Hopelessly unproductive works

Delivered on By Justin Pyvis

Good morning! The geopolitical situation in the Pacific certainly heated up after the election of Ferdinand “Bongbong” Marcos Jr as leader of the Philippines, with China’s ambassador Huang Xilian stating:

“I have no doubt that under the next administration, our bilateral relations will only become stronger, our peoples closer and our cooperation deeper and wider.”

Meanwhile China’s ambassador to Australia, Xiao Qian, sought to cool tensions:

“China’s growing power should not be seen as a threat by Australia.

A big and powerful country that pursues a friendly policy can definitely become a friendly and powerful partner. While growing and growing, China has always been committed to conducting friendly cooperation with countries around the world, including Australia.”

But ScoMo wasn’t having a bar of it:

“I don’t want to give any amplification for the views of the Chinese government.

I support Australia’s national interests, not the Chinese government’s view of what national interests are, whether it be in Australia or across the Pacific.”

Bongbong is likely to shift the Philippines – the US' oldest Asian ally – and “the thinking of ordinary Filipinos toward China in the coming decades”, which if true could help China expand its influence and power in the Pacific.

Whichever party secures government at next week’s federal election will certainly have its work cut out for it!

Reading the tea leaves

Daily % change







AU Bond



US Bond









Brent (bbl)



Gold (oz)



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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 US S&P500 edged down -0.13% overnight on a rollercoaster of a day, demonstrating the huge amount of uncertainty present about inflation and whether it could prompt the Federal Reserve to hike interest rates more aggressively. Producer prices did nothing to ease concerns, matching expectations with a 0.5% increase on the month and an 11% rise from a year ago.

Locally, the ASX200 fell -1.75% with all 11 sectors in the red, marking the first time the index has closed below 7,000 points since early March. Tech stocks were absolutely poleaxed (-8.7%) following the release of US inflation data the night before, the strength of which should see the Federal Reserve continue its planned monetary tightening (although it may not end well – see Food for thought below).

Elsewhere in the region, ongoing capital flight forced Hong Kong’s central bank to defend its US dollar currency peg for the first time since 2019, “driving up borrowing costs when the local economy is contracting under the weight of some of the world’s strictest Covid-containment measures”.

Food for thought

All else equal, sustained growth in the money supply leads to higher long-run inflation.
All else equal, sustained growth in the money supply leads to higher long-run inflation. Source

Has inflation already peaked? In the US, April’s headline consumer price index (CPI) grew just 0.3% from the prior month, the slowest rate of monthly growth since August 2021. But core inflation – which strips out food and energy prices – doubled from the previous month to 0.6%, returning to the rate of growth seen in the several months prior.

There’s a lot to disentangle in those figures. The headline rate fell largely because energy prices eased, a feat that may not be sustained in future months. The largest contributors to core inflation were services and shelter, the latter of which is measured with a considerable lag of around 12-15 months.

In other words, just as the the official inflation data were suppressed last year by various government programmes and the lags in housing inflation and wage negotiations, they may be held up this year as those effects work in reverse, even if the underlying cause of the current wave of inflation – excessive growth in the money supply – has already peaked.

And there’s evidence that inflation might subside sooner than later, with growth in broad money aggregates such as M2 already decelerating to levels less consistent with persistent, above-average inflation – ignoring economic growth and changes in velocity, above-average growth in the money supply needs to be sustained to generate “greater inflation even if that country is a low inflation country”.

That poses a challenge for policymakers. Central banks around the world eased monetary policy on an unprecedented scale following the outbreak of the pandemic but then failed to reign it back in when it became clear that level of stimulus was not warranted, preferring to believe that it was all just “transitory”.

Monetary policy operates with significant lags. By waiting so long, there’s now a very real risk that many central banks will find themselves aggressively tightening policy while on the precipice of a recession. That includes our own Reserve Bank of Australia, which started its tightening process at least six months too late.

But most of the damage was done last year as central banks sat idly by. As John Stuart Mill wrote in 1867:

“Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”

Many businesses and other investments (e.g. houses) that appeared profitable (i.e. productive) during the unprecedented post-pandemic fiscal and monetary expansion may turn out to be duds. Rising interest rates will simply start to reveal the wheat from the chaff.

Chewing the fat

Bits and bytes

🗳️ Crooked as a dog’s hind leg: “Australians were asked to rate the leaders out of 10 on trust and competency. Mr Albanese had an overall rating of 5.1, while Mr Morrison had an average rating of 3.3.”

🥝 Party’s over: Kiwi house sale volumes plunged 35.2% from a year ago in the year to April, with median sales prices down over 12% between March and April.

💰 The WA government released its 2022-23 state budget showing an estimated cash surplus of $3.8 billion in 2021-22, although it expects that to quickly turn into annual deficits every year until 2025-26.

🛡️ Finland’s President and Prime Minister issued a joint statement saying: “Finland must apply for NATO membership without delay. We hope that the national steps still needed to make this decision will be taken rapidly within the next few days.”

🤝 UK PM Boris Johnson “signed security pacts with Sweden and Finland that could see British troops sent to the Nordic nations in the event of a Russian invasion from ‘21st century tyrant’ Vladimir Putin”.

🏡 Workers in San Francisco want to spend 53% less time in the office compared to pre-pandemic, the highest in the US. In New York it’s 49%, while in Los Angeles it’s 47%.

🤷‍♂️ If you don’t hold the private keys and your cash isn’t insured… well: Crypto exchange Coinbase “is now warning that bankruptcy could wipe out user funds”.

🕵️‍♀️ Look out: “Federal regulators are investigating Elon Musk’s late disclosure last month of his sizable stake in Twitter… [after] Mr. Musk likely saved more than $143 million by not reporting that his trades had crossed the 5% threshold.”

🍎 One of our best innovations: “A Western Australian man known across the globe as the breeder of the Pink Lady apple, John Cripps, has died at the age 95.”

💸 Buy now, pay never: “In the past year, she [18-year-old Alana] joined up to about seven different buy now, pay later companies and owes more than $8,000. ‘It was so easy to sign up. They just asked for my name, date of birth and ID’, said Alana.”

🏉 Leon Cameron resigned as GWS coach in what was described as an “amicable separation”.

🏆 Australia was officially confirmed as host of the 2027 (men’s) and 2029 (women’s) Rugby World Cups.

📝 Legal might need to work on their contracts: “Moderna’s new financial chief left the COVID-19 vaccine maker after just one day on the job… [and] will receive 12 months of salary equal to $700,000.”

🔐 North Korea reported its first official COVID-19 case, with the government immediately plunging the entire country into lockdown in what it described as the “gravest national emergency”.

🏗️ Property developer Sunac, China’s third-largest developer by sales, became the latest indebted Chinese firm to miss a bond payment, raising concerns that it could default.

❌ “Conspiracy to collude with foreign countries”: China began arresting prominent pro-democracy supporters under Hong Kong’s controversial new national security laws.

⚽ Argentina pulled out of a contractual agreement to play Brazil in an exhibition match in Melbourne next month, forcing 60,000 tickets to be refunded.