Inflation worry watch

Bloomberg is in on the act. This argues that because the pandemic pushed down the price level this year, as we normalize the readings are going to look bad next year, even if the real price level isn’t much changed from where it was expected to be. Other reasons are the familiar ones: Fed tolerance etc. The other interesting comment is that there will be sectoral shortages: a lot of the restaurant sector workforce will have moved on to better things (well, at least things with more social hours) and they will not come back without a big financial incentive. The job market is not a commodity market: you have to overpay for labour to compensate for job uncertainty (and to reduce the impact of losing someone you’ve just trained).

Stocks to watch

There is a lot of talking up of own books on Seeking Alpha. There is a thesis that says that the US will see a surge in infrastructure spending next year. A good company to take advantage of this would be Granite Construction ($GVA). You can read the whole thesis here.

It has done well, but so has almost every other stock in the index, so maybe now is not the right time. The whole sector is probably worth looking at more closely. The infrastructure in the US seems very good compared to what we have to put up with, but better roads do translate into more votes, especially from marginal voters who think the Democrats are going to force them to give up their F-150s and start driving Tesla Model 3s.

Pandemic Protection Insurance

This article from Bellingcat gets a lot of data. The conclusion seems to be that the wrong people got furlough cash. Wrong, in the sense of people who the politicians hoped wouldn’t get the lions share of it. I’m not sure there is anything to worry about, but clearly very poor people tend to work outside of the formal economy, and so are going to miss out on any taxpayer-funded handouts.

Market crumbs

It’s official. The rally in US stocks this year has been the greatest of all time. Meanwhile, deaths from Covid-19 are also hitting an all-time high.

The US Treasury is sitting on ~$1.75 trillion of cash (held at the Fed), because Congress won’t (or isn’t able) to approve the budget bill.

At some point, the bill will get approved, and all these reserves will end up in private bank accounts. Unles the velocity of money totally craters, this is going to see a pickup in economic activity and with it accounts. Read more here

Wrap

Fairly risk off, although the NDX went up. Commodities doing well, including precious metals. Nat. gas continuing to fade. It has been on a downward trend since 2014. At some point it’s going to pick up the momentum of oil, which is now solidly positive. The dollar was strong today. Part of the explanation was the pound, which was weak, as it seems increasingly likely that the UK will leave the EU on even worse terms than envisaged.

Carbon credits and international cooperation

It seems as though burning fossil fuels is a real problem for the world. It is far from clear that it is even in the top ten problems, but this does not mean that we should not try to solve it. Carbon burning creates negative externalities, so the usual (“Pigouvian”) solution is to tax it, and use the proceeds to nullify the harm done. An example would be to use taxes on sugar to fund diabetes treatment centres.

The problem with CO2, though, is that it’s a global problem. Having a high tax in one country simply outsources the production of it to another country where the tax is lower. It’s really, however, totally impractical to impose the same cash tax on a tonne CO2 emissions globally. Such a move would plunge poor but developing countries into catastrophic fuel poverty. The solution, as explained by Raghuram Rajan, is to allocate a single, global allowance of CO2 emissions per capita. Depending on how much higher or lower a country ranks on this measure it agrees to transfer funds out of or into the country. The exact level of this clearing allowance would be determined by the distribution of consumption, the transfer price per tonne, and the response to the incentive.

Individual countries would decide for themselves how to pay for this international transfer payment. I am sure I’ve missed some vital wrinkle, but the point is to arrive at a mathematical solution to the problem, rather than have climate change summits, and agree some far-off goal of reducing global temperatures. This sort of approach secures great press for the country leaders, but really does very little to reduce CO2 in the atmosphere. Even shutting down a huge part of the global economy has not materially reduced CO2 emissions. Just imagine what would be needed really to move the needle! However, it we must move it, we should go for some objective, simple rule-based approach.

I know I’m being politically naive. Even the Taylor Rule has never been actually put into practice. But until we look at these approaches seriously, we’re going to have the same ineffectual policy making that has plagued the West for the last forty years.