, to a fleet of ageing truck-drivers, to warehouses. That’s “efficient” until it collapses due to an external shock; and it means economic hollowing out, growing inequality, and geostrategic weakness. (But hey, cheap stuff!) The logistics need to allow the US to rebuild a network of small/medium-scale distributed production with deliberate spare capacity, which can prevent bottlenecks while creating good jobs over a far wider geography. Which sounds internet-ish: and was also HOW THE US ECONOMY USED TO BE RUN until neoliberal economists sold the “efficiency” of massively-centralized, just-in-time, offshore, low-cost global production. For a Fed focused on social equality as much as inflation, this is a giant custard pie. And so is deciding what to do next: taper? SPLAAAAAAAT! Do nothing? SPLAAAAAAT!
Of course, Larry Summers is already out telling the White House now is the time to scale back on stimulus plans or else the US runs the risks of repeating the errors of the 1960s and 1970s: and he doesn’t mean flares. But will they listen – and will this also include infrastructure? There are lots of layers of inflation wrapped up in this political-economy issue that pretends it’s about “supply-demand curves”.
Meanwhile, in a country that knows more than a little about infrastructure and supply chains, and exporting to the US --China-- we got news that looks deflationary. The latest Total Social Financing data was lower than expected at CNY1,850bn and new loans at CNY,1470bn, and the Bloomberg measure of the China Credit Impulse dropped to just 2.9%, the lowest seen since early 2020. Of course, this coincides with a local market so frenetic it bid up iron ore 10% on a day just recently. So something doesn’t add up there either for someone.
But let me conclude with the final giant custard pie to the face: and once again it is provided by Elon Musk. Tesla has U-turned to announce that it will not be accepting payment in Bitcoin after all due to the environmental considerations involved. Until Bitcoin mining is green, Bitcoin aren’t ‘green’ for Tesla. And given most Bitcoin mining is done in China, until China goes green, Tesla won’t be Bitcoin-ing. That knocked Bitcoin down around 5%, as always happens with normal currencies when one gets a bit of news about them.
Is this perhaps Musk trying to do John Kerry a favour and nudge Beijing along to going Green? Is it Musk responding to the fact that the operating environment in China has suddenly gone sour, just as another flashy local rival to Tesla appears? Is it Musk noticing that his green credentials don’t fit with the how dirty Bitcoin allegedly is? Is it Musk himself slamming a giant pump-and-dump custard pie into the face of cryptonites for the second time, first on Saturday Night Live with Dogecoin, and now in slapstick fashion? Or is it Musk trying to get people not to talk about crumbling tech stocks? Whichever way one looks at it, it’s a dish for the crypto-sceptic SEC.
Now back to the post-US CPI mess --which I am not going to be cleaning up-- as we wait for US PPI, and get to play to a version of the game all over again.