Macro
One Economy’s Drink is another Economy’s Poison
Sorry, I forgot to mention that I was going to be away for the next couple of days, so I’ll give you the updates right now. I’ll try to simplify some of our discussions yesterday.
Firstly, in case you missed the dialogue on the question of whether inflation is good for stocks, as I mentioned, equities and commodities can indeed be good inflation hedges. In fact, as I mentioned in Decoding the so-called stock market rally/economic outlook contradiction, the rally of 2009 was, in part, an inflation trade which would have more than compensated for many years of inflation. Incidentally, one of the reasons for the equity rally I stated as being the pressure release on equities as a manifestation of an exploding monetary base in the banking system. Which, of course, makes Obama’s comments all the more poignant. This is more than just your run-of-the-mill anti-Obama sell-off. He’s effectively attempting to put a political plug on the Wall Street bank-monetary-base-to-risk-asset inflation valve in an attempt to get the inflation transmission-mechanism functioning more properly on Main Street. Hence the equity market sell-off had some conviction to it.
But when considering the cost of inflation or whether it is “good” for stocks or not we have to consider:
a) generally speaking the level of price inflation which results 4% is manageable 8% – less so. The piece I wrote on Friday was referring to how a higher inflation than we are accustomed to (what we are likely to get if the Fed is “successful” in promoting Money Supply traction) will be much more destructive to society and the economy and ultimately even real asset appreciation than we have been used to.
b) we need to differentiate between what is good for the economy versus what is good for equities/commodities and when independence between the two collapses.
c) the difference between the various economies, say, East and West, when considering inflation.
It’s the last point I wish to expand on today. Put (very) simply:
Less developed, Emerging economies with second-class infrastructure and support mechanisms (and thus higher savings rates) which run large surpluses would regard inflation as enemy #1. These countries (like China) consequently, would currently rather err on the side of disinflation.
More developed, Western economies with first-class inftrastructure and support mechanisms (and thus lower savings rates and record levels of consumer indebtedness) with run large deficits would regard deflation as enemy #1. These countries (like US, UK) consequently, would currently rather err on the side of inflation.
This would explain extremely responsive and proactive restrictive monetary policy (and associated rhetoric) by PRoC even while recorded CPI remains below trend while Bernanke has explicitly stated that The Fed would leave policy extremely accomodative for an extended period and would economic factors such as employment to gauge their more retroactive exit policy.
We’ve seen how equity markets react to restrictive Chinese monetary policy, so we need to monitor carefully the rhetoric as well as the inflation measures in China over the next few months. If inflation risks prove to be benign and China’s management of inflation expectations proves to be effective, there is no reason why equity markets continue to function with a normal level of volatility. However, tightening will get quite aggressive quite quickly at the first sign of a problematic inflation trajectory and, as we have seen already. While good for volatility, this could be at the expense of equity prices.
Macro Data to Watch 26th Jan:
- Singapore Ind Prod
- Korean GDP
- UK GDP
- US Consumer Confidence
Macro Data to Watch 27th Jan:
- German CPI
- South African CPI
- Australian CPI
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