Category: zerohedge

It’s hardly a secret that commodity and raw material prices in China have been soaring: this was confirmed by last night’s April PPI inflation print which surprised the market to the upside and reached 6.8% Y/Y, the highest since 2017.

The frenzy culminated with Monday’s 10% one-day jump in iron ore prices which, as Goldman’s China strategist Hui Shan wrote this morning, “brought many questions from clients regarding the impact of upstream price increases on the Chinese economy and monetary policy” especially when it comes to the threat risk of tighter monetary policy/rate hike by the PBOC.

So to address these growing concerns that China may be in the early stages of commodity hyperinflation, Goldman addresses these questions below in collaboration with its commodities strategists.

Q: Is China demand as strong as the commodity prices suggest?

Based on our reading of both macro data (e.g., PMI and exports) as well as micro data (e.g., steel consumption and air pollution), we think on-the-ground demand remains solid. Our equity analysts’ channel checks confirm stable infrastructure and property activity and resilient auto and appliance production in April. However, it is important to emphasize that China’s role in the commodity market has changed somewhat from previous years in three ways.

First, we have seen manufacturing outperforming infrastructure and property investment in China, which is also consistent with the fact that prices of flat steel (mostly used in manufacturing) outperform those of long steel (mostly used in construction). And the key source of manufacturing strength is strong external demand, which in turn was driven by economic re-opening after mass vaccination and significant monetary and fiscal support overseas. Therefore, as our commodity strategists have argued, the incremental demand for commodities currently comes from ex-China.

Second, changes in China supply outlook play an important role. Tightened steel capacity swap rules and the anti-corruption campaign in the coal industry of Inner Mongolia have added supply pressure during a time when demand is strong. China’s commitment to “Carbon Neutral 2060”, which our equity analysts expect to generate profound impacts on upstream industries, further signals to the market that China’s supply of high-emission products such as steel, aluminum and cement is unlikely to respond to higher prices.

Third, geopolitical tensions introduce risk premium and complicate the picture. The most recent example is the announcement by the National Development and Reform Commission (NDRC) to suspend indefinitely all activities under the China-Australia Strategic Economic Dialogue. Although little details were provided and our ANZ economics team believes tariffs or restrictions on iron ore are very unlikely given China’s heavy reliance on Australian supply, the news may have contributed to the latest market moves given the inbound questions that we received on the headline.

Bottom line: China demand appears robust in level terms, but we do not think the latest commodity price increases indicate China’s commodity demand is accelerating.

Q: What near-term responses can we expect from Chinese policymakers?

Chinese policymakers have taken notice of the sharply rising upstream price inflation. For example, at the Financial Stability and Development Committee meeting chaired by Vice Premier Liu He on April 8, policymakers stated the need to “keep prices stable” and to “closely monitor commodity prices”. On April 9, Premier Li Keqiang hosted a meeting with economists and entrepreneurs where Premier Li called for “strengthening the management of raw materials markets” and “alleviating the cost pressure on businesses”.

The challenge from a policy perspective is that at the same point Beijing desires lower commodity prices, they are also focused on achieving their de-carbonization targets by restraining metals supply in sectors with significant spare capacity, relative low value, and high carbon footprint (e.g., aluminum and steel in particular). Policy induced constraints on both current and forward supply act as tightening effects on underlying balances and support price. Moreover, in an environment of both strong domestic and external demand as is currently the case, such supply cuts provide even greater price effect. Until there is a material deceleration in demand conditions to moderate current tightness across the majority of industrial commodities, the ability to sustainably restrain price dynamics is limited.

In regard to actual policy tools to alleviate the pain on downstream manufacturers, so far there have been a few channels of attempted influence by Chinese policymakers. The first is to reduce other types of costs faced by businesses. We think recent announcements on cutting taxes and fees fall into this category. Second, policymakers can encourage imports and discourage exports to help meet domestic demand. For example, the Ministry of Finance has removed the export tax rebate on 146 steel products effective May 1. Third, the government can deploy strategic reserves of commodities. And lastly, regulators have urged commodities futures exchanges to curb speculative activities.

Bottom line: Although some measures are available to policymakers to temporarily alleviate pressures, the fundamental supply and demand tightness is more difficult to address.

Q: What is the impact of higher upstream prices on China growth and inflation?

Rising prices are the mechanism through which the market finds a new equilibrium by destroying demand and/or incentivizing supply. The degree to which each of the two margins of adjustment happens depends on supply and demand elasticities. So far there has been little evidence of end-demand destruction at current price levels in the available China macro and micro data. However, one trend which has emerged from late Q1 onward is a phase of downstream metal destocking. This has been best demonstrated by the negative metals apparent demand growth rates in April after strong year-over-year growth in Q1. We believe this reflects essentially a temporary buyer strike, where downstream consumers destock inventory until they have to return to market given end-demand requirements. This trend could temporarily soften metal physical markets, although raw material stock levels suggest this should abate into Q3.

The potential for supply-side responses are limited by Beijing’s de-carbonization policy emphasis. In the short run, whilst there exists some spare capacity flex in the system, a combination of weak processing margins (e.g., copper, zinc) or policy constraints at a provincial level (e.g., aluminum smelting in Inner Mongolia and steel mills in Tangshan) offer headwinds to any output acceleration. At the margin we do expect some improvement in secondary based metals production from scrap, though the volumes will be limited in aggregate. The risk of net supply capacity additions from here is low particularly in the aluminum and steel (blast furnace) sectors. A hard cap on aluminum capacity will be hit this year after which only swaps will be allowed. For steel, a recent tightening in blast furnace capacity swap rules (1.5:1 old for new swap ratio) limits any expansion potential beyond shifts to electric arc furnace (EAF).

While higher inputs costs are impacting gross margins in some industries including auto, historical experience suggests that downstream profits at the aggregate level do not suffer greatly when upstream prices increase, likely due to the relatively small raw material share of total costs and producers’ ability to improve efficiency and/or pass some of the higher costs onto end-consumers. That said, the COVID shock is like no other, and we may see significant demand destruction if prices move higher for longer, particularly when supply has become much less responsive to price signals than before because of longer-term trends such as de-carbonization.

In previous research, we have found that PPI inflation only affects non-food goods in CPI and the pass-through is far from complete. Given the softening food price inflation on pork cycle and the muted service inflation on both economic slack and government policies aimed at reducing housing and medical costs faced by consumers, we think CPI inflation is likely to remain subdued even as PPI inflation reaches a multi-year-high.

Bottom line: The impact of higher commodity prices and upstream producer prices on Chinese growth and CPI inflation looks limited thus far.

Q: Will the upstream price inflation cause the PBOC to tighten monetary policy?

In the Q4 PBOC Monetary Policy Report, the central bank characterized the high PPI inflation and low CPI inflation as driven by “temporary factors”. The Q1 PBOC survey of urban depositors showed inflation expectations remained subdued among consumers. In April, Monetary Policy Committee (MPC) member Wang Yiming discussed the rebound in oil and metals prices and highlighted the need to “avoid strengthening inflation expectations.” Overall, the central bank appears to be paying closer attention to upstream price pressures and inflation expectations over the past few months.

On the other hand, interbank liquidity has been kept ample and 7-day repo rate has stayed below the policy rate of 2.2%, suggesting little signs of policy tightening on the back of sharply rising upstream prices. The lack of response from the central bank makes economic sense because the root cause of the latest commodity price rally is not China demand. As discussed earlier, stronger ex-China demand and supply concerns have played a bigger role in driving the market higher. If this diagnosis is indeed correct, then tightening monetary policy in China would not be an effective solution. If anything, the demand destruction impact of higher input costs may argue for accommodative monetary policy to offset the overall burdens on businesses as long as inflation expectations remain anchored.

Bottom line: We do not expect the PBOC to tighten monetary policy on higher upstream prices.

Authored by Andrew Korybko via OneWorld.press,

CNN’s recent report that the US’ security services are considering contracting the services of so-called “researchers” as a legal workaround for spying on average Americans confirms that Biden’s dystopian hellhole is rapidly moving in the direction of establishing a “Cyber Stasi” for suppressing all digital dissent against the Democrats as they continuing consolidating their de facto one-party rule of the country.

The dystopian hellhole that I predicted would become a fait accompli following Biden’s confirmation as President by the Electoral College is quickly becoming a reality after CNN’s recent report that the US’ security services are considering contracting the services of so-called “researchers” as a legal workaround for spying on average Americans. According to the outlet, these ostensibly independent contractors would be charged with infiltrating the social media circles of white supremacists and other supposedly terrorist-inclined domestic forces within the country. The report claims that the intent is to “help provide a broad picture of who was perpetuating the ‘narratives’ of concern”, after which “the FBI could theoretically use that pool of information to focus on specific individuals if there is enough evidence of a potential crime to legally do so”.

In other words, the US’ security services essentially want to establish a “Cyber Stasi” of “fellow” citizens who spy on one another and produce purported “evidence” of “potential crimes” for “justifying” the FBI’s “legal” investigations. CNN quoted an unnamed senior intelligence official who asked, “What do you do about ideology that’s leading to violence? Do you have to wait until it leads to violence?”, thereby hinting that this initiative might likely be exploited to stop so-called “pre-crime”, or crimes before they occur. Put another way, even those average Americans who practice their constitutionally enshrined right to the freedom of speech to peacefully dissent against the Democrats’ consolidation of their de facto one-party rule of the country might find themselves targeted by the security services depending on how the contracted “researchers” spin their words.

It should be remembered that even Americans’ constitutionally enshrined right to the freedom of assembly is nowadays under scrutiny depending on the stated reason behind their planned peaceful protests if they dare to propose gathering in opposition to last year’s alleged voter fraud for example. The events of 6 January were exploited as a game-changer by the security services in order to restrict Americans’ freedoms. It’s neither here nor there whether one sincerely believes that the election was stolen since the purpose in pointing these double standards out is to prove that average Americans are being politically discriminated against with the implied threat of legal intimidation when it comes to exercising their constitutional rights about “politically incorrect” issues of concern to them.

Although the reported purpose of the “Cyber Stasi” is to preemptively thwart emerging domestic terrorist plots, it can’t be discounted that the combination of political Russophobia and “mission creep” will combine to create additional objectives such as stopping the spread of so-called “Russian disinformation” throughout society. That phrase is actually just a euphemism for “politically incorrect” facts and interpretations thereof that contradict the Democrats’ official narrative of events, being intentionally vague enough to function as an umbrella under which to cover practically every alternative understanding possible. With this in mind, those average Americans who dare to share something “politically incorrect” – even in private chats amidst the presence of “deep state” infiltrators (“researchers” employed as “Cyber Stasi”) – might be targeted by the FBI.

The end effect is that the US’ security services might succeed in suppressing most expressions of digital dissent in the coming future. They’re inspired to do so by the ruling administration which wants to impose a syncretic system of economic leftism and social fascism onto the country. It’s not “communist” in the sense that the economic vision is more akin to state capitalism than traditional Marxism, but the social impact will certainly mirror that of East Germany during its darkest days of Stasi rule, though that’s precisely why many critics casually describe it as “communist” despite that not being economically correct (at least not yet). The US’ “researcher”-contracted “Cyber Stasi” will have a chilling effect how Americans interact with one another from here on out, all in order for Biden’s dystopian hellhole to avoid the fate of its predecessor, East Germany.

A few weeks ago, we reported that China, the world’s largest country, reported a shrinking population for the first time in 70+ years, a sign that the global economy might struggle with long-term structural deflation as the population across the developed world shrinks.

But according to the latest census data released Tuesday by China’s National Bureau of Statistics, China reported only 12 million births last year, the lowest annual reading since 1961, and down 18% from 2019.

Looking back at the last 10 years, China’s population increased by just 72 million people (between 2010 and 2020) bringing the country’s total population to 1.41 billion. That breaks down to an average annual growth rate of just 0.53%, slower than the 0.57% seen in 2010, according to the FT.

You will find more infographics at Statista

As analysts studied the data,  Nikkei reported that the declining population growth reflects China’s “failure of policies designed to reverse China’s falling birth rate. The rate of increase is the lowest since China first conducted a census in 1953. The fastest growth was the 2.09% recorded in the 1982 census.”

You will find more infographics at Statista

Unsurprisingly, the declining birth rate shows that China’s average age has increased substantially, posing a demographic crisis similar to what’s being experienced in Japan. People over the age of 65 now make up 13.5% of the population, compared with 8.9% back in 2010, when the previous census data was published. Meanwhile, the working-age population of people aged between 15 and 59 declined to 63.35% from 70.14%.

Ning Jizhe, the director of the NBS, told the FT that China’s democratic crisis actually doesn’t seem so bad when compared with the US, which has an average age of 38.8 years, compared with China’s 38 years. Still, “the further ageing of the population imposed continued pressure on the long-term balanced development of the population in the coming period.”

Source: Nikkei

But Ning noted that an aging population will likely be a salient feature of China’s demographic trends for years

“The proportion of the elderly population is rising fast, and aging will become the basic characteristic of our country in the future,” said Ning.

Even after Beijing scrapped its controversial one-child policy in favor of a “two child policy” a few years back, China’s fertility rate – which measures how many children the average female will have in her lifetime – is still a paltry 1.3, below the ~2+ level needed for population replacement.

But falling birth rates weren’t the only problem plaguing China’s cities. Another issue seen in more than a dozen cities, especially in China’s north-eastern provinces, is that an exodus of younger workers seeking opportunities in more “economically vibrant” regions (or perhaps even abroad) is adding further pressure in local labor markets.

Looking back, China’s population added 5.8% in the decade to 2010 and grew by double-digit percentage amounts between each of the previous censuses, which were held in 1953, 1964, 1982, 1990 and 2000.

Source: Nikkei

Such a shift will have a major impact on what economists call “the dependency ratio”, which refers to the burden shouldered by workers for caring for children and the elderly.

Goldman analysts broke it down in a chart.

Source: Goldman Sachs

To be sure, while China’s population growth is slowing, it’s still in a better position than other developed Asian economies like Japan and South Korea.

Something took place on Tuesday that has happened just once since 2016: Japan’s Topix index (which is widely viewed as more representative of Japanese equities than the Nikkei) tumbled by 2% in the morning session…. and the BOJ did not intervene.

Why is this notable? Because – in a world where everyone is now completely used to Plunge Protection Teams and central bank bailouts as if it is a perfectly expected event –  this was only the second time since at least 2016 that the Bank of Japan did not make an ETF purchase after the Topix fell more than 1% in the morning session. The only other time? April 21, when the Topix also tumbled 2% in the morning session and the BOJ was nowhere to be seen.

To be sure, the BOJ’s lack of intervention was to be expected: as a reminder, the central bank tweaked its ETF purchase program at the March meeting, with changes that came into effect in April. As part of its policy review, the BOJ on March 19 said it would buy ETFs as needed, scrapping the previously 6T yen annual target, but keeping its 12T yen upper limit on purchases

Until last month, the largest drop the BOJ would tolerate without buying ETFs was the 0.89% full-day decline on Feb. 24; In other words, any time the Topix would drop by 1% or more, the BOJ would step in or else there would be a market crash. Furthermore, before this year, the BOJ typically bought if the Topix fell more than 0.5% in the morning session.

This changed on April 20, when the Topix tumbled more than 2% in the morning session and contrary to trader expectations that they would get bailed out, the BOJ did not intervene, and led to a panicked stock dump in the morning of April 21, at which point the BOJ had no choice – it had to buy ot else it would suffer a far worse crash. And buy it did, purchasing 70.1b yen on April 21, the day after it so miserly withheld its bailout of Mrs Watanabe.

As Bloomberg notes, “today’s lack of action by the central bank may further fuel speculation that the bank will only step in if the drop in the AM session exceeds 2%; previously the bank had bought after a 0.5% decline.”

So keep a close eye on Japanese stocks, where frentic investors will likely test the BOJ’s resolve again by dumping stocks if only to test the new level of the “Kuroda Put.” And woe to Japan if there is a second 2% – or bigger – drop in a row in the Topix and still no BOJ bailout.

The situation in the Seychelles, an island nation that has suffered from a recent surge in COVID-19 cases despite boasting the world’s highest vaccination rate, is going from bad to worse.

Since we last reported on the Seychelles one week ago, the island nation has faced a fresh surge in COVID cases.

The vaccine failure cannot be determined without a detailed assessment, said the WHO. The hike in coronavirus cases has stoked concerns that the jabs might not be helping to suppress the island nation’s COVID-19 outbreak. A vaccine failure can’t be determined without a detailed study by the WHO, however.

Presently, the health body is in direct communication with Seychelles and working on evaluating the situation, said Kate O’Brien, director of the WHO’s department of immunization, vaccines and biologicals at a briefing on May 10.

The Indian Ocean archipelago nation started vaccinations in January when it introduced the Chinese-developed Sinopharm vaccine. It administered Chinese vaccine shots to 57% of those who were fully inoculated and the rest received vaccines that were made in India.

Since last week, the number of active coronavirus cases has more than doubled to 2,486 people. Of these, 37 percent of the population have received both the vaccine doses, as per the report.

Due to the surge in COVID-19 cases, Seychelles re-imposed curbs last week, including closing schools, canceling sports events and banning mingling of households.

Seychelles’ first two positive cases of COVID-19 were confirmed on March 14, 2020. The two individuals were a couple from Seychelles who had returned from a trip to Italy. Aftre this, the country imposed a nationwide lockdown in which most shops, businesses and schools were closed for 21 days in April. The airport was also closed and ships were prevented from bringing tourists.

Finally, with the outbreak threatening to scuttle the island nation’s critical upcoming summer tourism season, Seychelles President Wavel Ramkalawan insisted that the island is safe for visiting tourists.

Still, the fact that so many residents are being reinfected with COVID despite being fully vaxxed is raising questions about the efficacy of the Chinese and Indian-made jabs.

Via The American Institute for Economic Research,

Economist Judy Shelton had a crackerjack column in last week’s Wall Street Journal on the lack of intellectual and policy diversity at the Federal Reserve. She points out that during the entire term of Chairman Jerome Powell and his predecessor, Janet Yellen, not a single dissenting vote was recorded among the governors. It reminds us of the central bank of the Soviet Union.

Is that what we want – GosFed? That’s our jibe, not Ms. Shelton’s. It’s a play on Gosbank, for Gosudarstvenny Bank, the name of the Soviet central bank. It’s not our intention to suggest that our Fed or anyone associated with it is a communist. All the more mystifying, though, is the absence of dissent among GosFed governors, particularly when a new administration is readying vast new spending.

It “may surprise people to learn,” Ms. Shelton writes, “that not a single dissenting vote was cast by any member of the Fed’s Board of Governors throughout the eight monetary-policy meetings in 2020 and the three meetings held so far this year. The same is true for 2019, 2018, 2017, 2016, 2015 and 2014, covering Mr. Powell’s years as Fed chairman and the entire term of his predecessor, Janet Yellen.”

“No Fed governor,” Ms. Shelton adds, “cast a dissenting vote from the Fed chair at any monetary policy meeting held throughout that time.” Presidents of regional Fed banks have during this period done some dissenting in the open market committee, but no break by a Fed governor with the chairman has fetched up on our scope in recent years.

It’s all the more powerful a point if one considers the unprecedented growth of the Fed balance sheet, which is now something like $7.8 trillion. Most of the securities that make up that debt, even if acquired on the open market, are obligations of the government of which the Fed is a part. That, incidentally, is how GosBank worked. Ms. Shelton wrote a warning about that, too, and also in the Wall Street Journal.

That piece, issued in July 2012, was called “The Soviet Banking System — and Ours.” Ms. Shelton wrote that “[u]nder Soviet accounting practices, the true gap between concurrent revenues generated by the economy and the expenditures needed to sustain the nation was obscured by a phantom ‘plug’ figure that ostensibly reflected the working capital furnished by the Soviet central bank, Gosbank.”

That is, as she puts it at one point, “The Soviet central bank was making up for the difference between government revenues and government expenditures by creating empty credits to be disbursed by central-planning bureaucrats.”

When Mikhail Gorbachev acceded to party boss in 1985, Ms. Shelton writes, the budget deficit the central bank was covering was more than 30% of total government expenditures.

Neither Ms. Shelton, as we read her pieces, nor we are suggesting the American economy is at quite that point or is false in the sense that the Soviet Union’s was. The system of having the Gosbank create money to fund the state, though, didn’t turn out so well. It’s getting harder by the year to see, as well, how the GosFed is going to come out whole in the end as well.

It’s maddening to see the Fed governors plunge down this road without recorded dissent. We made this point when the Democrats on the Senate Banking Committee were maneuvering to block Ms. Shelton’s nomination to a Fed governorship because she isn’t a “mainstream” economist. So did the Wall Street Journal. As did James Grant, who in 2016 wrote about a call by Democrats for more diversity at the Fed.

Mr. Grant, in his Interest Rate Observer, noted that what the solons — including, among others, Senators Bernie Sanders and Elizabeth Warren — wanted was diversity in race and gender on the mostly male and white Fed boards. Mr. Grant focused on “the kind of diversity that would leave the monetary establishment constructively rattled” — governors and economists who would question 21st century monetary dogma.

That question looms today at not only the Fed. We now have, in Janet Yellen, a former chairwoman of the Fed as Treasury Secretary. Dissent is also scant between the Fed and Treasury, as we launch these multi-trillion-dollar commitments. It’s easy to see why the comrades of Gosbank showed so little dissent. Say, or think, the wrong thing in the Soviet Union, and you risked a one-way ticket to Siberia. What in the world is GosFed’s excuse?

A tiger that was seen roaming loose in a Houston area neighborhood over the weekend has yet to be located – but its owner has been identified and arrested.

The exotic animal reportedly belongs to a man named Victor Cuevas, who was out of jail on bond on an “unrelated murder charge”, according to local ABC affiliates. “Cuevas is accused of shooting and killing a man in July 2017 and is out on a $125,000 bond,” the report reads.

Go figure.

Cuevas “is known to possess several exotic animals”, the report reads. Authorities took Cuevas into custody at his mother’s house on Monday, the same day he was supposed to turn himself in to the Harris County jail. Cuevas evaded police on Sunday and was also charged with felony evading arrest, as a result. 

Cuevas’ lawyer, Michael Elliot, wasn’t thrilled about his client being apprehended on the same day he was supposedly planning to turn himself in. Elliot said: “Fifteen minutes before he leaves to surrender, (HPD) go and arrest him, and the result is they get to keep him there for 10 days now.”

Paying adage to the famous “I was just holding it for a friend” defense, Elliot also maintains that the tiger doesn’t belong to Cuevas, but rather that he simply “knows the owner”. 

“There’s a lot of misunderstandings and miscommunications and a lot of things put out there falsely that’s very troubling. First off, The Houston Police Department here. I know they’re trying to do their job. Everyone wants to know about the tiger and their safety. Make no mistake, there’s no crime of having a tiger in the state of Texas,” he said.

However, ABC reviewed Cuevas’ Instagram and found he was “no stranger” to exotic animals:

The videos show him playing with a baby bear, feeding it with a bottle, and giving the bear kisses in his home. There are also videos of at least two monkeys. Cuevas is seen taking one monkey with him while he was having dental work done, and taking another monkey to a convenience store, where the clerk was not pleased. In addition, several videos show Cuevas cuddling with a young tiger.

Police had responded to a call about the tiger on Sunday. HPD Commander Ron Borza said: “The owner put the tiger in a white SUV and drove off from the scene, there was a brief pursuit, and the man got away with the tiger. My main concern right now is focused on finding him, and finding the tiger, because what I don’t want him to do is harm the tiger. We have plenty of places where we can take the tiger and he can spend the rest of his life.”

Our Animal Cruelty Unit, along with @BARC_Houston are currently investigating the incident in which a tiger was seen at 1103 Ivy Wall Drive about 8 p.m. on Sunday (May 9). The male owner was seen escorting the tiger to the residence then putting it into his vehicle. 1/3

— Houston Police (@houstonpolice) May 10, 2021

Cuevas’ neighbor, Jose Ramos, said: “I did notice one time, and this is something interesting, that I was walking by my driveway. There was a capuchin monkey that showed up in the window. I figured, ‘OK, this is a small animal. It could be domesticated.’ But I never thought they would hold a tiger in their house.”

Authored by Andrew Chen via The Epoch Times (emphasis ours),

Economics professor Doug Allen wanted to know why so many early models used to create COVID-19 lockdown policies turned out to be highly incorrect. What he found was that a great majority were based on false assumptions and “tended to over-estimate the benefits and under-estimate the costs.” He found it troubling that policies such as total lockdowns were based on those models.

“They were built on a set of assumptions. Those assumptions turned out to be really important, and the models are very sensitive to them, and they turn out to be false,” said Allen, the Burnaby Mountain Professor of Economics at Simon Fraser University, in an interview.

Allen says most of the early cost-benefit studies that he reviewed didn’t try to distinguish between mandated and voluntary changes in people’s behaviour in the face of a pandemic. Rather, they just assumed an exponential growth of cases of infection day after day until herd immunity is reached.

In a paper he published in April, in which he compiled his findings based on a review of over 80 papers on the effects of lockdowns around the world, Allen concluded that lockdowns may be one of “the greatest peacetime policy failures in Canada’s history.”

He says many of the studies early in the pandemic assumed that human behaviour changes only as a result of state-mandated intervention, such as the closing of schools and non-essential businesses, mask and social distancing orders, and restrictions on private social gatherings.

However, they didn’t take into consideration people’s voluntary behavioural changes in response to the virus threat, which have a major impact on evaluating the merits of a lockdown policy.

“Human beings make choices, and we respond to the environment that we’re in, [but] these early models did not take this into account,” Allen said. “If there’s a virus around, I don’t go to stores often. If I go to a store, I go to a store that doesn’t have me meeting so many people. If I do meet people, I tend to still stand my distance from them. You don’t need lockdowns to induce people to behave that way.”

Allen’s own cost-benefit analysis is based on the calculation of “life-years saved,” which determines “how many years of lost life will have been caused by the various harms of lockdowns versus how many years of lost life were saved by lockdowns.”

Based on his lost-life calculation, lockdown measures have caused 282 times more harm than benefit to Canadian society over the long term, or 282 times more life years lost than saved.

Furthermore, “The limited effectiveness of lockdowns explains why, after one year, the unconditional cumulative deaths per million, and the pattern of daily deaths per million, is not negatively correlated with the stringency of lockdown across countries,” writes Allen. In other words, in his assessment, heavy lockdowns do not meaningfully reduce the number of deaths in the areas where they are implemented, when compared to areas where lockdowns were not implemented or as stringent.

Today, some 14 months into the pandemic, many jurisdictions across Canada are still following the same policy trajectory outlined at the beginning of the pandemic. Allen attributes this to politics.

He says that politicians often take credit for having achieved a reduction in case numbers through their lockdown measures.

“I think it makes perfect sense why they do exactly what they did last year,” Allen said.

“If you were a politician, would you say, ‘We’re not going to lock down because it doesn’t make a difference, and we actually did the equivalent of killing 600,000 people this last year.’”

You wouldn’t, he said, because “the alternative is they [politicians] have to admit that they made a mistake, and they caused … multiple more loss of life years than they saved.”

Allen laments that media for the most part have carried only one side of the debate on COVID-19 restrictions and haven’t examined the other side. Adding to the concern, he says, is that views contrary to the official government response are often pulled from social media platforms.

He says he has heard that even his own published study has been censored by some social media sites.

“In some sense these are private platforms. They can do what they want. But on the other hand, I feel kind of sad that we live in the kind of a world where posing opposing opinions is either dismissed, ignored, or … name-called, [and] in some ways cancelled,” Allen said.

The NRA was dealt a serious blow on Tuesday after a Texas judge tossed the gun rights organization’s bid to declare bankruptcy, saying it was filed in “bad faith” in an effort to dodge litigation in New York.

Judge Harlin Hale tossed the case after New York Attorney General Letitia James and others questioned how legitimate the January 15th bankruptcy filing was, according to a report by Law 360.

#BREAKING: A judge has ruled in our favor and rejected the @NRA‘s attempt to claim bankruptcy and reorganize in Texas.

The @NRA does not get to dictate if and where it will answer for its actions, and our case will continue in New York court.

No one is above the law.

— NY AG James (@NewYorkStateAG) May 11, 2021

The group filed for Chapter 11 bankruptcy after James filed a lawsuit to dissolve the NRA – alleging that the organization has abused its status as a nonprofit, along with corruption, and a “culture of self-dealing, mismanagement, and negligent oversight” fostered by longtime CEO Wayne LaPierre.

The decision means that Hale will be able to more easily seize the NRA’s assets if she prevails in her New York lawsuit, where she argued that the group should be dissolved.

According to bankruptcy filings, the organization has $50 million more assets than their debt load, making the financially solvent. In their bid to restructure and move to Texas, the NRA claimed that New York’s regulatory environment is corrupt. NRA attorneys accused James, a Democrat, of waging a political campaign against the organization – and argued that Texas would offer a ‘regulatory haven’ for the gun-rights group.

Meanwhile, LaPierre faces additional litigation from James’ office, after the Wall Street Journal reported that the IRS is investigating him for potential criminal tax fraud.

Tomorrow we get a CPI number which according to consensus at least, will be historic: it will be the first 0.3% sequential increase in core (not the much higher headline) prices this century…

… a talking point which will merely underscore the recent surge in inflation fears across both companies (who can pass these rising costs on to consumers)…

… and consumers (who can’t).

Yet while households are growing more convinced with each passing day that higher prices will stick, with the NY Fed’s latest survey of consumer expectations revealing that over the next year consumers anticipate gasoline prices jumping 9.18%, food prices gaining 5.79%, medical costs surging 9.13%, the price of a college education climbing 5.93%, and rent prices increasing 9.49%…

… neither the Fed, nor sellside analysts are willing to concede as much yet. Take BofA’s chief economist Michelle Meyer, who expects core PCE inflation, the Fed’s preferred measure, to peak at 2.3% this quarter, before settling back down to 1.9% by the end of 2021. Meyer then expects prices to trend slightly higher over the medium term, eventually surpassing the Fed’s target consistently enough (and in an environment of full employment) that interest rate hikes will be warranted, possibly not until the second half 2023.

Needless to say, the market disagrees, and especially the bond market, where traders are pricing in far more inflation and faster Fed hikes than that. But, as BofA’s Jared Woodard notes, they often do, and are usually very early: as shown in the chart below, since 2007, rates implied by Fed funds futures have been, on average, 54bp higher than actual interest rates one year later.

But maybe this time will be different? As Woodard counters, the challenge for those who expect permanently higher or harmful inflation is to explain where it will come from. In response, the BofA strategist says he can see three possible sources of “permanent” inflation, if no no plausible ones.

1. Scarce goods

In 2020, many firms cut capacity and reduced inventories, expecting a long recession. The faster rebound has meant shortages in lumber, corn, copper, etc. Some bottlenecks may lack quick fixes (e.g. semiconductors), but many others can be resolved.

More importantly, whether necessitated by Covid or by the reorientation of supply chains toward reliable democracies, a period of higher capex should be tolerable. Many companies have proven pricing power, and in Q1, US corporate profit margins are at record highs.

Scarce workers

Woodard then predicts that there are also good reasons to think that any sharp surge in wages will end by Q4 for the following reasons:

• Labor supply is set to rise sharply.
• Generous unemployment insurance benefits expire in September,
• children will return to public schools,
• health concerns will be alleviated,
• firms will be able to hire from a broader pool of remote workers.

Indeed, we have 9.8 million unemployed workers and BofA economists expect an additional 2mm+ returning to the labor force by the fall, by which point the Biden unemployment checks will have expired. 

Meanwhile, those widespread reports of employers offering hiring bonuses…

… are a sign of a temporary mismatch, not an incipient spiral. “A bonus is not a raise”, according to BofA… although it’s a key part of one’s compensation – we wonder how many BofA bankers would work without one.

In any case, BofA believes that a higher long-term trend in wage growth would be positive for GDP and productivity: of the firms that said they will not raise capex in the latest Duke CFO survey, 2/3 said it is because they “have no need to expand capacity.” Persistent higher demand is necessary for sustained corporate investment. It’s, therefore, hard even to imagine a wage-spiral tail risk according to Woodard who argues that it would take steady wage gains of 10-12% to push inflation to the levels of the 1970s & 80s…

… and the US economy is structured very differently today. Non-elite unions are politically toothless. Technology penetrates every industry. The offshoring of more services is coming.

Excess demand

The last argument against persistent inflation is that there are also no signs of excess demand. The latest BofA consumer appears to affirm a “fiscal liquidity trap” thesis.

• High-income households have excess savings, but history shows they don’t spend; and a chill in high-income spending is more likely in 2021 from the threat of higher taxes (Ricardian equivalence);
• Low-income households received excess stimulus but their spending has already peaked (Exhibit 7) and <10% of new rounds of stimulus are being spent (Exhibit 8).

While we are confident that many readers will disagree, Woodard concludes that “in sum, we expect high inflation levels to be transitory because structural deflationary forces are very strong, most supply shortages can be resolved, wage increases are modest (and helpful long-term in any case), and there is no evidence of excess demand.”

* * *

Bullshit, you say. Between the trillions in stimulus and the monetary pump, this time is different.

Perhaps, but there is another problem: anyone wishing to hedge against soaring inflation faces a daunting high cost (one could almost say “inflationary” cost).

As shown in the chart below, historical data show that a permanent portfolio allocation to inflation assets only hurts returns (unlike a deflationary bias). Allocating $1 in 1974 equally to a basket of commodities, gold, global value, and European equities – i.e. inflationary assets –  was worth $38 today; at the same time, an allocation to IG corporate bonds, Treasuries, US growth stocks, and the S&P 500 was worth $104.

Curiously, even a tactical allocation imposes a significant cost unless timed perfectly. BofA economists expect 3.6% average inflation for Q2. Over the last 30 years, there were five occasions when CPI surged above that level (May’01, Sept’05, June’06, Oct’07, June’11).

On average, investors who bought inflation assets on those triggers suffered losses over the next year: commodities -10%, value vs growth -2%, EU vs US equities -3% and cyclical vs defensives -1%. Only TIPS and small vs large saw positive average returns. And today, 10-year TIPS yield -0.93%, just 19bps from record lows.

In conclusion, Woodard writes that “the best time to buy inflation protection would be after the next “natural” recession, not when inflation expectations are already at 13-year highs.”

While that may true, one thing Woodard refuses to admit – or perhaps forgot to acknowledge – is that in a world where even the BIS admits it is in the business of manipulating gold lower, crypto has emerged as the best inflation hedge in the world. In that case, his entire argument about “expensive” inflation hedges can be thrown out, because one look at the return of bitcoin, ethereum, or the various DeFi tokens in the past year, and the conclusion is that the market is convinced that what is coming will make the Weimar and Zimbabwe hyperinflations seem like a walk in the park…