Zhang Zhan
Doug Nolan
An audience question during the annual meeting of the Foreign Bankers’ Association of Amsterdam, May 14, 2024:
“Do you entertain the possibility that returning to the 2% target will not be possible with the current level of the Fed funds rate?”
Chair Powell:
“I do think it’s really a question of keeping the policy rate at the current level for a longer time than had been thought.
By many, many measures, the policy rate is restrictive. The question is, ‘Is it sufficiently restrictive?’
And I think that’s going to be a question that time will have to tell.
Entertain the possibility – that could be a very small probability – but I have said that I don’t think it is likely, based on the data we have, that the next move that we make would be a rate hike.
I think it’s more likely we’ll be in a place where we hold the policy rate where it is.”
Disciplined central bankers would undoubtedly more than “entertain the possibility” that additional rate hikes will be necessary to return the system to price stability.
To be sure, this is not the backdrop to signal that additional policy tightening is off the table.
Importantly, it is a consequential analytical and communications blunder to assert today that there is only a “very small probability” of inflation surprising to the upside.
For starters, the sordid history of inflationism informs us that once inflation has taken hold, it becomes quite difficult to return to price stability.
“Immaculate disinflation” is a contemporary contrivance.
U.S. CPI experience is a case in point.
After consumer inflation jumped to 6.1% in December 1969, it had dropped back to 2.7% by June 1972.
But CPI was back up to 12.3% in December 1974, before settling back down to 5.5% by September 1976. But an inflationary surge saw CPI spike to 14.8% by March 1980.
Then, after dropping to 1.1% in December 1986, CPI was back up to 6.2% by September 1990.
From a historical perspective, there is a significant probability of an inflationary resurgence.
And what is a reasonable probability of a major geopolitical development triggering an inflationary shock?
Some might argue 10 to 20%.
Closely monitoring troubling global developments – including this week – I would place the odds at greater than 50% (and growing).
And I would put odds of climate instability having a meaningful inflationary impact at least as high.
With a 3.9% unemployment rate and still 8.5 million job openings, what is the probability of ongoing elevated wage gains perpetuating second-round inflationary effects (especially in rents and housing)?
The likelihood of the unfolding historic A.I. spending boom (including energy infrastructure) adding to pricing pressures?
May 17 – Bloomberg (Carter Johnson and Nazmul Ahasan):
“The Federal Reserve’s delay of interest-rate cuts in a bid to temper inflation runs the risk of falling behind the curve, according to Mohamed El-Erian.
‘The Fed pivoted on the basis of data. It was the opposite of the pivot that they did in December — now they have to do a U-turn,’ El-Erian… told Bloomberg…
‘Is the inflation target the right target?
We all talk about wanting to go back to 2%...
Two percent is totally arbitrary.
If we are pursuing the wrong inflation target, the risk of a mistake — that mistake would mean sacrificing growth unnecessarily — the risk of a mistake is high.’
‘It’s a world that’s subjected to higher inflation.
And we’ve come from a world that was subject to lower inflation.’”
I take exception with the assertion that the 2% target is “arbitrary.”
Two percent has traditionally been viewed as approximating price stability, providing a little wiggle room seen as an essential buffer against deflation risk.
Close enough for government work, apparently.
The problem over recent decades is that CPI in the vicinity of 2% has not corresponded to general price stability, certainly not with respect to securities and asset prices.
The fundamental predicament today is Monetary Disorder, including speculation running completely out of control.
Focus on CPI misses the critical issue of today’s extraordinary price level instabilities.
This is a super cycle repeatedly extended by historic monetary inflation.
Loose conditions at this “Terminal Phase” are extremely destabilizing.
From the epic A.I. (and related) arms race to precarious speculative Bubbles, loose conditions only exacerbate systemic fragilities.
Stated differently, there are powerful and now well-entrenched inflationary biases throughout the economy and markets that are feeding on loose conditions.
One of my son’s high school pals had an especially rewarding trading week.
He had purchased GameStop call options ahead of Monday’s price spike.
We’re at the stage of the speculative cycle where traders – from high schoolers entering trades between classes (and during examinations, I kid you not) to hedge fund operators trading around the clock – have learned the tricks of the trade.
Risk-taking has been rewarded again and again.
Traders are emboldened and playing with the house’s money.
Disregard economic data, Powell, and geopolitics.
It was the splashy return of “Roaring Kitty.”
May 14 – Bloomberg (Bre Bradham and Subrat Patnaik):
“Meme-stock traders again piled into shares of GameStop Corp. and AMC Entertainment Holdings Inc. in a revival of the retail-trading frenzy that rocked markets during the pandemic.
The video-game retailer’s stock jumped 60% after rising as much as 113% earlier on Tuesday, while the beleaguered movie theater chain’s shares were up 32%.
The swings triggered multiple halts in the trading of each stock throughout the day. GameStop has picked up more than $11 billion in market value this month as its stock has soared, while AMC has gained some $1.2 billion.
The latest rally erupted on Monday following the return to social media of Keith Gill, who drove the meme-stock mania of 2021 under the moniker ‘Roaring Kitty.’”
Risk premiums traded this week near lows back to 2021.
Financial conditions are the loosest since 2021.
Stocks have been in a major rally, the strongest since 2021.
The VIX Index ended the week below 12.
From the April 19th intraday low to Tuesday’s intraday high, the Goldman Sachs short index surged 31.5%.
And it’s no coincidence that “Roaring Kitty” uses the loosey-goosey backdrop for a rather spectacular return to the spotlight.
A powerful short squeeze saw the Goldman Sachs short index post a two-day (Monday and Tuesday) gain of 11.8%.
Recalling 2021 crazy - compliments of massive Fed-induced (zero rates and Trillions of QE) loose conditions:
January 29, 2021 – Wall Street Journal (Julia-Ambra Verlaine and Gunjan Banerji):
“The investor who helped direct the world’s attention to GameStop, leading a horde of online followers in a bizarre market rally that made and lost fortunes from one day to the next, says he’s just a normal guy…
To many of them, Mr. Gill—who until recently worked in marketing for Massachusetts Mutual Life Insurance Co.—is the force behind the quadruple-digit gains in shares of the videogame retailer GameStop, up more than 1600% this year...
On Wednesday, the stock jumped 135% to $347.51, a record…
Mr. Gill posted a screenshot of his brokerage account…, showing a roughly $20 million daily gain on GameStop shares and options.
‘Your steady hand convinced many of us to not only buy, but hold.
Your example has literally changed the lives of thousands of ordinary normal people.
Seriously thank you.
You deserve every penny,’ replied one Reddit user…”
“Roaring Kitty” has more followers than Powell.
The Fed Chair Tuesday admitted the labor market remains “very, very strong.”
And at least he has retreated somewhat from “sufficiently restrictive.”
Curiously, the Chair Powell, in a moment of unscripted candor, even uttered “policy is probably restrictive.”
Markets see excessively loose conditions and increasingly powerful inflationary dynamics.
The Bloomberg Commodities Index surged 2.9% this week, boosting y-t-d gains to 7.2%.
From Bloomberg:
“The Bloomberg Commodities Index is on pace for a third straight monthly gain, a streak last seen in 2022 when core inflation was running above 8%.
The commodity index is up almost 4% in May, on pace for the best month since July.”
Gold surpassed $2,400 for the first time in Friday trading, ending the week at $2,414 with a 17.1% y-t-d gain.
Silver surged 11.7% this week to $31.493 – up 29.8% y-t-d to the high back to February 2013.
Platinum gained 8.8%.
Copper jumped 8.3%, pushing 2024 gains to 30%.
Nickel gained 11.2% this week,
Lead 2.7%, Tin 6.7%, Palladium 3.3%, and Aluminum 3.3%.
Crude futures rose 2.3%, gasoline 3.0%, and natural gas 16.6%.
Lumber gained 7.5%, Cattle 2.8%, Coffee 1.8%, Soybeans 1.9%, and Rubber 3.7%.
What is the probability that surging commodities prices foreshadow the next round of inflationary pressures?
It’s certainly not very low.
With the Fed refusing to tighten conditions, how will this sit with the bond market?
May 17 – Reuters (Liangping Gao and Clare Jim):
“China announced ‘historic’ steps on Friday to stabilise its crisis-hit property sector, with the central bank facilitating 1 trillion yuan ($138bn) in extra funding and easing mortgage rules, and local governments set to buy ‘some’ apartments.
Investors hoped the measures marked the beginning of more decisive government intervention to compensate for waning demand for new and old apartments, to slow down falling prices and to reduce a growing stock of unsold homes…
The homes would be used to provide affordable housing, Vice Premier He Lifeng said, without giving a timeline or a target for the purchases.
He also said local governments, already some $9 trillion in debt, can repurchase land sold to developers, and promised that authorities will ‘fight hard’ to complete stalled projects…
China's central bank said it would set up a relending facility for affordable housing that it says would result in 500 billion yuan worth of bank financing.
It would also further lower mortgage interest rates and downpayment requirements.
Additionally, it would make another 500 billion yuan available in its pledged supplementary lending facility to support policies including the redevelopment of some urban areas with older dwellings.”
Beijing has embarked on what I expect will degenerate into historic reflationary policymaking.
The Rubicon was crossed this week.
Xi Jinping’s global ambitions preclude desperately needed financial and economic adjustment.
Hopes that more conventional measures would avert apartment Bubble deflation have been dashed.
Ominously, last year’s record $5.0 TN of Credit (“aggregate financing”) growth and record $5.24 TN Bank Assets ballooning barely held crisis dynamics at bay.
Massive Credit growth, myriad stimulus measures, and bank reserve requirement cuts – and apartment Bubble deflation only accelerated.
Moreover, the massive investment (to counter housing weakness) in export industries (i.e., EV, solar, renewables, tech…) has provoked a powerful global trade backlash.
China has been a huge gold purchaser.
Is Beijing now stockpiling various commodities?
Ahead of economic recovery, currency devaluation or geopolitical upheaval?
Powell clearly does not factor China developments into his “very low probability” thesis.
More than ever before, inflation dynamics are out of the Fed’s control.
May 16 – Financial Times (Joe Leahy, Max Seddon and Demetri Sevastopulo):
“Vladimir Putin and Xi Jinping… vowed to work together against what they said was ‘destructive and hostile’ US pressure and to deepen the ties that have sustained Russia’s invasion of Ukraine…
Putin’s state visit… was a clear rebuke to the US after secretary of state Antony Blinken last month urged China to drop its support for Russia’s war in Ukraine.
Washington has also been considering imposing sanctions on Chinese financial institutions if Beijing does not stop its support.
A senior US official said the message from Putin and Xi sent ‘a signal throughout the People’s Republic of China that it is OK to be full-steam ahead on all trade with Russia and that is a concern’.
‘We find it unacceptable that Chinese companies are helping Putin wage this war against Ukraine and if China purports to support peace in Europe, it cannot continue to fuel the biggest threat to European security,’ the US official said.
‘This is not just a US position.
You also heard it from our G7 partners, Nato and the EU.’”
Thrilling comebacks of “Roaring Kitty” and meme-stock madness notwithstanding, it was an ominous week.
Those Xi/Putin bromance hugs confirm the world has changed for the worse.
And Beijing’s adoption of aggressive reflationary measures moves China one step closer to crisis of confidence dynamics.
And it’s not just the U.S. that must today seriously question the durability of business as usual with Xi’s China.
How can Europe not be aghast and alarmed by the whole thug bromance spectacle?
The Western world?
It's increasingly challenging to see how the China/Russia/North Korea/Iran anti-West alliance is consistent with a stable renminbi.
And I fear the typical constraints imposed by a currency crisis would push China closer to what I’ve called “Plan B.”
May 17 – Bloomberg (Simina Mistreanu and Christopher Bodeen):
“Russia and China are helping each other expand their territorial reach, and democracies must push back against authoritarian states that threaten their rights and sovereignty, Taiwan’s outgoing foreign minister, Joseph Wu, said…
Wu called on democracies to align in countering Russia and China’s military assertiveness in Europe, the South China Sea and beyond.
China threatens to invade Taiwan, a self-ruled democracy that it claims as its own territory.
‘Putin’s visit to Beijing is an example of the two big authoritarian countries supporting each other, working together with each other, supporting each other’s expansionism,’ he said.”
May 16 – BBC (Kelly Ng and Joel Guinto):
“Concerns are growing for the safety of a Chinese blogger, who has not surfaced days after she was meant to be freed from jail.
Zhang Zhan was sentenced to four years for livestreaming the Covid-19 lockdowns in Wuhan…
She was due to be released on Monday, but her whereabouts remain unclear, sparking concerns from rights groups.
The 40-year-old is among a number of people who got into trouble for reporting on Covid-19.
‘The international community must not forget Zhang Zhan and should demand that the Chinese government ensure that she is truly free,’ Human Rights Watch said...”
May 13 – CNN (Nectar Gan):
“A Chinese citizen journalist who has been behind bars for four years over her reporting on the initial Covid-19 outbreak in Wuhan is due to be released Monday…
Zhang Zhan, a former lawyer, was one of the few independent Chinese journalists reporting in Wuhan after the metropolis of 11 million people went into a complete lockdown, offering a rare, unfiltered glimpse into the reality on the ground as Chinese authorities imposed tight censorship on media coverage.
She was detained in May 2020 and sentenced months later… for ‘picking quarrels and provoking trouble’ – a charge commonly used by the Chinese government to target dissidents and human rights activists.”
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