REAL INDICATORS
The delicate fabric of the economy, at every point, is formed by the weft of the conjuncture and the warp of structural changes. The thread of one intertwines with those of the other, with the shuttle that incessantly shuttles around the loom. More than a fabric, one emerges fine tapestry, made «of the same substance of which dreams are made», Prospero would have said. Shakespeare would not mind being brought up here, because we are talking about human life.
As in any life, no one knows the finished design of that tapestry, because it is a work always in progress and in manufacturing. Almost a Penelope canvas, with the difference that no one unpacks it at night.
Some sketches, however, can be glimpsed, provided that it is not an illusion. First, that the strength of the question before the tragic war in Ukraine it was great. And it still is, net of China. You can read it both in the numbers and in the words of the press releases on the PMI indices.
We proved it right in the Lancette of March and here we summarize it: consumption driven by post-Covid reopenings and savings accumulated in lockdowns, albeit eroded by accelerating prices; investment in housing, and their furnishings and equipment, to meet the new needs that have emerged with remote working; investment in production capacity, to expand it in view of the greater current and expected demand and to adapt it to new digital technologies; stock accumulation of input and output, because now you never know, e just in case (just-in-case instead of just-in-time), including future price increases included among the possible inauspicious events; massive public capital expenditure to adjust the infrastructures that have become unreliable due to the long fasting of public finances.
Already in this succinct description it can be observed the intersection of short and long cyclical factors, to please both Keynes and Kondratiev. But it is as if the thread of the weft changed according to that of the warp, and vice versa. It always happens that way.
For example, today the information revolution has accelerated its pace, with the digitization of everything around us and beyond imagination. Just to mention one: the University of Oxford has started to teach the robot Chef (nomen automatus) the flavor of the food, before and after chewing (chewing). But this entails, in fact, more investments and greater demand, therefore a conjuncture that is accelerating. On the other hand, if there is greater demand, it becomes cheaper to introduce innovations because there is greater market acceptance. The opposite is also true: to overcome economic crises, new processes are introduced to lower the break-even point and offer goods at lower cost.
In addition to the digital paradigm shift, and linked to this, there is another one that affects the real economy: the circular economy. That is, designing products according to the reuse and recycling of everything they are made of. A must for the green deal between man and the environment. By equipping assets with chips, assets can be traced from origin to end. This falls in with the rise in commodity prices, which the excess demand (mentioned above) has caused. And another knot of the tapestry is being composed.
On the other hand, the just-in-case is itself a paradigm shift: after the sequence of terrible global shocks (Covid-19 and Russian invasion), companies have understood that efficiency is fundamental, but production is even more so. Some hint of this came with the tsunami in Japan and the flood in Thailand in 2011, which had caused the lack of electronic components in the automotive industry around the globe. Hence the increase in inventories, which leads to exacerbate the shortages of commodities and various semi-finished products, making them further expensive.
To make the weave of the tapestry even richer and more complex there are geographical differences. Indeed, i United States are in a state of overheating: with 1,8 places available for every unemployed person, it takes a team of brave and determined firefighters to tame the wildfire. But how?, one could argue, GDP fell by 1,4% (annualised) in the first quarter. The decline is precisely linked to the robustness of domestic demand, which needs to be satisfied hijacked exports and sucked imports (-3,2 percentage points the contribution of net exports) and led to an involuntary reduction of inventories (-0,84); public expenditure on defense also gave a negative contribution, and one can well imagine that with the war, the purchase of cannons will take precedence over that of butter. Furthermore, there was an energy shock but less devastating, because gas is less expensive than in Europe and because, since the USA is autonomous in primary sources, the high energy cost does not deprive the internal production-demand circuit of income. Finally, the soaring price of wheat and other agricultural fodder commodities (it is appropriate to say) the income of American farmers, who will buy more tractors and silos and other equipment, giving a new spin moves to the domestic question.
It is quite another matter the European scenario, theater of the new war and dependent on Russia and Ukraine for raw materials of all kinds and types. This explains the fall in the composite confidence index of households and businesses, back close to the lows of spring 2020. Consumers had started to shift purchases from goods to services, which explains why the real retail sales curve was already declining before the conflict. The high gas and electricity bills and the expensive filling up of car tanks will take away a lot of purchasing power. Governments are scrambling to support them with appropriate fiscal measures, but if the price of commodities does not fall, sooner or later the bill will reach end users: avoiding a recession becomes a mission impossible. Moreover, already in March German industrial products, French and Spanish have fallen, and a lot, due to lack of work pieces: this means home workers with wage subsidies that are lower than the normal paycheck, therefore lower income and lower consumption.
La China, then, continues to make history in itself: it has remained the only nation to pursue the "zero Covid-19". Why? What is hidden behind this stubbornness? The fear of having 25 million dead, in the absence of an equipped health system? The showdown within the CCP ahead of the XX National Congress in the fall? Both? Whatever the real reason, it remains that the economy kicked into reverse, as in 2020. Throwing tons of sand into the gears of global value chains (which, until two and a half years ago, were illustrious unknowns). An additional reason to shorten them e turn to good local suppliers: they will cost a little more, but at least you know you won't have to stop the plants. Still, it costs too much.
In short, by hook or by crook, efficiency decreases and the prices go up. Fuel the inflationary fire…
INFLATION
Inflation it's a breeze, «a very gentle arietta that numb, subtle, lightly, sweetly begins to whisper… But in a flash it becomes a storm and produces an explosion like a cannon shot, an earthquake that makes you tremble» Don Basilio would sing ai board of the central banks, which still don't quite know which way to turn.
Or rather, central bankers know it well, but they advance «feeling with their foot», Ariosto would say, as is done at night in an unknown path. For fear of making a mistake or arousing another monster: the recession. And how to blame them.
But the point is that people already act sympathetically towards increases in the price lists, accepting them as a matter of course because everyone knows that raw materials are more expensive, sea freights too, we don't talk about microchips... When asked: «And with the increase in costs, how do you manage?». L'businesswoman replied: «We pass it on to the clients, who don't bat an eye because they are aware of what is happening» (any reference to real facts and people is purely coincidental).
And you don't want to starve the worker and the clerk? So it will be inevitable to accept higher hourly wages, understandably. Et voila, the spiral is in motion.
On the other hand, the PMI component of prices paid and received is at record levels. It is true that these investigations are young girls, barely twenty years old, and they too know nothing of the difficult 70s. they sound alarm. Only in China does the desperation of closures lead to discounts.
Anyway, the scarcity of raw materials he continues, so there will be no rapid reduction in their prices which could help bring the consumer price momentum back. Of course, statistically their non-increase will slow down measured inflation, but the upward step in prices is there and this pushes companies to rebuild margins and workers to increase real wages.
Until before the pandemic these attempts were frustrated by the global competition and from e-commerce competition; now the former is diminished by the just in case (which leads to favoring nearby suppliers), from the lockdowns in China and from the sanctions against Russia. And the other works but it's not a magic wand. Neither the first nor the second are destined to disappear overnight.
The high prices they discourage demand and encourage supply: inflation is self-correcting in the long run. But for now there are signs of self-sustainability: companies increase prices because customers accept them, and they know that everything increases… The unknown factor is the 'final customer', the worker. In America wages are chasing inflation, not yet in Europe. But for how long?
RATES AND CURRENCIES
Le Central banks have wake up too late in the response to inflation? In hindsight, yes. It must be remembered that for many months not only the central banks but many commentators – including ourselves – were convinced that inflation was a phenomenon destined to return relatively soon. And maybe they were right, in the sense that, if it wasn't like this, it's mainly due to an unforeseeable event - another black swan – such as the invasion ofUkraine, which led to soaring of the prices of raw materials – from gas to oil to wheat… – at races to thehoarding, to new bottlenecks of offer, to stumbles of the logistics… But today inflation exists and is at levels such as to force central banks – under penalty of losing credibility – to raise rates and tighten the currency.
Certainly, the 'hawks' would like the monetary authorities to tighten sooner and harder. What is the point, say the penalty takers, of keeping rates – even after the recent increase in America – at 1% or less, when inflation, on both sides of the Atlantic, is just below or just above the 8%? Here it must be specified. The rates decided by central banks are often called – the nickname is a bit presumptuous – taxi-guide: in short, the Central Bank-teacher points the way forward and guides market rates up or down. And the 'guide' is made up of acts and intentions: the atti they are, in our case, the increases in these guide rates; the intentions are the guidance, announcements about future increases. AND the markets they have two heads – their head and the guidance - And they don't wait for future hikes to move rates. The graph shows how, to give a crucial example, in America an important rate such as that for i thirty-year mortgages (the most used for home purchases) has increased much more (it is now well over 5%) than the guide rate of the Federal Funds has increased.
Of course, with US inflation above 8%, even that 5% is a negative real rate. But is it legitimate to compare a thirty-year rate with thepunctual inflation of a month of spring 2022? Home buyers should compare that rate with the expected inflation over the life of the loan. And the surveys show that, already in the medium term (3-5 years) American households expect much lower inflationaround 3,5%. Thus vindicating those judgments of a few months ago regarding the temporary nature of high inflation. But even 3,5% would be too much for the Fed: its target is, as we know, 2%. We must then lower inflation expectations, and to do that you have to cool the economy (which is actually quite hot). Powell said he doesn't think sharp key rate hikes will lead to a recession (not meant to be a 'Volcker second'), but the line is narrow…
For the ECB the problem is different, but not too much. Here too the Bank is concerned about credibility, and we begin to hint at short-term rate hikes (while the rates on government bonds are clearly up - and it spread of BTPs increases, because the markets penalize the countries that have more to lose than high rates). But the problem in Europe is different. The war in Ukraine has tightened the knot around the throat of the economy, just as another knot – le anti-Covid restrictions – was instead loosened. The two effects have offset each other, but, looking ahead, the knot of war will continue to tighten. And the economy of the Old Continent, which was certainly not overheated, is much closer to the theater of war than America (there are those who think of anti-atomic bunkers or moving to New Zealand…). If the 'rec-flation' (worst neologism of stagflation) could the ECB – novel Florence Nightingale – come back to the rescue? Not as before: monetary policy – both in America and in Europe – is now encumbered by inflation. The rescue bar is placed higher and, barring a deep recession (which in itself would bring down inflation), central banks will not help.
And this 'not being helpful' also applies to the stock markets. The famous 'Greenspan put' – the belief that the Central Bank would lower rates to avoid trouble on Wall Street – is no longer valid: if the Fed really wants to slow down the economy – and there is no doubt about this – monetary conditions need to tighten: beyond to appreciation of the dollar (current) must also increase the cost of equity capital, and Wall Street is, in fact, at risk.
Il dollar in fact, since the invasion of Ukraine, it has increased above all: towards the euro, the yuan, the yen, and also towards – effective exchange – 42 commercial partners (see graphs). Both the growth differential and the interest rate differential are in his favor. And the rumor of sabers returns to the greenback the role of well-refuge. Role that instead seems to have lost their: Neither the war in Europe nor high inflation has shaken the yellow metal all that much. Dental and ornamental charms remain, but gold has lost its edge as a category of assets to defend against misfortune.
