Twenty four hours

Renewables

Renewable energy turned out to be cheaper than expected. People are generally wrong about the future, especially a future decades off. Keynes spotted that: he basically said it was a waste of time trying to predict interest rates 20 years away. Krugman has argued that because predictions twenty years ago were very pessimistic, the current pessimistic predictions are wrong too, in the same direction. He may be right, but it’s not a no-brainer.

Corporate taxation

Biden is jacking up corporation tax rates. Rates jump all over the place, without any systematic impact on stock prices, which is odd. Robert Armstrong wrote a good piece about this. [We should tax economic rents. Maybe corp. profits are rents. Maybe big tech has rents, but the rest? Maybe corp. taxes reduce private investment.]

Chinese Credit

Leland Miller: Borrowing from Chinese State Owned Firms Shrinks Most on Record. This is a post from The Sounding Line. It points out how while money creation in the US is growing at a huge pace, China is trying to de-leverage its notoriously over-leveraged economy. Deleveraging is always the tricky thing to do as a central banker. Which is, I guess, why they all want to put it off until it becomes a problem for the next board. The added complication is that it’s hard to see how the PBoC can keep the exchange rate stable against the dollar. I am not a massive dollar bear, but it’s hard to see how anyone can stop the RMB strengthening against the dollar. And as the RMB goes up, the currencies of all ASEAN countries are going to have to rise, since their economies are so tightly coupled with that of China’s.

This is probably not going to happen for a while, as the dollar (and dollar assets like US Treasuries) retains its safe haven appeal, but after the risk of another seizure of the world economy goes away, this must surely the way things will go.

Wrap

The reflation trade rides again! Markets spooked for some unknown reason. NDX down 2%. It is up 5% YTD, but in a market which is going bananas, this is not impressive. The gains from the “lockdown trade” of buying $NFLX and $PTON seem to be gone. Bonds were pretty flat. The dollar was up, 0.4% at 91.3. The only news which might explain this was that Janet Yellen conceded that if the economy overheats, interest rates might have to go up. I would have thought that this was a statement of the blindingly obvious, but it shows how twitchy this market is. The dog that did not bark was gold: it was down 0.8%. The GSCI commodities index was up ~1%, but this just reflects the heavy weighting of oil in this index. Oil was up 2%.

It might be worth looking at the work of Chase Taylor at Pinecone Macro. He is a terrific contrarian and explains why hydrocarbons will be the mainstay of energy production in the world for the next decade.

Chart

Inflation