Wednesday 15, June 2022

The worst of times?

It looks as though globalization, and with it the massive boost to the world’s labour supply, has paused if not permanently ended. The war in Ukraine is likely to drive a wedge between the West and Russia, and the West and China. Reshoring will drive up demand for labour in developed markets. That together with fairly negative demographic trends will surely boost labour returns and, from there, inflation.

In Western markets, we’ve seen extremely poor productivity growth, both labour and total factor. Maybe a tight labour market will fix this. Certainly, an abundance of savings, plus surplus labour supply, did the opposite, with productivity growth disappointing everywhere outside Asia. It’s a hard trick to pull off though. Many governments have tried, but nearly all have been found wanting.

Are conditions really tightening?

The Chicago Fed thinks not. A lot of inputs go into this metric. I am not sure it means much, but if the FOMC looks at this report, they won’t shy back from hiking. Of course, the Atlanta Fed GDP Now metric has just been reduced to 0. Which means that the Fed has already created a recession. Once we are in one, I wonder if it’ll keep hiking as long as inflation is elevated. Stagflation, baby!

Wrap

I’ve been out of circulation for a few days. What timing! The world is in meltdown over inflation. Biden has sent a letter to the oil industry asking it to increase refinery capacity, to cut fuel prices at the pump, somehow oblivious to the rhetoric of the past couple of decades about reducing dependence on oil. Zerohedge is not measured, but it is hard hitting. Read it’s take here.

My take on all this is that oil (WTI & Brent) will continue to go up. In a sane world, Biden would sell off the Special Petroleum Reserve (timed to reduce gas prices immediately before the mid-terms), but ahead of doing so, hedge the cost of replenishing it by buying forward a few quarters. I am not sure he’s done this: forward prices are pretty flat.

I’m with Kuppy: I think forward oil prices have a long way to go, in one direction, up. At least in dollar terms.

I’m still under the weather, so I’m going to skip the usual Twitter content. The Zerohedge piece has some nice embedded tweets.

It looks like the ECB has started buying BTPs, as the spread against Bunds was blowing up. The Eurozone has held fast much longer than most commentators thought possible, including the rolling crises of 2008, 2011 and 2014. The 2022 recession might prove its downfall. Don’t really know how to play this: maybe short EUR.USD? There will probably be some pretty violent price action as the ECB and European central banks try to stop out those betting against the Euro, so if you don’t have resources like Soros, it maybe better to stand well back.

The summer is nearly here, and many big market players are taking off positions, not

Wrap Update

Well, J Poww really did go for 75bp, and the Nasdaq mooned. Not sure it’ll stay up, though. Sometimes the reaction on the day is reversed the following day. Crude cratered (well, down ~2.6%). If the markets think that 75bp will crush inflation, maybe this makes sense.

Crypto markets took another hammering. These fabulous ‘risk free’ yields that crypto quasi-banks were offering were clearly unstable. I guess at some point there’ll be a relief rally.

DXY is now at 104.7. The dollar really is the cleanest shirt in the laundry basket.