Rabo: The Fed Is Giving People The FAIT Finger
By Michael Every of Rabobank
FAIT and lean cows
Then Pharaoh said to Joseph: “Behold, in my dream I stood on the bank of the river. Suddenly seven cows came up out of the river, fine looking and fat; and they fed in the meadow. Then behold, seven other cows came up after them, poor and very ugly and gaunt, such ugliness as I have never seen in all the land of Egypt. And the gaunt and ugly cows ate up the first seven, the fat cows. When they had eaten them up, no one would have known that they had eaten them, for they were just as ugly as at the beginning. So I awoke.” Genesis 41:17-21
Question: how many cows were there on average for the Pharaoh? Seven, or fourteen? And if seven, the fat or the lean? Without getting theological, these old questions apply for our modern day monetary Pharaohs, the central banks – and to billions around the world. Overnight we got the Fed minutes, the message of which our multi-coloured-dream-coated Philip Marey interprets as follows: despite the fact that headline inflation is going to pick up ahead, this is just (seven months?) of fat following (a lot more of) lean. As such, nothing needs to be done on rates.
Of course, this is hardly divine revelation. The Fed’s new Flexible Average Inflation Targeting regime (FAIT) means if it chooses, the lean cows can always be seen as eating the fat ones: as such, policy can always be set for the promised land of milk and honey and sustainable inflation and wage growth. In this case it means they can stay low. Indeed, swap markets are excitedly looking at 100bp of Fed hikes ahead towards the end of a Biblical seven-year cycle. That’s prophecy, not pricing. A lot can change in that kind of time horizon: as the news reports today, archaeologists have just discovered Pharaoh Seqenenre Taa II may have died on the battlefield, overwhelmed by attackers (in a war over noisy hippos).
One needs no exegesis to understand that the Fed’s view is also that while asset prices are already “elevated”, nothing needs to be done about that either. So the price of pyramids –and dare one say pyramid schemes?– can continue to soar, and new pyramids can be constructed all over the place regardless of the underlying return on investment. (“This is a wonderful little compact, bijou pyramid: two burial chambers up, two down, and with lovely views of the Nile. Slight problem with noisy hippos, but we have had a lot of interest, so we strongly suggest putting an offer in now.”)
So Fed policy remains ultra-easy. All is well! The problem, as I keep repeating –like the ‘Boring Prophet’ in ‘The Life of Brian’: “There shall in that time be rumours of things going astray, erm, and there shall be a great confusion as to where things really are, and nobody will really know where lieth those little things with the sort of raffia-work base, that has an attachment.”– is that inflation is rising sharply in lots of areas that have the potential to really hurt a very large number of people globally: energy and food. The Fed talking of lean cows, while allowing pyramid-scheme speculation in such commodities with its excess-liquidity, is to give these people the FAIT finger.
Millions in Texas, which has been emerging as the “state that works”, are already without power and boiling water to drink. They still have lots of fat cattle though. Indeed, US (and UK) retail sales are soaring, both up more than 5% m/m in December. We can’t disaggregate between those struggling to eat (or heat) and those who are making impulse on-line purchases because they are so bored, but the aggregate total is notable.
Yet imagine the pressures in the developing world. The rich UAE is already considering price controls amid spiralling food-price inflation: but what are poorer countries in the Middle East and Africa going to do when a Covid-battered economy then gets hit by a surge in food and energy costs? Wait for their USD1,400 checks?
The Fed may be looking at the lean cows in the rear view mirror when predicting inflation, say some; and it is studiously ignoring an increasingly-pharaonic socioeconomic structure in terms of the absence of wage inflation, say others; yet the FOMC is also now underlining again that as long as the grain stores of Pitom are full, what happens outside the Nile delta isn’t their problem. (“The dollar is our currency and your problem,” as the old adage goes.)
This underlines the larger issue I have been making for years: not that “the young shall not know where lieth the things possessed by their fathers that their fathers put there only just the night before, about eight O’clock,” but rather that trying to deal with domestic inequality –in the US, now through ultra-easy monetary and fiscal policy– does not sit easily alongside helping with fighting *global* inequality. The usual argument I have made is that this will lead to protectionism in the US, and others. (On which, US President Biden has stated Beijing will face US “repercussions” for its human rights abuses, though it’s business as normal between China and the EU, with textiles and tomato exports from Xinjiang booming).
Yet we now see that ultra-loose US policy also means food and energy prices soaring for those who can least afford it. (And how smart does China look for having been stockpiling commodities for some time?) The echoes of the last round of global food price spikes associated with Fed policy and pyramid schemes, and then the subsequent unrest of the Arab Spring, should make us all deeply concerned: it’s not as if we aren’t seeing unrest all over the place already!
So we have a global market that isn’t sure if 10-year Treasuries are going to 2% or back to 1%. If it goes to 2% then at least the USD might strengthen and commodity prices fall back – though that would be risk off for some markets, and if the US *is* more protectionist too, even more so. We would also get more chatter about the Fed having to cap yields, as predicted here many lean years ago.
Yet if the move is back down to 1%, then we are implying another seven-year lean patch at least – and, as we see, also higher food prices to boot, because the Fed liquidity has to go somewhere in a global system. That’s surely an environment where we are going to eventually hear someone cry: “Let my people go!”(?)
Thu, 02/18/2021 – 09:35