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Next Inflation Shock Comes From Resource Nationalism
Next Inflation Shock Comes From Resource Nationalism
First there was supply-chain disruption brought on by the coronavirus, then war in Ukraine further rocked commodity markets. The next bout of inflation via raw material prices will be brought on by resource nationalism.
While the cost pressures brought on by the difficulty in moving goods in a world in lockdown are fading, other factors are more enduring.
“Potential For Extreme Havoc”: $50 Trillion Question Is What If Yields Spike Higher
“Potential For Extreme Havoc”: $50 Trillion Question Is What If Yields Spike Higher
The size of the global government bond market surged by $10 trillion in the space of two years to reach about $50 trillion. Those outstanding borrowings are at least one gorilla in the room as investors gear up for a year in which yields are expected to climb as central banks step back and economies extend their recovery.
At the very least the weight of all that debt acts to enhance the role that “price-insensitive” investors play in repressing yields.
The savings glut is a big part of that pool. Across Asia and beyond there’s a generation or two who grew wealthy from the postwar booms and are now more concerned about preserving capital than about adding to it.
Their presence helps to explain the waves of buying that contributed to capping yields at about 1.7% for 10-year Treasuries this year, as does demand from pension funds and insurers — remember the U.S. defined-benefit funds who switched into bonds.
Then there are the essentially forced investments from banks that have to hold sovereign securities to meet rules introduced after the collapse of Lehman Brothers.
And we have the trillions of dollars that central banks hold, both via QE programs and in their foreign-exchange reserves.
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Food Inflation Is the 2022 Crisis, Not Supply Chains
Food Inflation Is the 2022 Crisis, Not Supply Chains
The real trouble will start when this year’s energy crisis morphs into next year’s food inflation problem.
We’ve all become armchair inflation experts. And why not? It’s almost impossible for anyone to keep getting it as systematically incorrect as professional economists have done this year.
It’s time for the conversation to move beyond the current obsession with eye-catching headline numbers. That we’re in a global inflation regime of a kind not seen for decades, is beyond doubt.
Interest in supply chains is at a 17-year high, according to Google Trends, but it has become a red herring when it comes to forecasting the persistence of inflation.
Supply-side constraints are usually a key initial catalyst in any price spiral. And it’s intuitive that the vast majority of supply-side issues are “transitory” in nature as supply eventually responds to higher prices. So, while it’s good to know when supply-side pressures will ease, that knowledge isn’t sufficient to conclude when the broader inflation threat will pass.
What we need to establish is whether demand will take over in leading the inflation charge. And, for that purpose, inflation expectations are critical. As measured by breakeven rates, U.S. 5-year expectations have breached 3% for the first time in at least 19 years. The U.K. equivalent is well above 4% for the first time in records going back more than 25 years.
Expectations of higher inflation have the double impact of encouraging people to front-load spending, further pushing up prices, as well as the more important effect of laborers demanding higher wages, thereby both directly increasing costs and the future pool of capital allocated to demand.
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“Get Ready For Some Serious Sticker Shock Very Soon: This Jump In Inflation Won’t Be Transient”
“Get Ready For Some Serious Sticker Shock Very Soon: This Jump In Inflation Won’t Be Transient”
Semiconductor Costs Could Lead to a Shock This Fall
Consumer confidence is key to how people plan to spend. You can see it in the chart below. And as the chip shortage grows, expect the higher prices to begin showing up in products, which could dampen confidence and eventually stall consumer spending.
The recent surge in chip prices hasn’t affected consumers, and stimulus has kept spending up while confidence has lagged. But that will soon change. Manufacturers have been eating the increase costs and not passing them on to consumers. With chip prices expected to rise every quarter this year, many companies will be unable to keep swallowing it, especially those with tight margins.
Manufacturers order semiconductors six months in advance. The choke points along the supply chain driving up prices and creating shortages will come to a head in the third quarter, when the next orders to replace inventories are delivered, according to the founder of SouthBay Research Andrew Zatlin.
Automakers will struggle to hold the line. At General Motors, for example, roughly 5% of the cost of goods sold is from semiconductors. The company has 11% margins, and a surge in chip prices will hit profits hard, according to Zatlin. And small business who sell to the likes of Amazon and Walmart with tight retail margins will be forced to raise prices even higher.
The impact should only spread from there. Which is why this jump in inflation won’t be transient as the Fed hopes. Every manufacturer with tight margins will be forced to raise and maintain higher prices. So get ready for some serious sticker shock very soon.
Bloomberg Markets Live , Vincent Cignarella, zerohedge, inflation, supply shortages, supply chains, price inflation
