Rabobank: Western Leadership Has Successfully Turned Our Economies Into Emerging Markets
It was a tough call for me whether to go with the above title of the Daily today, or for ‘These are not serious people, and I refuse to take them seriously’.
Friday’s shocking US inflation came in well above expectations at 1.0% m-o-m / 8.6% y-o-y headline, and 0.6% m-o-m / 6.0% y-o-y core. That’s the highest y-o-y headline CPI since December 1981, even further back in time than the first ‘Top Gun’ movie. Indeed, in Tom Cruise terms, it’s back to his second-ever movie, ‘Taps’.
Over the past decade, US CPI averaged 1.6% y-o-y. Over the past 12 months, it was 6.9%. Food, energy, and services inflation is rampant, and while goods inflation is edging lower and inventories need to be cleared, there is still an implied manufacturing shock coming from the input side with a lag. Indeed, core inflation has only seen one monthly print lower than 0.5% (6% annualized) since October last year, the trend in energy is not going to stop, and neither will that in Owners’ Equivalent Rent given soaring mortgage rates force more people to rent.
There is now some talk of so-called “core-core” inflation excluding food and energy, and airfares, rents, vehicles, hotels, and health insurance, which shows inflation is ebbing. Logically, if we take out everything going up then inflation is zero. Likewise, the Fed and the White House told us there was no inflation; was going to be no inflation; if there was any inflation it was mild; and once it got high, that it would be transitory. These are not serious people, and I refuse to take them seriously.
Yet the Michigan consumer survey collapsing to a lower level than during the Global Financial Crisis should be, with 1-year ahead inflation seen at 5.4% and 5- to 10-year inflation up to 3.3%. Given it is estimated US households need over $430 more a month just to stand still vs. inflation, this is not a surprise. Indeed, what Philip Marey had already flagged the Financial Times’ today makes clear is now the widespread view: ‘US set for recession next year, economists predict’. Yet we were repeatedly told by the Fed, the White House, and many in markets that a US recession was not a risk. Likewise, RaboResearch flagged the energy-shock risks for Europe weeks ago, which the ECB still does not recognize. Even Australia is now seeing market calls for a 15% drop in house prices ahead, which is hardly GDP positive for an asset-addled economy.
In short, we can ignore ‘stagflation’ and can proceed to a new word shared by an incisive reader: “Incession” – inflation and recession. I repeat that we aren’t used to that concept in developed markets by any name, but emerging markets know the phenomenon all too well. Congratulations to the Western leadership of the past four decades, who have successfully turned our economies into something closer to emerging markets!
Markets are obviously far from happy. US 2-year yields leaped from 2.81% to 3.14% Friday, the kind of spike few see in a career. 5-years jumped from 3.07% to 3.31%. 10-years rose less, from 3.04% to 3.16%, so 2s-10s is close to inversion again, and 5s-10s already is. 30-years, despite wild swings, only rose 3bp at the close to 3.19%, so 5s-30s is also inverted and 2s-30s is close to it.
https://www.zerohedge.com/markets/rabobank-western-leadership-has-successfully-turned-our-economies-emerging-markets