Tuesday 28, June 2022
Inflation and commodities
Kuppy talks about ‘Project Zimbabwe,’ by which he means the incontinent money printing of central banks in response to the pandemic, wobbles in the polls, the market getting twitchy … well, more or less anything that might make politicians look bad. The logical response of markets to this is to bid up the prices of real assets relative to nominal ones. So, one should buy silver and sell treasuries. But things are not so simple. The YoY performance of silver has been dire: down 20%. In the face of CPI prints closer to 10% than 2%, it has dropped 5% in the last month. Gold, the other store of real value has done better, but not by much: it’s up 3.3% YoY, and down over the last month. Lumber is down 18.5% YoY, Iron Ore is down 45%. OK, I’ve cherry picked a bit: lithium is up 436%, Brent is up 60% YoY.
Bonds are pretty sanguine about inflation. The 10Y is up at 3.17% as a yield, maybe up 170bp over the year. Given that inflation is up 700bp or so, this is a vote of confidence that inflation really is transitory. In the last week, nearly all developed economies have seen dropping yields on govt. bonds. Given that inflation is so rampant, which means that real interest rates are deeply negative, and thus expansionary, this is remarkable.
The conflict at the heart of politics
People vote for politicians who promise to do stuff they want done. The dilemma politicians face is that voters don’t vote for politicians because they’ve done stuff that was wanted in the past. Ronald Reagan famously promised to reverse Roe vs Wade in the 1980 presidential election. He didn’t, because by doing so he’d just lose a load of votes. Likewise, Democrat administrations, since 1973, have had the option to put the right to access to abortion on a solid statutory footing, out of the reach of the Supreme Court to reverse its earlier decision. They did not, because they knew that if they did that, there would be one fewer reason for voters to vote Democrat.
Partly, this is because of the well known tendency of people to regret a loss much more than they value a gain. People quickly forget the passing of laws that they approve of. It’s the ones that rankle that they think about most, and which influences their vote so heavily. That’s the reason incoming governments rarely bother to reverse legislation enacted by a predecessor. For example, the 1998 Human Rights Act makes it a lot easier for Brits to use the precedents of the European Convention on Human Rights. It was used to prevent asylum seekers being transported to Rwanda recently. Politicians rail against it, but none of them want to repeal the act.
As politicians become more and more slavishly the creatures of opinion polls, we can see more of this, and as a result more incoherent and incompetent policy making. This is not a partly political point. All major parties would prefer to consult a focus group before expressing a preference for a type of biscuit. I don’t know where this will end. It must be very frustrating for Whitehall mandarins, who, I’m sure, would love to actually do some real policy work.
Wrap
The story of the day is a recovery in oil prices. Apparently Macron told Biden at the G7 meeting that the UAE could not expand production, and Saudi Arabia was having difficulty raising production by more than 150e3 bpd. How Biden could not know that already beggars belief, but the consensus is that he barely recognizes his wife, and so has no hope of gaining an understanding of the complex dynamics of global oil production. The consensus might be totally wrong, and manipulated by Zuck or Putin, or Xi. Who knows?
The yen is showing weakness, the USD is strong. Equities were down a fair bit, but they’ve had a recent strong run and they are still up on the week.
On a personal note, I discovered that commercial mortgage rates had gone up by 100bp in less than a month (for five-year fixed rates). This is bad news for the UK housing market.
Trump has tantrums, who could have guessed?
Comments !