By Michael Every of Rabobank
Right In The Goolsbees
Let me ‘shock’ you: financial press headlines are often wrong in multiple ways. The sin can be one of omission, in that they don’t cover key stories (like the Hunter Biden laptop, or the Durham report’s evisceration of Russiagate). Other times they cover stories that aren’t happening as portrayed (like the politicized intelligence-agency rebuttal of that laptop story, or Russiagate). But most often it’s erroneous post hoc ergo propter hoc: X happened because of Y. And these aren’t silly errors, but shilly ones.
Bloomberg says US stocks rallied yesterday because debt ceiling fears receded. Maybe. Yet on FinTwit there is a strong view that the actual driver was neck-deep 0DTE options trading, again. That isn’t as good a story if you want to be bullish stocks: “Equities rise on further premium-collection options strategy akin to CDS before the GFC: Investopedia notes their expiry can be extremely lucrative or costly as stakes are high at this late stage, and a lot can happen in a day.” That’s less likely to keep bums on seats and assets under management (AUM) growing.
Did you also know that most analysis of reported central bank speech is based on bullet point quotes of only a few words rather than the entire interview/speech? That’s partly because there are so many of them, and partly due to our ADHD environment, where what we take as talent today would merely be holding the paint brush or chisel for past Michelangelos. I sometimes insist on watching an entire interview or reading a whole speech for nuance and context, but I fall into the same trap too due to time pressures. For example, yesterday I quoted Fed Vice-Chair Goolsbee sounding hawkish (“services inflation is more persistent than previously thought, and he wasn’t sure if the Fed had restrained the economy sufficiently yet“). However, that didn’t represent his entire thinking given Goolsbee also noted that “Mocking immaculate disinflation is a mistake because there was a large component that was immaculate inflation.” In which case let me take the time to engage in something I do thoroughly and regularly: said mockery.
“Immaculate disinflation” is stupid. We might get disinflation in some sectors for a while, but if so it’s going to be painful, alongside a biting recession that you have to be a first-order thinker not to see would trigger a fiscal response, restarting the inflation cycle.
“Immaculate inflation” is as stupid. Only a central banker thinking rates didn’t need to rise in 2021 as there was no inflation pressure despite fracturing supply chains, Covid labor shocks, and fiscal-transfer demand shocks first in goods, then in services, could come up with it. Said inflation is as “immaculate” as one looks after a weekender at a muddy Glastonbury hanging with the Fabulous Furry Freak Brothers at a 24/7 psychedelic dance tent.
Linking bad reporting, snapshots, and central banking, yesterday’s Financial Times said ‘Bank of England governor admits UK economy suffering from wage price spiral’. That would be a devastating official assessment. Our views of the US from Philip Marey, the Eurozone from Elwin de Groot and Bas van Geffen, the UK from Stefan Koopman, and Australia from Ben Picton are of real risks of wage-price spirals, and hence rates being higher for longer, but none are making that claim in full – yet. Indeed, as Stefan noted in response to the FT, Bloomberg covered the BOE speech better in talking of “a risk of inflation persistence,” as a spiral means each curve should be above/wider than the one before, which is not happening – yet.
Yet smacking central-bank doves, immaculately, right in the Goolsbees, IMF no.2 Gopinath says she sees “sizeable risks” inflation will remain high or accelerate globally, most so in emerging economies. She said markets were probably “too optimistic” about what it would take to bring down inflation because “price pressures seem entrenched,” and stressed “central banks must remain resolute in keeping policies tight and recognize that insufficient monetary tightening now may necessitate even more painful actions down the road,” as the lessons of the 1970s still apply today. As such, this is getting reported much, even as bullet points.
That’s as Australian 12-month consumer inflation expectations came in at 5.2%, up from 4.6% and 5.0% a year ago. Yet jobs data were -4.3K vs. an expected +25K, with part-time +22.8K, boom time, and full-time -27.1K, bust time; or just bad data time. In terms of capping wage pressures, the 400,000 new workers, 1.5% of the population and 2.9% of the labour force, arriving in Australia this year might help. But they will also lift already sky-high rents even further as higher rates see housing construction stop; and higher rents mean higher wage claims and/or higher inflation; or no spending on anything else at all. That’s bowling the RBA a Goolsbee.
Related to the inflation/deflation debate, geopolitics still lurks. Markets are happy to cover it when it means deflation, e.g., when Turkey, not Russia, says the Black Sea Grain Deal is to be extended by Russia, and wheat prices drop 4.5%.
However, I doubt many morning notes will include The Economist story ‘Henry Kissinger explains how to avoid world war three’, where the centenarian says, “Both sides have convinced themselves that the other represents a strategic danger….We are on the path to great-power confrontation,” and the solution is that “America and China must learn to live together. They have less than ten years”. How?! And what does that imply for assets with a 10-year plus maturity?
At least it incentivises zero-day-to-expiry equities option trading, because frankly who knows how long we’ve got.