Wednesday 27, April 2022

Expectations

The market really doesn’t see inflation yet. This

Agricultural products

Oil is yesterday’s fuel. Nobody wants to use it, and nobody wants to be in the business of drilling for it. Everyone wants to drive around in a solar-powered car. But this is not easy or cheap to do, so a second-best solution is to use oil, but to make it ‘renewable,’ i.e. from plant materials. The problem is that the plant materials you might use a corn and soya, which happen to be important foodstuffs, the demand for which is not likely to drop as the world becomes more populous and richer. Given that the cost of inputs to producing plants like soya and corn are going up rapidly.

I always felt that corn was the commodity to buy, but I have read a piece by Doomberg which makes the case that soybeans might be a better bet. His point is that diesel is in very short supply, and the only renewable option for replacing its use is “the beans.” He makes the case forcefully, here. Of course, it may already be too late. In case you somehow missed it, this is not advice, and you should assume that those trading the commodity are better informed than you are and that its current price fully incorporates all information about the likely course of present and future supply and demand evolution.

Elon and China

This is the best piece I’ve read on the extent to which Elon Musk is beholden to the Chinese Communist Party.

Wrap

This was a moderately risk-on day. The SPX was up 50bp. Bonds were down, but yields were up only of the order of 10bp at max, apart from those with credit problems, such as Brazil, where the yield went down 8bp. In currency markets, the dollar continues to crush other currencies. The milkshake theory wins the prize! Commodities were mildly up, apart from gold.

Image of the day

Marchand de Fleurs des Halles, 1968
©︎Robert Doisneau pic.twitter.com/oebgCwjBiy

— megumi (@caecilia1003) April 27, 2022

Private sector loans

Money is created by commercial banks lending, and through lending creating deposits (i.e. money). This chart shows how weak money creation has been since the Global Financial Crisis, and explains why we have had such weak inflation.

source: tradingeconomics.com

Inflation reduces wages, but it allows the desire for savings to come into equilibrium with the demand for investment. It allows an easier restructuring of the labour force than an economy with weak inflation. A central bank should engineer loose monetary conditions as part of its mandate. It has failed up to now, but as long as it doesn’t pitch us into recession, we might at last see some return to proper real growth.