By Michael Every of Rabobank
Back at what feels like the beginning of time, one of my --quite traditional-- high school teachers embedded in me the question that I should always consider when reading any source or data: ‘Cui Bono?’ - "to whom is it a benefit?" That is to ask, who wrote what I am quoting? From what standpoint? To what end? And in terms of data, besides the quality of results, who paid for the study? What ideological framing, if any, may have slanted the results? And which study, that might have provided different answers, was not carried out and why – and can you find someone who did that work elsewhere? Nowadays of course a far more essentialist variant of this critical thinking is prevalent in many Western education systems, but the same lens can be turned on it too, as it arguably should be on everything. Trust me, this really matters for markets, because there are so many examples of where just a little incredulity, rather than instant credulity --“because markets”-- might be of analytical benefit to us all.
How about the classic past example of Alan Greenspan, former Fed Chair and ‘guru’, who in 1983 argued it was necessary to raise workers’ social security taxes to bridge the fiscal deficit following the Reagan tax cuts for the rich in 1981; then, after Clinton’s 1993 tax hikes partially reversed Reagan’s second tax cut for the rich in 1986, and there was an economic boom fueled by Greenspan’s own monetary-policy tech bubble, in 2001 he argued the US fiscal surplus was a problem - and the only solution was a massive $1.3 trillion Bush tax cut aimed again at the rich. (NB Greenspan was not arguing that fiscal surpluses are harmful from an MMT perspective!) What did one expect from a man with a crush on Ayn Rand?
Another more recent past example floated last week was that anyone with a knowledge of heterodox economics could have also seen in advance that QE could never achieve its key goals. Central banks may keep saying it has, but the slump in productivity and inflation, and the gig/hawkerisation of the pre-Covid economy, all made abundantly clear this was Greenspanish thinking. Indeed, now we see that it is *fiscal policy* and ‘Build Back Better’ that are required to stop the rot, and rotten populism: where were all these thinkers for the last few decades? And cui bono in their absence?
This issue is pertinent today too because there is an ongoing debate about if we are going to ‘beat’ Covid in the way the general public conceives of these things. Scientists -–not the ones you hear most from, or the ‘data’ variant-- always made clear vaccines would not stop Covid in its tracks if, like other such viruses, it mutated into something more dangerous and/or transmissible, which vaccination can theoretically accelerate in a process known as ADE. (And on which the jury is still out.) There is a popular misconception that at some critical threshold of vaccination Covid just ‘goes away’, but the science, regardless of who Twitter bans, suggests that happy outcome will arguably only happen if new variants become milder, like a ‘flu.
So what should we do? In Australia, which was aiming for Zero Covid a few months ago, the health advice in New South Wales is now that: “We need to get used to being vaccinated with Covid vaccines for the future” and that Covid is just going to be part of our lives from now on. And, indeed, Israel is preparing for a fourth booster shot in early 2022. But at some point ‘cui bono?’, and what the cost/benefit analysis of this is, will again be at the forefront of public and government debate; and the different answers that are generated will produce deep social and international splits. As if we are short of them!
Indeed, the issue is doubly pertinent because just as Covid is not ‘sorted’, neither is the economy. Regardless, much-heralded ‘Build Back Better’ is already being forgotten in major economies - apart from China, where it is being greeted with genuine shock and consternation by markets. True, there is the US $3.5 trillion fiscal package and the infrastructure deal - but will they pass? (And how productive that spending would prove is another question.) Yet the US just saw 7.5m people lose extended unemployment benefits yesterday, and another 2m lose an additional $300 in weekly top-ups, on top of the lapse of the eviction moratorium. EU governments are heading in the same direction, as is the UK.
Some say it will end in economic ruin, and the only option is for more public hand-outs from now on: Cui bono, beyond the recipients? And there are those who say that this will work out fine because there are so many job openings in more productive sectors it will be a positive shock to the economy: Cui bono on *that* assumption?
Meanwhile, let’s look at the (limited) evidence from Israel, which: 1) vaccinated rapidly; 2) opened up; 3) got hit by Delta; 4) did 3rd shot boosters and is planning 4th; and 5) has removed pandemic economic job assistance in an economy with a stark divide between high- and low-productivity sectors. What do we see there? That unemployment has jumped – and stayed high. The headline was 5.0% in July against a peak of 5.5% earlier this year, and on a broad basis 8.4% vs. 9.0% the month before and a peak of 18%. Moreover, low-skilled workers are quitting their jobs at record levels even though the transition from waiter to high-tech is hardly an easy one for most. It seems Covid has forced a reassessment of life choices for many, with fewer willing to work for low wages in low status, low productivity, high stress sectors: that is a trend we also see among truckers/delivery drivers in the US and UK (not helped by tax changes and Brexit in the latter), which is exacerbating current supply chain dislocations.
Against that backdrop, is paying people more in welfare a good decision, “because big government”? Is telling people to go back to low wages in low status, low productivity, high stress jobs or starve, “because markets”? Indeed, aren’t workers suggesting they would prefer something more shocking to markets, along the lines of China’s ‘Build Back Better’, e.g., on-shoring supply chains, boosting infrastructure, lowering costs of living, and redirecting capital towards higher paid, higher tech, higher productivity manufacturing jobs? Cui bono? And who *doesn’t* benefit?
Well, China’s mega developer Evergrande for one is looking ever less grand, as it struggles to raise $7.4bn in short-term debt obligations, its bonds are no longer eligible as collateral, and some are suspended on one Chinese exchange, even it talks of default risks, and Chinese USD junk bond yields, particularly for property developers, gap higher in unison. Not that this kind of mega credit event matters for CNY, of course, which is a precursor of what markets look like when they have broader social goals.
Indeed, the full market implications (even if means no actual movement!), from tapering(!) QE to fiscal stimulus, to what kind of fiscal stimulus, to geopolitical tensions, arguably all run through what happens next with Covid, and on our attempts to impose idealized views of it and other things onto a very complex reality without thinking about who benefits, and why we ourselves are using those arguments.
US Meat Prices To Remain Elevated Amid Depleted Reserves
US Meat Prices To Remain Elevated Amid Depleted Reserves
Beef, pork, and chicken in US cold storage warehouses have yet to recover from pandemic…
Beef, pork, and chicken in US cold storage warehouses have yet to recover from pandemic lows and could continue to support higher prices.
New United States Department of Agriculture (USDA) data shows beef reserves dropped 7.7% from a year ago in August, poultry supplies fell 20%, and pork plunged 44% to their lowest levels since 2017, according to Bloomberg.
Jim Sullivan, commercial director for Stable USA, said low meat inventories would suggest meat prices will stay elevated.
"Prices remain very elevated compared to seasonal expectations," Sullivan said.
Soaring supermarket prices have been on the radar of the Biden administration as working-poor families allocate a high percentage of their incomes to basic and essential items. Higher food inflation eats away their wages and is why Biden recently increased SNAP benefits by a quarter.
Earlier this month, the Biden administration finally addressed inflation as a concern but didn't blame the trillions of dollars in fiscal and monetary policies and labor shortages on increased food inflation but instead placed responsibility on meatpackers.
White House National Economic Council Director Brian Deese said "pandemic profiteering" food companies are driving up supermarket costs for Americans. This is nothing more than a blame game and failed government policies that have not just increased food prices but have left supply chains reeling due to stimulus checks that disincentivized workers from working.
New data of low meat supply at US cold storage facility is more bad news for the Biden administration, who will have to develop a new narrative about why meat prices aren't going down. If food inflation remains elevated into early next year, Americans might vote with their wallets during next year's midterms.
Where Do Monetarists Think the PCE Price Level Is Going To?
From an email from Tim Congdon, at the International Institute for Monetary Research (9/20): I suggest that a more plausible figure for end-year PCE annual…
From an email from Tim Congdon, at the International Institute for Monetary Research (9/20):
I suggest that a more plausible figure for end-year PCE annual inflation is between 5½% and 6%. (The consumer price index – up by 4.5% in the first seven months of 2021 – may finish the year with a rise somewhere in the 6½% – 7½% area.)
The conclusion is based on the following reasoning:
In the background here is the huge overhang of excess money balances. In the year to mid-May 2021 the M3 measure of broad money increased by 35%. The evidence over many decades is that – in the medium term – the growth rates of money, broadly-defined, and nominal gross domestic product are similar. So – unless that 35% number is now followed by a big contraction in the quantity of money – the US economy will continue to be affected by two conditions, specifically,
• ‘too much money chasing too few assets’, and
• ‘too much money chasing too few goods and services’.
Of course the two conditions are interrelated and also interact with each other. Our research emphasized last year that rapid money growth was likely to boost asset prices first, and that has been right. (Incidentally, to attribute the behaviour of the prices of US tech stocks to bottlenecks and supply shortages would be daft. Does one have to say these things?)
What’s the implied path of the PCE deflator, relative to nowcasts and forecasts? See Figure 1, where I’ve used the mid-point of Congdon’s forecast (5.75% December y/y), shown as the red square.
Figure 1: Personal Consumption Expenditure deflator (black), Congdon midpoint forecast (red square), Cleveland Fed nowcast as of 9/23 (sky blue +), Survey of Professional Forecasters August median forecast (green line), FOMC 9/22 projections (blue square). Source: BEA, Cleveland Fed, Philadelphia Fed/SPF, Federal Reserve, and author’s calculations.
The FOMC median forecast is surprisingly similar to the Survey of Professional Forecasters’ median forecast from the preceding month (mid-August). The FOMC members then still perceive a deceleration in inflation in the last half of 2021.
Congdon’s forecast looks plausible given the August PCE deflator nowcast (and even more using the September). However, it’s far outside of the range projected by the FOMC, as shown in Figure 2, which includes the high/low inflation forecasts.
Figure 2: Personal Consumption Expenditure deflator (black), Congdon midpoint forecast (red square), Cleveland Fed nowcast as of 9/23 (sky blue +), FOMC 9/22 projections (blue square), high and low forecasts (dark blue +). Source: BEA, Cleveland Fed, Federal Reserve, and author’s calculations.
In other words, the monetarist view (if I can use Congdon’s view as a proxy) differs from both a mixed bag of mainly mainstream economists (proxied by the Survey of Professional Forecasters) and policymakers (the FOMC).inflation monetary reserve fed
US stocks march on, lifted by business optimism
Benchmark US indices closed higher for the second consecutive day on Thursday September 23 lifted by positive sentiments from Fed s economic outlook…
Benchmark US indices closed higher for the second consecutive day on Thursday, September 23, lifted by positive sentiments from Fed’s economic outlook.
The S&P 500 was up 1.21% to 4,448.98. The Dow Jones rose 1.48% to 34,764.82. The NASDAQ Composite rose 1.04% to 15,052.24, and the small-cap Russell 2000 was up 1.82% to 2,259.04.
Traders ignored the weak unemployment data released by the Labor Department on Thursday, which showed new jobless benefits claims rose by 16,000 to 351,000 in the week ended Sep 18.
Economists consider the rise in benefits claims to be because of Hurricane Ida and forest fires and not due to flawed policy action. On Wednesday, the Fed said that it might start withdrawing stimulus support from November. The statement raised confidence in the economic recovery.
Financial stocks were among the top movers on S&P 500 Thursday, while energy and real estate stocks declined. Stocks of BlackBerry Limited (BB) rose 12.08% a day after reporting quarterly results. Its revenue rose to US$175 million in Q2, FY21, from US$174 million in the year-ago quarter.
Accenture plc (ACN) stock jumped 2.63% after reporting its fourth-quarter results. Its net income was up US$1.43 billion from US$1.30 billion in the same quarter of the previous year.
Salesforce.com, Inc. (CRM) stock rallied 7.38% after it raised the full-year revenue guidance. It expects its FY 2022 revenue to be US$26.35 billion, up from its earlier forecast of US$26.3 billion.
In the energy sector, Exxon Mobil Corporation (XOM) rose 3.58%, Chevron Corporation (CVX) gained 2.51%, and ConocoPhillips (COP) gained 2.45%. Kinder Morgan, Inc. (KMI) and EOG Resources, Inc. (EOG) advanced 2.51% and 2.76%, respectively.
In the consumer discretionary sector, Nike, Inc. (NKE) increased by 1.26%, Starbucks Corporation (SBUX) gained 1.25%, and General Motors Company (GM) rose 2.24%. Ross Stores, Inc. (ROST) and Hilton Worldwide Holdings Inc. (HLT) ticked up 1.62% and 4.30%, respectively.
In financial stocks, Berkshire Hathaway Inc. (BRK-B) rose 1.65%, JPMorgan Chase & Co. (JPM) jumped 3.35%, and Bank of America Corporation (BAC) rose 3.79%. Wells Fargo & Company (WFC) and Morgan Stanley (MS) jumped 1.58% and 2.86%, respectively.
Futures & Commodities
Gold futures were down 2.05% to US$1,742.40 per ounce. Silver decreased by 1.71% to US$22.515 per ounce, while copper fell 0.48% to US$4.2317.
Brent oil futures increased by 1.38% to US$77.24 per barrel and WTI crude was up 1.37% to US$73.22.
The 30-year Treasury bond yields was up 5.04% to 1.941, while the 10-year bond yields rose 7.71% to 1.434.
US Dollar Futures Index decreased by 0.39% to US$93.100.dollar gold silver commodities policy fed us dollar
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