Running rampant

Delivered on By Justin Pyvis

Good morning! Congrats to Australia’s 31st Prime Minister, Anthony Albanese, and the Labor party for claiming an expected outright majority at Saturday’s election.

The next few years certainly aren’t going to be easy: the federal government’s net debt will soon surpass $1 trillion with no end in sight, up from zero just over a decade ago; real wages are declining at the fastest rate on record; and geopolitical concerns in the Pacific are likely to escalate as leaders increasingly cast their gaze abroad in attempts to distract people from declining economic growth and living standards at home.

All we will say is good luck, because Albo’s certainly gonna need it!

Reading the tea leaves

Daily % change







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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 was largely unchanged, gaining 0.01% but finishing down for a seventh straight week (-3.1%), its longest weekly losing streak since March 2001 amid uncertainty about the outlook for growth and inflation as central bankers attempt to achieve a ‘soft landing’ – pull inflation down without triggering a recession.

Locally, the ASX200 gained 1.15% led by tech (+4.6%) and materials (+2.2%), the latter benefiting from gains to the big miners after China cut its benchmark rate for mortgages by 15 basis points to 4.45%, a bigger-than-expected cut as its economy continues to sputter.

Food for thought

The RBA rarely achieves its 2-3% inflation target, even in 'normal' times. But that doesn't stop it from forecasting a smooth transition into the band.
The RBA rarely achieves its 2-3% inflation target, even in 'normal' times. But that doesn't stop it from forecasting a smooth transition into the band. Source

Inflation is running rampant across the developed world, surprising central bankers who for months were forecasting any rise in consumer prices to be “transitory”, quickly falling back within their target range.

Those confident claims were made despite a flood of ultra-easy monetary and fiscal policy delivered in response to the pandemic, both of which remain highly stimulatory.

Australia’s own central bank governor, Philip Lowe, as recently as November 2021 remarked that he did not expect the need to raise interest rates until 2024:

“Given the latest data and forecasts, the central scenario for the economy continued to be consistent with the cash rate remaining at its current level until 2024.”

Just six months later not only did Lowe have to pull that forecast forward, he actually had to hike rates.

But Lowe’s grave forecasting errors are not specific to him or the RBA. Following the UK’s 40-year high 9.0% inflation reading in April, former Bank of England governor, Mervyn King, pulled no punches:

“Central banks around the world have made serious mistakes in not acting much sooner. Including ours.

Central bankers around the world are very confident that inflation will simply fall right back to the target. But when people come to set prices or bargain for wages, they won’t necessarily assume that inflation will come straight back down to 2%.

King believes that even though central banks have belatedly started to tighten policy, they’re still not doing enough to convince people that they’re willing to get on top of inflation:

The idea that interest rates of 1% are going to have much impact… is really very strange. They have to give a very strong signal they’re determined to get on top of the inflation problem.”

King wrote a book on how forecasting can go wrong, Radical Uncertainty, in which he and co-author John Kay lamented the uncritical reliance on models within organisations such as central banks:

“You cannot derive a probability or a forecast or a policy recommendation from a model; the probability is meaningful, the forecast accurate or the policy recommendation well founded only within the context of the model.

Informed judgement will always be required in understanding and interpreting the output of a model and in using it in any large-world situation.”

The models used by the world’s central bankers to predict inflation are imperfect event during ‘normal’ times. Throw in a pandemic and those models become worse than useless because they give central bankers the pretence of knowledge:

“The pretence that every important macroeconomic issue could be explained in terms of a single model was a major error.”

How central bankers achieve the ‘soft landing’ their models are once again forecasting remains to be seen. Colour us sceptical, but given their models are deeply flawed – if they weren’t, we wouldn’t have had the inflation problem in the first place – we’re not at all confident they’re going to pull this one off!

Chewing the fat

Bits and bytes

🚰 On the eve of the election news was leaked that the National Security Committee of cabinet rejected a push from then-Foreign Affairs Minister Marise Payne to double Pacific aid funding last year to help counter China’s influence.

🐒 It’s here: “New South Wales has reported a ‘probable’ case of monkeypox in a returned traveller from Europe - the same day Australia recorded its first confirmed case of the rare illness in Victoria.”

🏊‍♂️ Zac Stubblety-Cook broke the men’s 200m breaststroke world record at the Australian Swimming Championships in Adelaide.

🏊‍♀️ Ariarne Titmus broke the 400m women’s freestyle world record at the same event.

🤼‍♂️ Jeff Bezos and the White House are embroiled in a war of words over inflation, taxes and the unionisation of Amazon employees.

👉 Elon Musk was accused of sexual misconduct towards a SpaceX flight attendant in 2016, claims he says are “utterly untrue”.

📈 Core inflation in Japan hit a 7-year high 2.1% in April, above the Bank of Japan’s target of 2%.

🔥 Germany’s producer prices rose at a new record-high rate of 33.5% from a year ago in April.

🏃‍♂️ A 30-year-old man died after collapsing at the finish line of the Brooklyn Half Marathon on Saturday.

🎾 Wimbledon was stripped of its ranking points this year “because of the All England Club’s ban on players from Russia and Belarus over the invasion of Ukraine”.

🛂 Some countries still have hard borders: “Japan will next month double its limit on foreign arrivals to 20,000 a day”, although tourists will still be barred.

🔨 “The G7 finance ministers and central bank governors have called for a swift and comprehensive regulation of crypto assets.”

⚔️ Ukraine’s President Volodymyr Zelenskyy said there are around 700,000 soldiers actively defending the country.

⚽ Manchester City won the English Premier League for a fourth time in five years, coming back from 2-0 down to defeat Aston Villa to secure the title.