Category: zerohedge

Authored by Dylan Grice via TheMarket.ch,

All people are driven by incentives, including senior officials at the most powerful central banks. A look at Jerome Powell’s portfolio shows what incentives might drive the chairman of the Federal Reserve.

«You show me the incentives, I’ll show you the outcome.»

– Charlie Munger (*1924, Vice Chairman of Berkshire Hathaway)

James M. Buchanan won the 1986 Nobel Prize in Economics for his pioneering work in public choice theory, the systematic study of the efficacy with which representative organizations act on behalf of those they represent.

Its starting point is simply that the presumption of some kind of higher benevolence or public-spiritedness on the part of political agents is a bad one.

Decades before Nassim Taleb had written «Skin in the Game», and without so much of the literary flair, Buchanan argued that agents should be expected to accommodate their own interests pari-passu with those of the group only to the extent that their incentives were accurately aligned. To the extent that there was a misalignment, the agent’s private interests would trump those of the public. The challenge of designing institutions to efficiently achieve that alignment was one Buchanan made his life’s work.

When it came to central banks, Buchanan, writing in 1984 in «Can Policy Activism Succeed? A Public Choice Perspective», when the inflation of the 1970s loomed large in the rear-view mirror (and therefore in most people’s forecast of the imminent future), was clear on what had to be done:

«There is relatively little to be gained by advancing arguments for «better informed» and «more public-spirited» agents, to be instructed by increasingly sophisticated «economic consultants» who are abreast of the frontiers of the «new science». All such efforts will do little more than provide employment for those who are involved.»

Instead, the circumstances faced by central banks must be aligned with those destined to live with the consequences of central banks actions. Thus, for example, Buchanan believed that anyone working in a central bank should be paid in a fixed nominal salary, ensuring their purchasing power would decline inversely and proportionately to each years’ rate of CPI inflation. Such an arrangement would give central bankers skin in the game in the delivery of price stability.

Incentives for continued asset price inflation

Today’s Federal Open Market Committee (FOMC) also has skin in the game, albeit in a perversion of Buchanan’s original notion. According to disclosures required by the Orwellian-sounding «Office of Government Ethics» (OGE), FOMC-chair Jerome Powell’s private incentives are for continued inflation of asset prices.

The OGE requires members of the executive to file 278e forms disclosing the source of all income and assets beyond their public pay. The precise dollar value of holdings isn’t disclosed in the reports, but broad ranges are.

For example, we don’t know exactly how much the Chairman has invested in Goldman Sachs’ Tactical Tilt Fund, but we do know that it’s somewhere between $1.45m and $6.2m. Similarly, we don’t know Powell’s exact net worth as it stood at the end of 2019, but we do know that it was somewhere between $18m and $55m.

For the avoidance of any doubt, we have no problem at all with people doing well for themselves, or having done well for themselves prior to their public-sector careers provided the gains were earned legitimately – which in the Chairman’s case is clearly true. Neither do we have a problem with public servants having private interests, provided that those interests are fully disclosed which, commendably, they are in this case.

In other words, the magnitude of the Chairman’s individual wealth is of little interest to us. However, the composition of that wealth is, and so the following chart shows our calculations of the ranges given in the OGE filings for the calendar year 2019.

We find it noteworthy that around 60% of Powell’s net investable worth is in (primarily US) equities, a share which is likely higher today given the stellar performance of said equities since the filing (+39% for the S&P 500).

Equally noteworthy is what is absent from the portfolio. In particular, we find it interesting that Powell owns no Treasuries. True, there’s an exposure to a more tax-efficient version – municipal bonds –, but if Powell’s portfolio is a variant on the classic 60-40, there’s a very clear underweighting of nominal assets relative to that framework.

If actions speak more truthfully than words, then the chairman of the FOMC is telling everyone to protect themselves from CPI inflation.

To put it another way, he’s telling everyone to get exposure to financial asset inflation. Consider that as the stock market was wilting by more than one third in March of 2020, Powell’s net worth was falling somewhere between $3.5m to $7.5m, or around 20%. He would have felt the pain of the panic acutely and, if he’s like the rest of us, would have been looking for ways to relieve that pain.

Will Powell really remove the punchbowl?

Aside from whether or not one agrees or disagrees with the Fed’s actions then and since, it’s difficult to see how Powell’s thinking at the time could possibly have been unbiased. In the same vein, it’s difficult to see how they could be unbiased today.

Powell has been consistent in his communication to the market that the Fed expects the current CPI surge to be «transitory», to use its recently coined watchword. Rest assured, he and other senior policy makers like Treasury Secretary Janet Yellen have repeatedly affirmed, the Fed had the tools to act should its benign view of inflation prove incorrect and will not hesitate to use them should the necessity arise.

Yet in his July 14th semi-annual report to the Congress, after three consecutive CPI prints in excess of market expectations there was no use of the word «transitory». The emphasis instead was on a quiescent inflation market. Unemployment, meanwhile, had «a long way to go» before meeting the Fed’s full employment goal, and the Fed stood to deliver «powerful support to the economy until the recovery is complete.»

Nassim Taleb says that as a species we’re not so much «rational» as «rationalizing». The head is merely the heart’s stooge. We surmise, therefore, that the Fed’s oft-stated rationale for leaving policy looser for longer – its desire to first see unemployment at record lows – is a trick of the frontal cortex.

The real driver of the Fed’s super-accommodation is that tight policy will lead to a significant and emotionally painful hit to the Chairman’s and his family’s net worth.

It’s difficult to see where Jerome Powell’s incentive is to – paraphrasing William McChesney Martin Jr – remove the punchbowl as the party is getting started. It’s very easy, in contrast, to see his incentive to add an extra kick to it.

A group of seven Capitol Police officers filed a lawsuit Thursday accusing President Trump and nearly 20 members of various (allegedly) “far-right” groups (including the Oath Keepers and Proud Boys, of course) of being part of a plot to disrupt the peaceful transition of power on Jan 6, when the officers were injured during the unrest on Capitol Hill. 

According to the NYT, this latest lawsuit is the “most expansive civil effort to date seeking to hold Mr. Trump and his allies legally accountable for the storming of the Capitol.”

Three other similar lawsuits have been filed in recent months, including one filed by two Capitol Police officers back in March which accused President Trump of being directly responsible for unleashing his followers on the officers for a violent confrontation. But Thursday’s lawsuit is the first to allege that Trump worked in concert with the “far-right extremists”, something the FBI has already shot down, as we noted last week.

“This is probably the most comprehensive account of Jan. 6 in terms of civil cases,” said Edward Caspar, a lawyer who is leading the suit for the Lawyers’ Committee for Civil Rights Under Law. “It spans from the former president to militants around him to his campaign supporters.”

So far, the most public venue available for the Capitol Police officers who were injured on Jan. 6 has been a Congressional Hearing in July where several officers testified about their injuries.

According to the lawsuit, one of the officer-plaintiffs, Governor Latson, was trying to secure the Senate chamber when a mob of rioters broke in and shoved him, beat him and hurled racial slurs at him, the lawsuit says

Another, Jason DeRoche, was beaten after being surrounded on the west front steps where rioters pelted him with batteries and doused him with mace and bear spray, causing his eyes to swell shut.

The suit also accuses Trump and the co-defendants of violating the Ku Klux Klan Act, an 1871 statute that includes protections against violent conspiracies that interfere with Congress’s constitutional duties. It also accuses the defendants of committing “bias-motivated acts of terrorism” in violation of District of Columbia law.

The lawsuit comes as the DoJ continues with its criminal investigation into those who participated in the attacks, hundreds of whom have been arrested after a review of photos and footage shared on social media, and by the news media.

Back in March, Democratic Rep. Eric Swalwell, a noted Trump antagonist, filed a similar complaint against the former president, while Rudy Giuliani, Donald Trump Jr. and Representative Mo Brooks of Alabama, a Trump ally, have also been targeted.

In each lawsuit, President Trump has sought to have the suit dismissed by arguing that he was acting in his official capacity as president on Jan. 6 and therefore cannot face civil litigation.

The new lawsuit appears to largely rely on news reports and details gleaned from criminal cases filed by the DoJ, it takes a broad view of the origins of the attack. It argues that the conspiracy to disrupt the election started as early as May 2020, when President Trump began complaining on social media that mail-in voting could “lead to fraud” and continued by accusing Roger Stone of echoing “false” claims on “right wing” news outlets like InfoWars. Finally, it ties the conspiracy together by claiming Trump was explicitly commanding the Proud Boys to attack as far back as September 2020, when he said during the second presidential debate that the Proud Boys should “stand back and stand by” (even though he hadn’t even lost the election, or contested anything, yet).

The surprisingly detailed lawsuit mentions other steps along the path to Jan. 6, including inlate November, when it claims a California-based political organizer named Alan Hostetter, who believed the election was stolen, posted a video on the internet claiming that people “at the highest levels” needed to be “made an example of with an execution or two or three.” Several “Stop the Steal” activists are accused in the suit of deliberately “spreading lies” to provoke a riot.

As far whether the lawsuit will succeed, legal experts are skeptical given the broad protections afforded by Trump’s office.

Interested parties can read the entire lawsuit below:

8 26 21 Smith v Trump Complaint (1) by Joseph Adinolfi Jr. on Scribd

Two months ago we reported that Bank of America had released a new proprietary indicator tracking the level of transitory inflation, which incidentally was at the highest possible reading of 100.

Of course, since then it’s only gotten worse and the core PCE report released earlier today revealed another explosion in all price pressures, not just transitory, rising to the highest level since 1983.

In other words, persistent (non-transitory) inflation is rising sharply as well. So to get a more complete picture of current inflation dynamics, last month BofA revised its transitory inflation meter with the BofA US Persistent Inflation Meter (PIM), and here, a “surprise”: it soared to 75 in June from 37 in May, indicating elevated persistent inflation.

Fast-forward to today when the latest BofA reading of both transitory and persistent inflation meters, showed what everyone already knew: both series hit record highs, with Transitory inflation at the highest possible reading of 100, while the sticky “Persistent” inflation rose from 75 to 90, which while also the highest on record, still has some more upside to go.

As BofA’s Alexander Lin explains, the July CPI report showed a cooling off in core inflation with core CPI rising a still elevated 0.3% (0.33% unrounded) mom. Transitory drivers of inflation ebbed as used cars slowed to a 0.2% mom clip and airline fares edged down -0.1% mom. That said, there was strength in new cars, up 1.7% mom, and lodging which spiked 6.0% mom. For more details, see Core CPI cools to 0.3% mom in July. And while transitory inflation cooled on a sequential basis, “it remains elevated on a % yoy basis.” As such, the BofA US transitory inflation meter (TIM) remained at 100 for the fourth consecutive month, signaling historically strong transitory inflation.

But the real story is that while transitory factors cooled in the July CPI report, stickier and more persistent components of inflation were solid.

Owners’ equivalent rent (OER) and medical care services both rose 0.3% mom, and rent of primary residence increased 0.2% mom. As a result, the BofA US persistent inflation meter (PIM) strengthened to 90 in July. In other words, both transitory and persistent inflation are running at historically elevated levels.

 Finally, here is a longer chart history of average inflation data behind BofA US TIM and PIM. Both are at all time highs.

This confirms that contrary to its best wishes and naive expectations that inflation will somehow magically just go away in 2022, the Fed is already far behind the curve and has a major headache on its hands. Furthermore, as Deutsche Bank pointed out last month, Wall Street consensus inflation expectations for 2022 are already well above 2%, which is impossible if inflation is transitory and if there is going to be a deflationary phase after the current burst in transitory inflation ends.

In other words, the Fed is again wrong and sooner or later, 10Y yields which continue to pretend that everything is fine, will face a day of very painful reckoning.

Authored by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

This month marks fifty years since President Richard Nixon closed the “gold window” that had allowed foreign governments to exchange US dollars for gold.

Nixon’s action severed the last link between the dollar and gold, transforming the dollar into pure fiat currency.

Since the “Nixon shock” of 1971, the dollar’s value — and the average American’s living standard — has continuously declined, while income inequality and the size, scope, and cost of government have risen.

Since the beginning of this year, price inflation has increased much, and it could continue onward to exceed the 1970s-era price spikes. Understandably, Republicans are trying to blame President Joe Biden for the price increases. However, a major cause of the current price inflation is the unprecedented money creation the Federal Reserve has engaged in since the 2008 market meltdown. This, though, does not mean Biden and most US politicians of both parties do not bear some responsibility for rising prices. Their support for the Fed and massive government spending contributes to the problem.

The main way the Fed pumps money into the economy is by monthly purchases of 120 billion dollars of Treasury and mortgage-backed securities. Even many Keynesian economists agree that rising price inflation means the Fed should stop pumping money into the economy. Yet, this year the Fed is likely, at most, to only slightly reduce its purchases of Treasury securities. It will almost certainly keep interest rates at near-zero levels.

A reason the Fed will not stop or significantly reduce its purchases of Treasuries and allow interest rates to increase is that doing so would increase federal debt payments to unsustainable levels.

Even with interest rates at historic lows, interest payments remain a significant portion of federal spending, and recent indications are that the US government is not about to start being frugal. 

Consider, for example, Congress’ six trillion dollars “Covid relief and economic stimulus” spending spree and the Senate passage of the trillion dollars “traditional infrastructure” bill and a budget “outline” of a 3.5 trillion dollars “human infrastructure” bill.

The “human infrastructure” bill represents an expansion of government along the lines of the Great Society. Among its initiatives are universal pre-kindergarten; two “free” years of community college; increased government control of health care via expansions of Obamacare, Medicare, and Medicaid; and a raft of new government mandates and spending aimed at reshaping the US economy to fight “climate change.”

The need to gain support of “moderate” Democrats will likely mean the final “human infrastructure” bill will costs less than 3.5 trillion dollars. However, no Democrat is objecting to the bill’s programs; the objectors just want cheaper tolls on the road to serfdom.

While progressives will likely accept reduced spending levels in order to get their wish list into law, they will then work to increase funding and expand the programs. As the programs become more entrenched, even many “conservatives” will support increasing their funding.

The expansion of government will increase pressure on the Fed to keep the money spigots open. This will lead to a major economic crisis. The good news is the crisis may mark the beginning of the end of the fiat monetary system and the welfare-warfare state, along with the dawn of a new era of free markets, sound money, and limited government.

At a monthly press briefing in Beijing, China Defense Ministry spokesman Tan Kefei blamed the U.S. Thursday for “serious difficulties” in the bilateral relationship, highlighting the Biden administration’s strategy of “comprehensive containment” against the country to maintain dominance in the region, according to Newsweek. 

Kefei said the U.S., under the guise of freedom of navigation, in the South China Sea, displays its power by sailing warships and is creating instability in the region. 

Kefei said: “At present, relations between China, the United States, and the two militaries face serious difficulties at an important juncture. The root cause is the U.S.’s obsession with hegemony and its Cold War and zero-sum mentality.”

“The U.S. does not accept and will not allow or accommodate China as it grows stronger,” he added. “It treats China as a strategic rival and security threat, implementing comprehensive containment and suppression of China while seriously undermining China’s sovereignty, security and development interests.”

The comments come as Vice President Kamala Harris is on her tour around Southeast Asia and has called for other countries to pressure Bejing for its actions in the South China Sea. 

“We need to find ways to pressure and raise the pressure, frankly, on Beijing to abide by the United Nations Convention on the Law of the Sea, and to challenge its bullying and excessive maritime claims,” said Harris.

Besides Harris, Defense Secretary Lloyd Austin said: “Beijing’s claim to the vast majority of the South China Sea has no basis in international law.” 

The South China Sea is in focus because it’s a resource-rich shipping lane that is the most vital route for commercial vessels globally. China continues to lay claim to all of the waters but other claimants, such as Vietnam, Malaysia, and the Philippines, have also claimed parts of the sea.

“[We] are not asking countries in the region to choose between the United States and China. In fact, many of our partnerships in the region are older than the People’s Republic of China itself,” Austin said.

Kefei said Austin’s comments were “irresponsible and wrong.” 

Meanwhile, just north of the South China Sea is Taiwan. We reported Wednesday that Tokyo and Taipei are holding meetings to address Beijing’s increasingly aggressive stance against Taiwan at the end of the week. 

Authored by Bill Blain via MorningPorridge.com,

“It seemed a bit bizarre to be flying around on a private jet in order to hock, of all things, low-carbon investment products.”

ESG is a marvellous concept appallingly executed. To understand how it’s gone wrong I recommend Tariq Fancy’s rant about his time as Sustainability CIO at Blackrock. To figure out how we actually deliver climate-change mitigation, social amelioration and better corporate governance, and avoid these lofty concepts being hijacked and suborned by business and finance interests, we need to replace the carrot of ESG with the stick of Carbon Taxes and Corporate Legislation. Time to get real and dispense with ESG claptrap.

Ever since I started writing the Morning Porridge back in 2007 – trying to explain to my bond-buying clients the consequences of the then unfolding banking crisis and the opportunities it presented – I’ve been amazed at just how inefficient markets can be, how distortions are often ignored, groupthink dominates strategies, and sheer laziness, (a lack of “intellectual curiosity” as one despicable boss put it back in the 1990s), leads to all kinds of market tomfoolery.

Markets really are about the madness and behaviour of crowds.

It’s very different to what I was taught back in the early 1980s when economics whittered on about “rational expectations”. I’ve learnt there is nothing particularly rational about the way market participants tend to think.

During the Second World War a study of soldiers figured only about 3% of frontline troops actually fought to kill. The rest were followers. So it is in finance. The bulk of market participants go with the flow. They don’t ask the difficult questions and they don’t call out obvious inconsistencies. These sheep inevitably get rounded up and fleeced by the tiny number of wolves. It works because market participants are attracted to well marketed big ideas, but run with them without really appreciating the consequences of the hype they’ve bought into.

A number of distortion themes have particularly dominated markets over the last few years.

• The first is monetary distortion, which has utterly dislocated the pricing mechanism of markets.

• The second is ESG – Environmental, Social, Governance – based investing, which has become rather like the Spanish Inquisition in its determination to root out and punish unbelievers and burn them as heretics.

I am such a heretic.

ESG has become a particularly dangerous notion. Regular readers of the porridge will know I have a very uneasy relationship with the concept. Although I absolutely believe in the science of climate change, am probably the last Clause 4 Socialist left working in the City of London, and will only invest in companies that can show pristine corporate governance, I find ESG to be a very poorly constructed edifice. I’ve long believed many ESG proponents have been feathering their own nests.

I’m not the only person who sees it.

This week we’ve seen an incredible post by Tariq Fancy: the Secret Diary of a “Sustainable Investor”. He’s the former head of Sustainable Investing at Blackrock – from 2018-2019 – the largest fund manager on the planet, which boss Larry Fink has committed to ESG goals. Fancy resigned when he figured ESG is riddled with inconsistencies, dubious motivations and concluded its “a dangerous placebo that harms the public interest.” (Let me be clear – I have no problem with Blackrock. I seriously admire the firm. But to be fair… I’d like to earn fees from them…)

Fancy has called ESG “marketing hype” and “a dishonest promise”. Among the many issues he has identified are:

• Financial Institutions have obvious motivations to push high fee ESG products to raise profits. (In his essay Fancy describes Blackrock iShares executives pushing ESG ETFs purely on the grounds of the additional fees they could generate in a competitive sector.)

• The data underlying ESG theories is unclear and subjective.

• Suppliers – from rating agencies, consultants, index compilers, data vendors, are all jumping on the ESG bandwagon to reap their share of the returns.

• There is no evidence that Greenbonds achieve anything when green bond issuers use other funding to keep doing “bad stuff”.

• Greenwashing is a risk to investors – and could distort the way in which major investors allocate capital to the companies and investors funding carbon reduction.

Fancy suggests ESG has become top-cover for polluters – high carbon emitting companies, and the investors invested in them. They have successfully avoided the hefty costs that carbon taxes would impose on them, by pretending to embrace ESG. He uses a sports analogy: “it’s much better to play clean if you have a referee [Carbon Taxes]. But if you don’t have a referee, play dirty.” Which is exactly what greenwashing, hidden behind ESG, allows. He is spot on.

In an interview Fancy gave discussing ESG and Carbon Taxes I particularly love this quote: 

“Finance does what finance does. It’s about finding the best profit opportunities. There is a reason Goldman Sachs does not try to IPO the Sinaloa Cartel. If it is legal, they will surely do so, because it’s probably a really lucrative high-cash flow business. But, the reason they aren’t doing it isn’t because of some business statements or ESG policies. Nonsense. Because its illegal and they can’t.”

Perhaps his most telling line Fancy learnt during his short-time was Blackrock was: “Reacting with denial, loose half-measures, or overly rosy forecasts lulls us into a false sense of security, eventually prolonging and worsening the crisis. And yet Wall Street is doing just that with climate change, craftily greenwashing the economic system and delaying overdue systemic solutions, including those intended to combat rising inequality and the insidious political risks it creates. It’s clear to me now that my work at BlackRock only made matters worse by leading the world into a dangerous mirage, an oasis in the middle of the desert that is burning valuable time.”

So how do we change and put finance back on track to save the planet?

Let’s be clear. ESG is not all bad. It has raised the flag on climate change. To a lesser extent it’s highlighting social inequality. I see little sign its actually increased the tempo on improving corporate governance however.

Over the years I’ve ranted about ESG many times, but the search function on the www.morningporridge.com website isn’t quite the state-of-the-art search-tool I was hoping for. Back in March it was fuming about Holier than thou ESG, and earlier about ESG’s chaotic evolution, the incentivisation of “Greenwashing”, and how unbalanced it all is.

I’ve mocked my own UK government for its issue of Green Gilts. Really? What did they achieve except giving the Chancellor an opportunity to brag about launching them? Finance professionals in the gilts market are utterly bemused by them – pointless is their conclusion, but because the Europeans were doing them, Britain had to do them.

I am still furious that the govt minister in charge of the COP26 party in Glasgow later this year threw his toys out the pram to stop a perfectly sensible and necessary UK metallurgical coal mine project that would have created good jobs, cut carbon miles and cut costs for the UK to make our own steel rather than importing it from China. I’m told the minister threatened to resign if the coal mine wasn’t stopped because his “optics” wouldn’t look good if the UK was digging a mine.

ESG has become a veil for bad actors to hide behind. It’s no longer the route forward. Shut it down now.

There are a number of things I would propose to advance the notion:

• I came to the conclusion years ago that the only important part of ESG is the G: Governance. Any company that is well managed and governed should be reconciling stakeholders and shareholders to optimise being a good socially and environmentally aware firm while producing decent returns. Stakeholder Society and the Friedman dictum of delivering profits to owners can meet in the middle.

• Tax Carbon Emissions. This is a difficult one because it will expose the political/ business coverup ESG has provided. Companies, and the politicians in their pockets, will argue ESG verbiage is a much better way to get them to change, rather than immediately taxing them to the rafters for pollution. Yet, taxation is direct and effective.

Rather than allow Big Business and Finance to set the agenda on what markets should deliver in terms of social amelioration and climate mitigation, I’m afraid we’re actually going to need some rules. It’s going to be governments job to improve corporate governance which may well mean we need worker and other stakeholder board representation by law, and for government to change to focus of legislation from the carrot of taxonomies and ESG standards to the stick of Carbon Taxes.

I can just imagine how the US coal, oil and gas shills in Congress and the Senate will respond to proposals that polluters pay… Not positively.

Just as everyone was settling on for the long sleep through tomorrow’s J-Hole speech from J-Powell, a blast at Kabul’s airport has catalysed some fear and sent VIX exploding higher…

And that has sent stocks tumbling…

Gold also jumped on the reports…

Is this the beginning of the “instability cascade” that BofA warned about?

Peak shipping season is underway, and container ships anchored off California are on the verge of record congestion.

New data from Marine Exchange of Southern California & Vessel Traffic Service of Los Angeles and Long Beach ports shows port congestion outside the busiest US gateway for trade with Asia is rapidly building and rose to 40 vessels on Friday, tying the record high set on Feb. 1. 

According to the Port of Los Angeles, the average wait time for a vessel increased to 7.1 days, up from 6.2 days a week ago. 

Bloomberg notes, “the delays along key transpacific trade routes may be exacerbated by recent Covid outbreaks at Asian ports.” 

Readers may recall the collapse of the trans-pacific supply chains has been among the main reasons for soaring consumer goods prices. It’s also hardly a secret that the most vulnerable section of supply chains are West Coast ports where congestion remains off the charts and could soon reach uncharted territory in the coming weeks. 

The transpacific trade routes have experienced significant port delays in China in recent weeks because COVID outbreaks are shutting down terminals. 

We’ve discussed the latest meltdown down of the trans-pacific supply chains in “Supply-Chains Brace For Collapse: Port Of LA Fears Repeat Of “Shipping Nightmare” As China Locks Down” and “Shippers Frantic After China’s Busiest Port Shuts Container Terminal Due To Covid.” 

Goldman Sachs has explicitly warned that “port closures or stricter control measures at ports could also put further upward pressure on shipping costs, which are already very high.”

There is some good news in Asia, Chinese authorities are set to reopen the container terminal at the massive Port of Ningbo in the near term, as long as no COVID infections are detected. 

The timing of this bottleneck at US West Coast ports comes at an inopportune time for US importers who are ordering back-to-school and restocking goods ahead of the upcoming holiday season. Persisting trans-pacific supply chains disruptions means consumers may experience price rises of certain products and or shortages. 

Besides congestion in California, East Coast ports are also reporting increasing bottlenecks. 

by Bas van Geffen, senior macro strategist of Rabobank

Back To Sleep

Fixed income markets were in for a bit of a rude awakening after being lulled into a slumber when the Fed’s Jackson Hole conference was moved to an online format last week. After all, if Delta can throw the FOMC’s planned get-together, it might just cause the Committee to reassess its wider impact on the economy. Indeed, expectations of any significant policy announcement at the –virtual– Jackson Hole event are low, and in fact, the market appears have added some speculation that the taper announcement could be delayed even further.

That sleep was rudely interrupted as evidenced by the sell-off in European government bonds yesterday: German 10y yields rising 5 bps and the Italian equivalent even by 9 bps on the back of ECB policymakers De Guindos and Lane. De Guindos’ comments were widely interpreted as hawkish -at least compared to his usual stance- as he noted that the data so far point to a solid Q3. He concluded that the ECB may upgrade its economic projections, and that if the economy normalises, policy should follow. Of course, he probably primarily had PEPP in mind, with the calibration of the unofficial target pace of Q4 purchases up for debate in September. Nonetheless, amidst otherwise quiet markets -with ECB buying also still on summer schedule- that may have startled some slumbering traders.

The market was less unanimous about Chief Economist Lane’s comments. At face value, Lane seemed to strike his usual dovish tone, but a case could also be made for a more hawkish read. For example, being asked when the ‘crisis phase’ (and thus PEPP) are over, he replied “the crisis phase lasts while the downside risk is substantial”, which should be seen in the context of the ECB’s current assessment that risks to the economic outlook are “broadly balanced”. Of course, he did add that post-PEPP, the regular purchases would continue to add stimulus. The market being awakened by both ECB officials is somewhat ironic, considering that Lane specifically hummed the lullaby that the ECB would act if a US taper tantrum would cause spill-overs into European markets.

As an aside, these discussions about tapering in the US and the future for (or after) PEPP in the Eurozone will once again kindle the debate between stock and flow effects of quantitative easing. Policymakers are often keen to stress the former, noting that the central bank’s built-up portfolio effect remains a powerful force. Traders, however, tend to focus on the flow effects of new buying. Perhaps aware of this, Mr. Lane addressed the flow effect yesterday. He noted yesterday that “you cannot think about the volume of the APP independently of the volume of net bond supply. The relatively high fiscal deficits that we saw last year and this year will not be lasting in the coming years”. He’s not wrong. I would defer to the extensive work my Rates Strategy colleagues have done on the topic of net-net supply (i.e. issuance minus redemptions and ECB purchases). And there’s certainly an argument to be made for Lane speaking the market’s language.

However, these comments are clearly at odds with the mantra that the ECB does not finance deficits. We, too, have in the past drawn comparisons between the impact of Covid-fighting measures on government’s issuance and deficits on one hand, and the ECB’s decisions to enlarge the PEPP envelope on the other.

US live cattle prices in all regions are $128 per head Tuesday, but meat packer margins are somewhere out in orbit and continue to climb in the greatest squeeze since the beginning of the COVID-19 pandemic. 

Demand for beef is skyrocketing ahead of labor day. Bloomberg compiled ag data via HedgersEdge that showed increasing beef demand is pushing meat-packer margins to near the $1,000 per head mark last seen in May 2020 when the virus pandemic squeezed food supply chains. 

Bloomberg said, “restaurant reopenings, Labor Day grilling and more tourism around the world are boosting prices for the red meat. But with cattle prices lagging the eye-popping gains in meat, the profits that packers like Tyson Foods Inc. are making could bring more scrutiny in Washington for an industry that critics say is too concentrated.” 

With meatpackers, such as Tyson Foods raising its fiscal 2021 revenue forecast on strong beef demand, these companies are making hand over fist while raising retail prices. 

Tyson’s CEO Donnie King recently told investors that cost pressures would force the company to raise meat prices in the next two weeks. 

The notable trend within the food supply chain is that COVID disruptions continue to linger. Food prices have gone through the roof, and megacorporations like Tyson are handsomely profiting from market imbalances. 

No consumer is looking forward to this fall when supermarket prices are expected to spike even further. Perhaps, Labor Day cookouts will be the most expensive ever.