Tantalean Punishment

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INFLATION connection connected calculator successful thought for FED see liking complaint hike, world economics and ostentation control, US dollar inflation

Khanchit Khirisutchalual

Never regret thy fall, O Icarus of nan fearless flight. For nan top calamity of them each is ne'er to consciousness nan burning light" - Oscar Wilde

While successful our erstwhile speech we mused astir nan "reversal theory" and as specified we turned much antagonistic connected nan outlook for "high beta" successful wide and "duration exposed assets" successful particular, arsenic we stated successful our speech "State of Ambivalence" we stay little convinced astir nan ostentation receding narrative. As such, because of immoderate conflicting macro information specified arsenic nan astir caller US CPI and PPI information and nan elusive ostentation target of 2% being actively discussed, erstwhile it came to choosing our title affinity we decided to spell for a Greek mythology reference. Tantalus was a Greek mythological fig astir celebrated for his reward successful Tartarus, nan heavy abyss that is utilized as a dungeon of torment and suffering for nan wicked and arsenic a situation for nan Titans. Tartarus was made to guidelines successful a excavation of h2o beneath a consequence character pinch debased branches, pinch nan consequence ever eluding his grasp, and nan h2o ever receding earlier he could return a drink. He was besides called Atys. The Greek utilized nan proverb "Tantalean punishment" successful reference to those who person bully things but are not permitted to bask them. As specified nan latest nonfarm payrolls important emergence is intelligibly a bully point but, unluckily inflationary pressures are not permitting nan Fed to bask this benignant of data. It is to beryllium noted that nan English connection "tantalize" intends to torment pinch nan show of thing desired but retired of reach, tease by arousing expectations that are many times disappointed. The 2% ostentation level is truthful thing desired but retired of scope for nan Fed arsenic pointed retired precocious by Mohamed El-Erian, main economical advisor astatine Allianz and Bloomberg Opinion columnist:

You request a higher unchangeable ostentation rate. Call it 3 to 4%. "I don't deliberation they tin get CPI to 2% without crushing nan economy, but that's because 2% is not nan correct target." Mohamed El-Erian.

With US CPI rising by 0.5% successful January, nan astir successful nan past 3 months pinch a higher than expected 6.4% level, nan "Fed's "Tantalean punishment" mightiness so beryllium pivoting, but nan different measurement that is, meaning hiking higher for longer we think. Mohamed El-Erian besides added:

It's correct to return information into relationship but you've sewage to person a position of wherever you're going. The problem now, is that nan Fed is stuck chasing an elusive 2% goal.- Mohamed El-Erian

As such, again arsenic successful 2022, "convexity" is starting to wound again, peculiarly successful agelong long US Investment Grade:


US IG YTD (Macronomics KOYFIN)

In erstwhile musings successful precocious 2022 we recommended nan "Make Duration Great Again" (MDGA) waste and acquisition which is successful effect investing connected nan agelong extremity of Investment Grade Credit from a transportation and rotation down position which had seen US High Grade (Investment Grade) 15+ years "outperforming" US High Yield and now is only up by +2.47% (5.34% YTD successful our erstwhile conversation). "Convexity" being back, US Investment Grade is suffering.

As we pointed earlier connected successful our erstwhile conversation, arsenic per Lord John Maynard Keynes' advice, we person changed our sentiment simply because facts and circumstances person changed. The ones who do not alteration their sentiment successful nan agelong tally comes to grievous nonaccomplishment to paraphrase Lord Keynes aliases look nan mythological "Tartarus" arsenic such. We do not want to look nan aforesaid fate.

In this conversation, we would for illustration we would for illustration to talk why it will beryllium difficult successful nan existent discourse to person a accelerated receding ostentation towards nan 2% level and arsenic good an humanities position connected ostentation and commodities. We besides want to look astatine "the reversing pivot" communicative and what it entails.

  • The "Tantalizing" 2% ostentation target

After having seen US shaper prices rebounded successful January by much than expected, it is clear to america that persistent inflationary pressures will push nan Fed to prosecute further interest-rate increases successful nan months ahead, somewhat validating nan "hiking higher for longer" Fed narrative:


US PPI (Bloomberg - Twitter)

With nan PPI (Producer Price Index) for last request rising by 0.7% past month, nan astir since June owed to higher power costs, nan PPI has climbed 6% from a twelvemonth earlier.

When it comes to nan unemployment level, we deliberation that we person seen successful nan United States nan lowest constituent successful this rhythm and work together pinch nan beneath floor plan from Bloomberg:

US Jobless rate

US Jobless complaint (Bloomberg - Twitter)

Another illustration of nan proverb "Tantalean punishment" for nan Fed, meaning person bully things but not permitted to bask it, has been nan rebound successful unit income astatine nan commencement of nan year:

US unit sales

US unit income (Bloomberg - Twitter)

The astir awesome was nan jump successful edifice income successful January pinch a summation of 7.2%, nan strongest level since March 2021.

In February 2021 successful our speech "Some Like It Hot", we confided that we had switched allegiance from nan "deflationista" campy towards nan "inflationista" camp. We opined astatine nan time:

The Fed said they are happy pinch ostentation ticking higher. The Fed follows nan Phillips Curve. The existent precocious rates of unemployment and debased rates of ostentation supply argumentation makers pinch ample information to clasp nan tradeoffs suggested by nan Phillips Curve, arsenic modified by nan earthy complaint and expectations augmented theories. The faster that nan labour unit adjusts its expectations successful consequence to changes successful inflation, nan quicker nan marketplace will return to a normal unemployment rate. The quicker that nan labour unit is to adapt, nan little effective monetary argumentation whitethorn go arsenic a intends of reducing unemployment. This is nan principle of nan "expectations-augmented" mentation of nan Phillips Curve. Easy monetary argumentation mostly enhances economical activity and employment but increases inflation. The Fed would for illustration to "overshoot" its ostentation target of 2%. Let's beryllium clear connected this. The surge successful US ostentation expectations continues unabated, highest since March 2013 astatine 2.37%. And nan enslaved marketplace is starting to return note, pinch 30-year Treasury output moving up to supra 2%, highest since past February." - Macronomics - March 2021

We besides pointed retired successful this March 2021 speech that galore sell-side companies were talking nan anticipation of a caller commodity super-cycle. We person seen this movie before. A trader friend of ours pointed retired to america nan pursuing that successful 1719, acknowledgment to John Law, nan French monetary guidelines exploded higher starring to a roar successful stocks followed by a roar successful commodities.

This roar successful commodities led to a surge ostentation and wheat prices exploded higher and yet led to nan French Revolution arsenic intelligibly explained by French economist Florin Aftalion successful his 1987 book entitled "The French Revolution - An Economic Interpretation":

Historically nan highest prices touched by wheat anterior to nan French Revolution were successful 1789. Between 1780 and 1788, nan mean value for a "setier" of wheat (setier was an aged French units of capacity equating to 156 liters), was unchangeable betwixt 19 pounds and 13 shillings and 25 pounds and 2 shillings. Between 1786 and 1787 nan value was unchangeable astatine 22 pounds a setier. In 1788 it roseate by 15% but successful 1789 it roseate by 36% successful 1 year, rubbing 34 pounds and 2 shillings. The harvest for 1788 was 1 3rd little and this effect was capable adequate to trigger nan doubling of prices successful nan play 1788-1789. Just earlier "Bastille Day" connected nan 14th of July, location was a tremendous large wind connected nan 13th of July 1789 which caused monolithic destructions to crops.

Wheat value earlier French Revolution

Wheat value earlier French Revolution (Florin Aftalion 1987)

Wheat prices successful "pounds per setier" units connected nan 24 of June each twelvemonth from 1728 until 1789, root - "Le prix du blé à Pontoise en 1789" by Dr Florin Aftalion.

As we pointed retired successful our speech "The Law of nan Maximum" successful 2016, "The Law of nan Maximum" was a rule created during nan people of nan French Revolution arsenic an hold of nan Law of Suspects connected 29th September, 1793. It succeeded nan 4th May, 1793, "loi du maximum", which had nan aforesaid purpose: mounting value limits, deterring value gouging, and allowing for nan continued travel of nutrient proviso to nan group of France. Numerous nutrient situation during nan French Revolution which led to speculation connected a expansive standard were linked to nan "inflationary" bias of nan much-dreaded dense issuance of "assignats" which mislaid quickly their value:

Assignats value evolution

Assignats value improvement (Le marché des changes de Paris à la fin du XVIIIe siècle (1778-1800) -1937)

According to Andrew Dickson White, Professor of History astatine Cornell, nan ever-greater and yet uncontrolled issuance of insubstantial money authorized by nan National Assembly was astatine nan guidelines of France's economical nonaccomplishment and astir surely nan origin of its progressively rampant inflation. This is arsenic good confirmed by French economist Florin Aftalion successful his 1987 book. What we find of liking from a humanities perspective, is that pinch nan repeal of "The Law of The Maximum" successful December of 1794 came inflation, wide economical strife and riots that yet lead to nan emergence of nan Directory and nan extremity of nan Thermidorian play and nan execution of French leader Robespierre.

The due French revolutionary play (1789-1794) was characterized by mediocre harvests and very akin meteorological factors witnessed successful 1788 and 1789, namely very basking spring-summer periods pinch very bad upwind followed by very acold winters (-21 degrees Celsius successful Paris during nan wintertime of 1788) arsenic a reminder.

As good our trader friend pointed retired nan play of 1793 and 1821 were nan emergence successful nan monetary guidelines was much contained. During nan US civilian war, location was a important emergence successful nan monetary base starring besides to a roar successful banal prices followed by a roar successful commodities value owed to embargo policies:

The Nobel Laureate Milton Friedman erstwhile noted that wars person provided laboratories to analyse nan behaviour of money, prices, and income (Friedman, 1952). The Confederate acquisition during nan American Civil War is nary exception. Between January 1861 and April 1865, nan Lerner Commodity Price Index of starring cities successful nan Eastern Confederacy accrued from 100 to complete 9000. Price ostentation successful nan South during nan Civil War ranks 2nd only to nan American Revolution successful U.S. history."

Lerner value index

Lerner value scale (Lerner 1956 - - Money and Finance successful nan Confederate States of America.)

On a broadside statement and returning to nan "Law of nan Maximum" we find it absorbing to find a akin argumentation geared towards Russian lipid prices pinch "cap prices". As pointed retired by our smart trader friend "war commodities" are mostly nan ones that rises nan most.

Since nan warfare collapsed retired betwixt Russia and Ukraine, we recovered of awesome liking nan widening successful nan dispersed betwixt lipid prices and pitchy fuel:

Jet substance vs lipid prices

Jet substance vs lipid prices (IATA - S&P Global - Refinitiv Eikon)

Competition is coming for Jet Fuel fixed Air India announced a 470-plane bid pinch Airbus and Boeing successful what stands to beryllium nan largest acquisition successful commercialized aviation history. Does nan world person capable "refining capacity" currently? The reply is simply no:

Nearly 1mn b/d of caller US refining capacity is nether building aliases planned for finance successful nan coming years, but galore of those projects are improbable to beryllium completed connected clip aliases astatine all."- source Argus Media - Crude Summit

Deglobalization, wars and sanctions are inflationary. That simple. As good arsenic pointed retired by our friend Zoltan Szelyes CFA, CAIA, ESG policies are inflationary:

Drivers of inflation

Drivers of ostentation (Zoltan Szelyes - Macro Real Estate)

ESG initiatives lead to higher costs. This was arsenic good pointed retired by Mish Shedlock connected nan 14th of February successful his station "The EU Warns - There is nary flight from its ESG Environment Madness":

The European Parliament's situation committee past Thursday backed tougher authorities that will unit firms pinch complete 250 unit and yearly worldwide turnover of much than €40 cardinal (US$42.8 million), to cheque and study whether their suppliers wrong and extracurricular Europe usage enslaved aliases kid labour, aliases pollute nan environment."

As good Mish pointed retired an article that Hong Kong was going to salary 30% much for ESG jobs arsenic companies conflict for talent. Sustainability reporting arsenic good arsenic accrued salaries are "inflationary" successful our book. If you deliberation Asian companies will not walk connected nan costs of regulatory load to their European clients, deliberation again.

Returning to nan taxable of rising "commodities" we recovered an humanities absorbing article from nan 21st of February 1938 from nan Time mag archive:

Since February 1933, nan wide U. S. value level has risen 32%, costs of surviving 24%, prices of workplace products 118%, wholesale prices 45%, Moody's scale of spot prices of basal commodities 140%, prices of copper 188%, lead 115%, eggs 73%, flour 69%. Listing these figures and galore others successful nan December Atlantic Monthly, Princeton Professor Edwin Walter Kemmerer commented: "That is inflation." Economist Kemmerer expects commodity prices to emergence immoderate 69% much and nan costs of surviving to double. Nor is this a lone-wolf stand. Harvard's Professor Melvin Thomas Copeland made akin predictions past autumn (TIME, Oct. 4). And 82% of nan 2,560 ranking U. S. economists successful nan American Economic Association are connected grounds that nan coming U. S. inclination is toward vulnerable ostentation of money and credit.

Back successful 1933, successful communal pinch galore different investor, a group of ultraconservative young men successful Boston's Back Bay began to interest astir imaginable ostentation and really it would impact enslaved and banal values. After 2 years of quiet study, they decided that nan only satisfactory hedge against ostentation is commodities. Accordingly, successful February 1935 they group up what they judge to beryllium nan first commodity finance spot successful nan world, called it Commodity Corp. Last week, aft 2 years of "laboratory testing" successful Boston, Commodity Corp. moved to Wall Street pinch assets of astir half a cardinal dollars successful its coffers and large plans successful its little case." - Source Time Magazine, 1938.

For those of you not acquainted pinch nan activity of Professor Edwin Walter Kemmerer he was a professor of economics astatine Princeton University. He became celebrated arsenic a "money doctor" aliases economical advisor to overseas governments each astir nan world, promoting plans based connected beardown currencies and balanced budgets. He besides helped successful nan creation of nan US Federal Reserve System successful 1911:

A value is nan worth of a peculiar commodity successful position of nan worth of nan monetary unit. It is an look of nan number of units of money for which a commodity is bought and sold. The value level represents a composite of individual prices. Prices fluctuate, therefore, pinch nan changing worth of equipment and besides pinch nan changing worth of money." - Edwin Walter Kemmerer - The Prospect of Rising Prices from nan Monetary Angle

If nan only satisfactory hedge against ostentation is commodities arsenic thought by investors successful 1933, we are not amazed to person seen specified a important emergence successful commodities related banal prices specified arsenic Glencore (2 years floor plan below) successful nan Diversified Miners space:

Diversified Miners 2 years chart

Diversified Miners 2 years floor plan (Macronomics - TradingView)

This "commodities related" surge tin besides beryllium ascertained successful nan lipid tankers 2 years floor plan below:

Oil tankers 2 years chart

Oil tankers 2 years floor plan (Macronomics - TradingView)

And successful lipid services arsenic well:

Oil services 2 years chart

Oil services 2 years floor plan (Macronomics - TradingView)

As pointed retired by an astute scholar of ours (that goes by nan nickname of "Salmo Trutta" successful Seeking Alpha), Dr. Philip George told america nan following:

When liking rates spell up, flows into savings and clip deposits increase." (thereby destroying money velocity).

What we person seen successful caller years is that reducing liking rates towards nan zero bound simply inflated plus bubbles (Cantillon effect) without really improving nan existent system (CAPEX lagging besides acknowledgment to ESG unit for Oil & Gas) sloppy of nan overmuch vaunted "wealth effect". The ongoing "Tantalean punishment" for nan Fed intends that it needs to "moderate" nan number of its hikes successful bid not to "crash" nan existent economy.

  • Pivoting nan different way?

Looking astatine nan return of nan "convexity" pain, 1 mightiness wonderment if so nan consequence reversal is coming from nan Fed "pivoting nan different way".

As such, nan caller emergence successful "real yields" has ensured a return of nan "Gibson Paradox" and weighted connected golden and golden miners:

Real rates

Real rates (Bloomberg - Twitter)

In akin manner to 2022, some nan US Treasury Notes 10 twelvemonth output and nan US dollar versus nan Japanese yen person risen together:

US 10 twelvemonth USTs vs JPY

US 10 twelvemonth USTs vs JPY (Macronomics - TradingView)

Given existent rates are connected nan emergence again, nary wonderment Japanese yen ETF YCS is experiencing a boost arsenic it did successful 2022:

ETF YCS 1 1 year

ETF YCS 1 1 twelvemonth (Macronomics - TradingView)

As we pointed retired successful our erstwhile conversation, nan astir predictive adaptable for default rates remains in installments readiness and if in installments readiness successful US dollar position vanishes, it could portend surging defaults down nan line. The quarterly Senior Loan Officer Opinion Surveys (SLOOs) published by nan Fed does a overmuch amended occupation of estimating defaults erstwhile they are being driven by a systemic factor, specified arsenic a move successful business rhythm aliases an all-encompassing macro event. Tightening successful in installments standards successful conjunction pinch complaint hikes will yet weight connected High Yield we pointed out:


US HY YTD (Macronomics - KOYFIN)

As pointed retired by Brian Wälchli successful our LinkedIn feed:

We amended get that soft landing and re-anchoring of ostentation - US Equity Risk Premium now astatine 175bps, a caller 15 years low." Brian Wälchli

MSPRSPX 15 years

MSPRSPX 15 years (Brian Wächli - LinkedIn - Bloomberg)

We besides work together pinch Boaz Weinstein successful our Twitter feed, erstwhile it comes to assessing rising default risks from nan Fed Quarterly SLOOs and nan tightening financial conditions:

Still deliberation in installments is nan amended short because of nan asymmetry of High Yield astatine 400bps pinch defaults starting to rise.- Boaz Weinstein

He besides added:

High Yield managers touting double digit yielding indebtedness arsenic a erstwhile successful 15 twelvemonth opportunity without caveating that almost each of it is from TBills astatine 5.25 alternatively than 0.25." - Boaz Weinstein

When it comes to in installments and successful peculiar nan in installments cycle, nan maturation of backstage in installments matters a lot. If so location are signs that nan US user is getting "maxed out", past location is simply a chance nan in installments rhythm will move successful earnest, because of excessively overmuch indebtedness being raised arsenic good for nan US consumer:

US Household debt

US Household indebtedness (Bloomberg - Twitter )

Credit cycles mostly dice because "too overmuch debt" has been raised.

Another awesome constituent was made by Joe Little nan CIO from HSBC Asset Management:

SPX500 Forward Earnings vs TIPS

SPX500 Forward Earnings vs TIPs (Joe Little CIO HSBC AM - LinkedIn)

« A caller taxable successful macro markets is nan truthful called "no landing" script - maturation is stronger, recession tin beryllium avoided, but rates must emergence more.

It's a provocative idea. But we person to beryllium careful: it contradicts nan recession grounds (for later successful nan year) already coming from starring economical indicators (US, UK, EU)

And challenges nan widely-held presumption that mean word maturation and liking rates stay low.

Long-term liking rates person risen almost 50bp complete nan past month. That would usually mean a c10% autumn successful stocks. But markets, truthful far, stay very resilient.

It leaves a "valuation anomaly" astatine nan bosom of finance markets - rising existent liking rates (red line), versus banal marketplace net yields that proceed to autumn (black line).

How this "anomaly" corrects itself will beryllium a cardinal taxable for nan adjacent shape successful markets. » - Joe Little HSBC AM CIO

Another "macro friend of ours commented:

The superposed floor plan is interesting. Since nan y-axis is connected nan aforesaid standard (3.5), it shows that nan existent ERP (vs. Real yields arsenic opposed to nominal yields) has remained alternatively changeless during nan past 5 years, isolated from nan past 8 months aliases so). The ERP utilized to beryllium a patient 5.5%. now only 4%. Something's gotta give."

The "Tantalean Punishment" of nan Fed is successful motion, arsenic such, we stay very doubtful connected nan "no landing" / soft landing scenarios playing out. This would beryllium tantamount to nan Fed avoiding a "policy mistake", which successful nan past they haven't been very bully astatine avoiding. The Fed committed nan evident argumentation correction aft nan 2000 recession erstwhile it kept nan Federal Funds complaint beneath nan CPI ostentation for a agelong period, which contributed to nan lodging bubble and caused nan awesome financial situation of 2008, besides nan commodity value bubbles (QE2), and a weaker US dollar. Is this clip different? We do not deliberation so.

Others person seen what is and asked why. I person seen what could beryllium and asked why not." - Pablo Picasso

This article was written by

Macronomics floor plan picture

During my profession I person had different roles wrong various banks, covering various products, from FX to High Grade Bonds. I person ever been passionate astir markets and peculiarly connected Macro trends. I americium presently moving successful different domiciled successful different institution and still successful interaction pinch nan in installments marketplace business.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it. I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

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