Lost In Translation

By Michael Every of Rabobank

Our ECBeebies’ analysis of the ECB’s strategic review (“Lost in Translation”) notes there was no new stimulus. However, by shifting the focus on inflation reaching the 2% target to “well ahead” of the end of its projection horizon, the ECB emphasized it will be “persistently accommodative”. This may have added some downward bias to the markets’ reaction function to inflation forecasts, with the end-point of the staff projections becoming less indicative for policy. In short, the ECB is a loooong way from raising rates whatever data we see ahead. Which we already knew.

Indeed, as noted yesterday, one could speculate Lagarde may never raise rates, just as Draghi never did. Notably, the last ECB hiking cycle was now a decade ago, with two 25bp moves, rapidly reversed, and more, over 2012-15 following the Eurozone crisis. Moreover, *every* ECB hiking cycle has been followed by reversal: they hiked from late 2005 to July 2008, when the GFC was biting – and had to cut in October; and they hiked from late 1999 to late 2000, as the tech bubble was about to burst – and cut in May 2001. Are key messages being lost in translation somewhere?

On which, at a CNN Town Hall US President Biden was asked: “What is your administration doing to ensure the poor and middle class are not hurt by higher prices?” in light of the inflation risks from two multi-trillion dollar packages the White House is pushing. The reply was:

“No, look, here’s the deal. Moody’s today went out, Wall Street firm, not some liberal think-tank, said if we pass the other two things I am trying to get done, we will in fact reduce inflation. Reduce inflation. Reduce inflation. Because we are going to be providing good opportunities and jobs for people who in fact are going to be reinvesting that money back in all the things we are talking about. Driving down prices, not raising prices. And so it, it is, I, I, I sincerely mean this. Prices are up now. And they are up – for example, we’re in a position where you’re trying to build a house, trying to find two-by-fours and lumber. Well guess what? People stopped working. Cutting lumber. They stopped doing it because they, the unemployment was so…..Now all of a sudden there’s this need, because people are coming back and guess what, instead of paying ten cents, you’re paying twenty. You understand what I am saying?” (“Yes,” adds the CNN host; “No,” says I.) “It relates to what in fact is now needed because we’re growing.”

Trying to translate, high inflation is driven by a loss of labor supply, due to unemployment benefits, and as this reverses –yesterday’s surprise spike in weekly initial claims aside– so will inflation. Relatedly, a small business owner was told they needed to raise the minimum wage to $15 to get staff. That’s a worthy goal, and one which would help close labor vs. capital gaps; but SMEs are least-well placed to raise wages without passing those costs on; big corporations can – but generally just offshore or automate as an alternative.

Moreover, this view overlooks just how strained US supply chains are: there is almost no spare capacity on rails or road at present. One report just seen is of another US firm placing a two-week delay on all containers moving into Chicago, which will naturally have to sit in West Coast ports. Moreover, there is as large a problem with *international* supply chains as US demand surges. Yet, according to the president, even more demand won’t make things worse because this money will be “reinvested back in all the things”: so trillions in public spending will be saved by households and pumped back into Treasuries again? That’s how tax cuts for big businesses work, rather than driving investment, but Joe Public’s marginal propensity to consume is different, no? Anyway, Presidents Biden and Erdogan can swap their views on inflation as well as NATO next time they speak.

President Biden also had this to say on Covid-19: “And the question is whether or not we should be in a position where are why can’t the experts say we know that this virus is in fact it’s going to be or excuse we know why the all the drugs approved are not temporarily approved and but permanently approved, but that’s underway too.”

Which, to be fair, is in keeping with how little sense almost everything everyone in authority everywhere has been making in the last 18-months. As examples: US Senator Klobuchar has introduced a Section 230 bill specifically to punish social media if they allow public dissemination of virus “disinformation”; Dr Fauci is accusing Senator Paul of slander; Senator Paul wants a “criminal referral” for Dr Fauci’s actions; China refuses to cooperate with a WHO investigation into Covid-19 origins; and US Democrats just blocked a bill to force the Director of National Intelligence to declassify US investigations into it.

Indeed, on inflation and labor shortages and Covid, the UK now faces empty supermarket shelves, with people warned not to panic buy by the government – naturally producing panic buying? A list of key workers is now being made of those who do not need to self-isolate if ‘pinged’, which is so long that one wonders why they are still bothering to ping at all. But with Covid case numbers about to grow exponentially as restrictions are dropped, some experts warn, and pinging still a thing, pingmageddon looks likely to continue. Not coming soon to a supermarket near you.

So are we inflating or deflating? Reopening or locking down? Singing or pinging? Markets have difficulty translating this noise into a signal, but are erring on the side of caution (today) – while central banks are making it abundantly clear they are doing nothing.

Meanwhile:

Bloomberg purrs how China-US trade is booming despite tariffs and the trade/Cold War backdrop. Something appears to have been lost in translation there too. Covid is hardly normal times, and China’s SHARE of exports to the US, even under the current extreme circumstances, has *declined*. Imagine when things get back to normal – if that is still a thing.

Russia seems to be able to translate some things extremely well. The day after the US and Germany agreed a Nord Stream 2 deal to allow Germany and Russia to get everything they wanted, and Ukraine bupkis, Moscow is suing Kyiv for a slew of alleged offenses, including the downing of MH17(!); and there has been another major cyberattack on Western firms’ websites. (And on South Africa’s main port and rail system by the way, making more of a mess there.)

In China, Evergrande continues to wobble – as it waits to find out which particular de facto public bailout will emerge? Beijing has also announced Didi is facing “unprecedented” punishment for its US IPO, which may include a fine, the suspension of some operations, or the introduction of a state investor. In other words, the $4bn Didi just raised from the US may end being at least partly handed over to Beijing; or as a business loss; or nationalized. Wall Street singularly failed to translate those evident political risks “because markets”.

In Tokyo, the Olympics are about to start with fewer athletes, less sponsorship, no spectators, and no director of the opening ceremony – because of some far-beyond-lost-in-translation Holocaust jokes nobody in Japan was capable of Googling before hiring him for the job.

Happy Friday.