Rabobank: Everything is happening everywhere all at once
– Michael Every of Rabobank
Today’s title, referencing a soon-to-be-released movie that looks a superior version of a multiverse of madness than the one starring Dr Strange, nicely sums up our current global situation. Everything is happening everywhere all at once – yet key markets are failing to capture it or aren’t explaining the second or third order implications where they are.
At some point supply-shock-driven inflation is likely to bring about its own demise via demand destruction, and bond investors look to be signalling we are getting close to a tipping point for broad price gains even if wheat and crude stay elevated.”
I always listen to the bond market over the equity and FX markets; or at least I used to when we had a real bond market rather than one where yields are pegged by the BOJ, leaving otherwise silly FX as the only market with common sense. Today, one must add commodities as ones to watch. Oil and wheat are only a small part of CPI. However, you mess with them, and you mess with everything everywhere all at once, directly or via second or third order effects.
However, oil is at $113 and rising despite the slowdown. US retail gasoline just hit a new record high in nominal terms, and even in real terms is not far off the peaks seen around the Arab Spring- or the Iranian Revolution. Those in the know underline that even if more oil were pumped, it would not help because the problem is the structural lack of capacity at refineries, which will take a long, long time to reverse. That feeds into the price of almost *everything*.
With a lag, into food – which also leads to the price of everything else given demand is to a large degree inelastic. Unsurprisingly, we hear more warnings of food shortages.
Sri Lanka is officially down to its last day of petrol. It was already going hungry – now it will be immobile. Angry people were already burning down politicians’ houses. Now they seem to be attacking anyone looking wealthy. ‘Oh, that’s just Sri Lanka,’ some say. True. But Iran is seeing food protests; so is Tajikistan. Significantly lower bond yields, when oil and food prices are rising and demand is largely inelastic, and “demand destruction” means hunger, is not something that ‘just happens’ like it could when commodity prices were low. Especially not when it also implies a collapse in the stock market and in housing and soaring unemployment to boot. Yes, such a global risk-off phase may be bullish for core bond yields like the US and Germany – but in many places, it is a potential disaster. If Wall Street continues to say commodities don’t matter and inflation has peaked, the likelihood is that we will see dozens more African, Middle Eastern, and Asian countries experiencing exactly the same socio-political destabilisation.
Consider that if Wall Street is saying inflation has now peaked and is pushing bond yields lower, it is taking the Fed’s foot off the gas in terms of financial conditions – naturally, in a self-serving manner that helps prop up asset prices.
There is also another angle. To pencil in very low bond yields is to ignore politicians who are not going to ignore the risks of what is going on in Sri Lanka happening to them. There is now no mystery as to how one can raise long-absent final demand: you use fiscal policy. It was always that simple, it’s just that we had had decades of enforced ignorance rammed down our throats by ordoliberals. Yes, you also have to control supply chains to control inflation at the same time – but that won’t stop politicians from reaching for stimulus as soon as things turn down.
Do you really think that if unemployment, energy, and food all soar, and stocks and housing fall, that politicians will refuse stimulus measures? Yes, the UK government is telling people to cook meals for 30p(!), ride busses all day to keep warm, or to ‘get a job with higher wages’, but this is electoral ricin, and it is rumoured to be considering tax cuts by the summer. Elsewhere in Europe we see energy subsidies, which given supply-side constraints effectively push the burden onto the world’s poorest, creating more Sri Lankas. In short, don’t rely on fiscal policy to be restrained into a downturn.
Meanwhile, nominal pay is rising rapidly, and the worse things get, the more people will demand more of it. Yes, real pay is falling for many – but that is an impetus for more pay rises, and will not stop just because Wall Street says ‘inflation has peaked’: not when the alternative is homelessness, hunger, and ‘Sri Lanka’.
Also, deglobalisation is happening. As I have repeated regularly, it was never going to be driven by leftist sentiment about the working class vs. the upper class; but as soon as you make it a rightist shift over national security, it can and will.
Indeed, besides a focus on commodities, it is all geostrategy now. You can’t look at your usual market and not at what is going on everywhere else all at once. For example, Turkey is blocking Sweden and Finland’s entry into NATO. Given the pressures, all EM are under, and Turkey being a major energy and food importer, as well as reliant on exports to the EU, it is hardly likely to be positive for the struggling TRY, close to its record low of 15.66. Indeed, will soon-to-be-more-weaponized Fed swaplines to help flailing EM be made available to a country going down that geopolitical path?
Everything. Everywhere. All at once. Not your usual market metric going up or down a bit.
Article edited for brevity. Read the full article here.
