Inflation spirals on up

Delivered on By Justin Pyvis

Good morning! In response to the news that China’s foreign minister will this week “seek a region-wide deal with almost a dozen Pacific islands covering policing, security and data communications cooperation”, new PM Albo said:

“We need to step up, genuinely, into the Pacific, that is why Penny Wong […] is already on her way to Fiji.

We need to respond to this because this is China seeking to increase its influence in the region of the world where Australia has been the security partner of choice since the Second World War.”

It’ll be interesting to see if anything comes of new foreign minister Penny Wong’s latest trip. Expect a lot more visits to the region in the coming months and years, with tensions to the north warming as a slowing China increasingly looks to achieve some of its other goals, such as countering the US influence in the Pacific and pushing for the ‘reunification’ of Taiwan.


Reading the tea leaves

Daily % change

AUD/USD

71.0

+0.1%

AUD/CNY

4.78

+0.8%

AU Bond

3.23

+0.3%

US Bond

2.76

+0.3%

ASX200

7,106

-0.7%

S&P500

4,058

+2.0%

Brent (bbl)

117.3

+2.9%

Gold (oz)

1,849

+0.2%

Iron ore (t)

129.4

-1.6%

Bitcoin

29,500

-0.2%

Ethereum

1,829

-6.0%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 gained 1.99% overnight led by consumer discretionary (+4.8%) after a series of positive outlooks from retailers such as Macy’s and discount stores Dollar Tree and Dollar General.

Travel stocks also performed well following an upwardly revised guidance from US carriers Southwest Airlines and JetBlue Airways for the second quarter.

Finally, US initial jobless claims fell more than forecast following last week’s unexpected rise, easing some concerns that cooling labour demand had already set in.

Locally, the ASX200 fell -0.69% with only tech (+1.0%) making ground thanks largely to data company Appen (+29.2%), which became the subject of a hostile takeover attempt from Canadian telco giant Telus.

All 10 other sectors finished in the red following weaker than expected total new capital expenditure, which fell by -0.3% in the March quarter, with a large decline in buildings and structures (-1.7%) likely due to poor weather on the east coast and ongoing supply and labour issues.

Also not helping matters was China’s Premier Li Keqiang, who said China’s economy was faring worse than in 2020 when it experienced a full, but much shorter, lockdown. All of the big iron ore mining companies fell following the statement, led by FMG (-3.7%).


Food for thought

"Heightened risk perception and expected monetary policy tightening" means "debt vulnerabilities are back in focus".
"Heightened risk perception and expected monetary policy tightening" means "debt vulnerabilities are back in focus". Source

How long will it be until financial repression – “policies that result in savers earning returns below the rate of inflation” – becomes vogue in most developed economies? Given the enormous levels of debt racked up in response to the COVID-19 pandemic, on top of already high debt levels, it may be sooner than you think:

“During the pandemic, deficits increased and debt accumulated much faster than they did in the early years of other recessions, including the largest: the Great Depression and the Global Financial Crisis. The scale is comparable only to the two 20th century world wars.

According to the IMF’s Global Debt Database, borrowing jumped by 28 percentage points to 256 percent of gross domestic product in 2020. Government accounted for about half of this increase, with the remainder from non-financial corporations and households. Public debt now represents close to 40 percent of the global total, the most in almost six decades.”

Government debt can be paid back in three ways: spending less/taxing more, borrowing, printing money, or some combination of the three. Printing money and borrowing is always tempting because the cost is invisible – until it isn’t – at which point scapegoats can be trotted out to buy more time (‘Putin did it; greedy corporations!').

But eventually inflation and all of its insidious effects become too high for politicians and central banks to ignore. The problem, as many Latin American countries have found out over the years, is that:

“Countries get into fiscal problems, they have inflation, they raise interest rates, that just raises debt costs, and the inflation spirals on up.”

If politicians insist on money printing as the solution to their debt problems, the only way to sustain it while also hiding much of the cost from the public is through financial repression.

For example, the government/central bank could reduce or stop paying banks interest on reserves that they’re required to hold for ‘financial stability’; raise the amount of those required reserves; or adopt any other myriad of options that directly or indirectly force capital into places where it will earn a below-inflation rate of return, such as government bonds.

It’s that or cut spending and/or raise taxes, something for which no government in the past couple of decades has had much of an appetite.


Chewing the fat


Bits and bytes

🧙‍♂️ Labor MP Tanya Plibersek apologised for likening the new opposition leader, Peter Dutton, “to Voldemort, the villain from the Harry Potter series”.

⚡ From July power prices will rise by up to 18.3% in NSW, 12.6% in south-east QLD and 9.5% in SA due to the “cost pressures facing electricity providers”.

🏗️ REMI, an east-coast independent investment company that catered to “boutique property developments”, collapsed while still owing creditors $A70 million.

📣 In a new filing, Elon Musk revealed he had “increased his personal funding of the [Twitter] purchase from $27.3bn to $33.5bn and secured an additional $6.25bn in equity financing”.

✈️ Despite strong demand, Qantas will cut domestic capacity and “rebalance airfares… because jet fuel prices had continued to rise over the past month”.

💰 Venture capital firm Andreessen Horowitz announced a $4.5 billion crypto fund, calling the bear market an opportunity to get in on “the next major computing cycle”.

📈 The Bank of Korea raised its cash rate by 25 basis points to 1.75%, a second consecutive hike as it seeks “to wrestle consumer inflation down from 13-year highs”.

🌲 That’s one way to return to growth: “Japan plans to call for moving ahead with a new “green” gross domestic product (GDP) indicator that will reflect the country’s progress in reducing greenhouse gas emissions.”

📉 Bloomberg’s China economic indicators worsened in May, even as areas affected by virus control measures fell to 20.5% of GDP, down from 35.1% at this time last month.

📡 “Elon Musk’s SpaceX told the Federal Communications Commission in a presentation last week that its Starlink satellite internet service now has over 400,000 subscribers around the world.”

🙃 Raise prices, lose more customers, requiring even higher prices… “NBN Co claimed prices needed to be increased due to ‘increasing competition from 4G, 5G, fixed wireless network and low-earth orbit satellite operators in those markets in which residential services are supplied’.”

🔫 A National Rifle Association conference to be held tonight, with former President Trump as the keynote speaker, will be gun-free.

⚖️ “A jury in Portland has convicted a self-published romance novelist — who once wrote an essay titled How to Murder Your Husband — of fatally shooting her husband four years ago.”