Good afternoon – with apologies for my enthusiasm, this is a long read for a long weekend, but maybe worth it for keeners.
How to stretch a dollar: After digesting think-tank recommendations from the heads of the best business and economics schools in the land, on August 27, 2020, the US Federal Reserve (AKA the Milk Marketing Board of Money) amended its long-standing statement on inflation, to allow price increases to temporarily run higher than 2%. That now ominous amendment is directly quoted here:
The New Monetary Policy:
“The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep judges that longer-term inflation expectations firmly that are well anchored thereby at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee’s ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
So anyways, ouch: The resulting 9-ish percent inflation is an embarrassment for them now. In fairness, there’s been some massive supply shocks since their strategy change, but they’re supposed to know stuff about stuff while preparing stuff to protect us from stuff we can’t predict.
Thomas Sowell, the brilliant, pragmatic economist, has said: “The more I study the history of intellectuals, the more they seem like a wrecking crew… replacing what works with what sounds good."
Downwardly Inflexible: Like my waistline, inflation resists shrinkage – the nasty, headache of the 70’s is back like Homer Simpson to a pork chop. Hopefully recent signs of price moderation will continue, but we’re going to need a little cooperation from Russia and China. And… just think for a moment how that last statement doesn’t roll off the tongue.
Nevertheless, the Greenback is still the cleanest dirty shirt: Fortunately, the following sad tales are examples of inflationary fates we’ve largely avoided so far in the west:
The not-dollar: This one-hundred trillion dollar (100,000,000,000,000) Zimbabwian bank note (below) was worth about 40 cents US at one point in 2015. Today its only value is in its capacity as a souvenir conversation-starter
The not-kidding:
Although this unwieldy
armload of cash probably
looks like a stunt,
this picture is reportedly
from an actual shopping trip.
Hyper-inflation has taken a
serious toll on
Zimbabweans over the years.
This must be the worst example
of inflation on record, right?
Of course not
The unimaginable: The Hungarian pengo wins the prize for monetary
meaninglessness.
The exchange rate just before its July 1946 demise was 460 octillion pengo to
1 US dollar.
I’ll write that out here for visual effect: 460,000,000,000,000,000,000,000,000,000
to
1
Book Recommendation: Men Without Work by Nicholas Eberstadt. Okay, it sounds painfully depressing, but worker shortage is the other supply chain problem: According Eberstadt, the past two generations of western culture has softened men’s’ resolve to work. Between 1965 and 2015, an ever-growing segment of working-age men exited the labor force. Beyond the shortened supply of workers, it’s a serious personal and societal cavity. “By and large, nonworking men don’t ‘do’ civil society,” Mr. Eberstadt says. “Their time spent helping in the home, their time spent in worship—a whole range of activities, they just aren’t doing.”
So, are markets at an inflection point? Markets smell the other side of a recession like old farmers who, on a hot, sunny afternoon get the faint scent grain dust and rain in the air and immediately know they won’t be sleeping for several nights in a row. It’s probably not over yet. Watch for stops and starts, but – markets (and farmers) are endlessly sniffing the horizon.
Weekly Charts:
From RBC Economics: U.S. GDP growth, has now contracted for two consecutive quarters.
U.S. GDP decreased by an annualized 0.9% in Q2, adding to the 1.6% Q1 drop
Weakness relatively broadly-based with offset from stronger services consumption and a larger net trade add.
Still resilient economic backdrop and elevated inflation to keep Fed on a more aggressive hiking path, slowing consumer demand further down the road
But, also according to RBC Economics: “The second consecutive decline in GDP in Q2 does not qualify as a ‘recession’ on its own. Other indicators on balance have looked much better. Industrial output rose by an annualized 6.2% in Q2 and the economy added another 1.1 million over the same quarter, including a 372k increase in June. Both retail and wholesale sales are still at levels well above pre-pandemic. Indeed, there’s hardly evidence for the NBER’s three criteria for a recession – depth, diffusion and duration – all being met at this point.”
And, lastly, here’s our weekly global financial markets analysis:
Dour data dependency – You know the Fed is playing an outsized roll when negative earnings data is good news on the rate front, and good rate news is a butane torch on forward earnings expectation. Um. What?
Regional developments: Canadian energy diplomacy takes center stage; all eyes on U.S. consumer inflation; Mixed European earnings season;
Supply chain risks linger due to China’s ongoing anti-COVID-19 measures.
Read the full article here: Global Insight Weekly
Enjoy your weekend!
May the sun eat alllllllllll the mosquitoes in your backyard!
Mark