Friday 8, July 2022

Labour and other factor markets

We never talk about the market for capital being too tight. Nor the market for commodities. Gas prices may be high, but we are confident that the market will clear: those who need gas most will get it. Those who do not need it so much will do without, or use substitutes, like imported fertilizer or aluminium, or turn down their thermostat, or insulate their houses.

The labour market is different. Full employment is when about five percent of the workforce is unemployed, and governments worry if unemployment gets below this figure. Nobody ever seems to think it’s fine if wages rise to the point where employers use automation, or people make their own coffee.

The odd thing now is that commodity prices are crashing, because a recession seems unavoidable. But businesses cannot find enough workers to fill their vacancies. Larry Summers has been arguing that we’re facing ‘secular stagnation’, which is high unemployment and high inflation: something supposedly ruled out by the Philips Curve.

I have no idea what the economy will do. I feel that I am not alone. It’s Non-Farms Payroll day in the USA today. Forecasts are 225K, which seems pretty healthy to me, especially when unemployment is notionally 3.6%. Yes, I know that these statistics are very unreliable.

Boris

He’s gone (I think). It will be an amusing spectator sport to guess who will take over, and I may have a bet on the outcome, but somehow it seems less compelling a sporting spectacle than Wimbledon or the cricket. My guess is that it will be someone dull and wooden. The Tory party has had enough excitement already this parliament. The prospect of a general election with Keir Starmer going up against a clone does not make my pulse race.

Crypto

Crypto is not like housing. But it’s not like beanie babies either.

Net Interest writes about crypto and parallels to the GFC. He provides this list. Some crypto lenders pretended to be banks. This makes sense. Banks have the lowest cost of funding of any financial entity, so if you are doing any sort of lending, you want to be as bank-like as possible. If you can persuade people that they can lend you money without taking any risk that they’ll get it back, they’ll lend you it for free. In an inflationary environment, which is basically the whole globe, this means a negative real funding cost. The key to pulling this off is to convince people never to ask for their money back, because, well, they haven’t got it. People have lost faith in Celsius Network LLC. It’s perfectly possible they’ll lose faith in money-market funds, and even third-tier banks. Once this starts happening, there is a rush for the exit and people get crushed.

I don’t think governments will do this for Celsius. But once confidence ebbs, they may regret that decision. No, I don’t think that the Ponzi scheme promoters who run these firms deserve to be bailed out either, nor did I think that Jamie Dimon should have been. But I kind of understand why it was done.

The elephant in the room is Tether. It’s clearly a Ponzi, but it’s held up so far. Once it goes, Bitcoin will surely implode. Once Bitcoin craters, surely all the alt-coins will follow it. Will the pain stop there? I really am not sure it will.

Wrap

The payroll number was high: 372K new jobs last month. The equity markets slumped, because the assumption is that this increases the risk of more and more aggressive rate hikes. The only thing that matters seems to be the Fed. The expected risk off pattern emerged, at least ast of 5:50 UK time for other markets: yields up, commodities up, dollar up.