🎌 Japanisation
By Justin Pyvis – Delivered on 12 Nov 2021

Good morning! It was all about bubbles yesterday, and not just the ones being blown by the world's central bankers (see the Feature below for more on that). No, we also got news about additional quarantine-free travel bubbles after ScoMo announced discussions were underway with both Japan and Korea:

"I think we'll move fairly quickly beyond that [Singapore bubble] into Korea and Japan, and before the end of the year I hope we're opening up even more."

Good news, although it's now looking like Aussies will be able to visit New Zealand, Singapore, Japan and Korea before they'll be allowed to cross the Nullarbor into WA!

Elsewhere, one day after ditching its mask mandate Queensland is on "high alert" following the discovery of a second unlinked COVID-19 case on the Gold Coast. Premier Annastacia Palaszczuk warned that "if we see more unlinked community transmission on the Gold Coast in the next 24 to 48 hours, we may have to put in place some further restrictions".

😬 Have a great weekend.

Fully vaccinated population (aged 12+)


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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing the US S&P500 looked like it might just barely edge higher for the first time in three days, trading up around 0.10%. Bond markets took the day off for the Veterans Day holiday and the US Dollar Index climbed to its highest level since July 2020, as punters bet that due to record-high inflation the Fed may have to start tightening policy ahead of its European counterpart.

Locally, the ASX200 lost ground for a fourth straight session, dropping -0.57% after the 30-year high US inflation read overnight and a disappointing domestic jobs report.

A notable gainer was iron ore miner Fortescue, which surged +8.19% on stronger iron ore futures prices and comments from CEO Elizabeth Gaines, who revealed that the company's green hydrogen spinoff, Fortescue Future Industries, still had plenty of unspent cash left over from last year.


A reopening blip: Australia's unemployment rate shot up 0.6 percentage points to 5.2% in October. This series has become a bit misleading of late due to lockdowns and the ensuing shrinkage, then inevitable expansion in the participation rate. For instance, 13 million Australians were still in lockdown when this survey was conducted (26 September to 9 October).

Conversely, November's release – which will capture a reopened NSW and VIC – could be quite strong.

Wage pressures: According to Mercer's annual Total Remuneration Survey, "93% of Australian organisations are planning salary increases for their workforce in 2022 of 3%, up 0.5% from 2021".

Inflation in... Japan?!: The corporate goods price index (what companies charge each other for their goods and services) in Japan hit a 40-year high, rising 8.0% from a year ago in October – the biggest increase since comparable data became available in January 1981. 🔥

Almost there: The UK economy grew 1.3% in the September quarter, meaning it's now just 0.6% smaller than it was pre-pandemic. According to the Office for National Statistics, the increase was led by health (more elective surgeries) and lawyers (property related), partially offset by declines in car manufacturing and sales. Of concern was business investment, which "remained well down on pre-pandemic levels".

From deadline to deadline: Just cut it up into little pieces already. China's Evergrande made interest payments on three bond tranches due last month, just prior to the end of the 30-day grace period, narrowly avoiding a formal default yet again.

Elon pays his tax: A day after his Twitter poll asking whether he should sell 10% of his Tesla holdings, Elon Musk exercised his 2.15 million in Tesla stock options due to vest next August and then immediately sold about 934,000 shares for just over $US1.1 billion "solely to satisfy the reporting person's tax withholding obligations related to the exercise of stock options".

However, he then went on to sell another 3.6 million shares over the following day (perhaps in part causing the 10%+ daily decline?), taking his total Tesla liquidation to about 3% of his overall stake (~US$5 billion).

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🎌 Japanisation

Consumer price inflation in the US grew at an annualised rate of 11.4% in October. Speaking at the Australian Tech Council yesterday shortly after the release, former US Treasury Secretary under Bill Clinton and Harvard President Larry Summers said that "containment of inflation is going to be an important policy priority in the Unites States, the United Kingdom - and I would submit quite plausibly in Australia as well".

"Is this a serious problem? It's very difficult... experience suggests, to manage soft landings, where interest rates are raised just enough to take edge of inflation but not enough to push the economy into downturn.
Big picture, we are looking at a relatively strong economy, and we are probably more concerned about its overheating than its under-heating and being too cool."

Stepping back: Larry Summers has been arguing for the better part of a year that the US Federal Reserve is underestimating inflation. In August, we covered a warning from Summers about quantitative easing (QE) – the act of printing money and giving it to banks in exchange for Treasury bonds – because most of the problems associated with a pandemic cannot be "overcome by printing money".

The Reserve Bank of Australia (RBA) has pledged to continue its own version of QE, despite already owning over 25% of Australia's federal debt and recently having to abandon a component of it after markets correctly called its bluff.

Why this matters: Summers worries that by keeping interest rates low for so long, central banks – including the RBA – have set the stage for the "Japanisation" of their economies.

By that, he means they encouraged excessive leverage and asset price inflation, leading to "the perpetuation of zombie enterprises and the perpetuation of financial bubbles", because the pain of unwinding such bubbles has created "a world where the feasible range where interest rates can be varied will be much less than it used to be".

If central banks have effectively neutered themselves going forward it means governments will have to bear more responsibility for economic stabilisation, a task at which they've historically not been very good (political incentives don't often line up with positive long-term outcomes).

Looking forward: The inflation genie may already be out of the bottle, so to speak. The public certainly thinks so. If Larry Summers is right, how central bankers respond over the next few months will be critical as to whether or not they can maintain some semblance of inflation-busting credibility, or if the world's major economies will blindly stumble further along the road towards "Japanisation".

The Wrap Up
    France international and PSG women's soccer player Aminata Diallo was arrested after allegedly hiring two men to injure a teammate to stop her competing for playing time.
    🌏Taiwan's government responded to former PM Paul Keating's claim that it was "not a vital Australian interest" but rather a "civil matter" for China, by saying "a peaceful and stable Indo-Pacific region is in the interest of Australia, Taiwan and other countries".
    🎓No wonder it's so expensive. Yale University now employs as many administrators as it has undergraduate students, possessing the highest manager-to-student ratio of any Ivy League university.
    🎬Pesky inflation! In the "coming weeks" Netflix will raise its standard Australian subscription fee from $A15.99 to $A16.99 a month.
    🏰Poland accused Belarus of "state terrorism", claiming the latter lured over 2,000 migrants from the Middle East "and sending them to cross into Poland in retaliation for sanctions".
    🥶China's President Xi Jinping called for global cooperation, warning that "The Asia-Pacific region cannot and should not relapse into the confrontation and division of the Cold War era."
    🛒Google lost an appeal against a European antitrust decision over the use of its own price comparison shopping service, meaning it will have to pay a fine of €2.42 billion.
    🦗Some excellent batting from Matthew Wade and Marcus Stoinis saw Australia defeat Pakistan by 5 wickets (with 6 balls remaining) to qualify for the T20 Grand Final against New Zealand.
    ⚱️Chairman of selectors George Bailey confirmed that Marcus Harris will joined David Warner as Australia's opening pair in the first Ashes Test at the Gabba.
    The Socceroos were held to a 0-0 draw against Saudi Arabia in a World Cup qualifier.
    😏This is one of those things, where if you have to say it... Boris Johnson said the UK is not "remotely a corrupt country".
    👽Three quarters of American adults "believe Facebook is making American society worse", yet around the same share (69%) admit to using Facebook, half of whom visit the site every day...
    💰According to Alibaba, Chinese consumers spent a record amount during the annual 11-day Singles' Day shopping festival, up 14% from last year.
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