Base of comparison; comparison of bases

Welcome back from the Easter holiday – and to a new form of inflation.

No, not US corn at $8 a bushel, and rising. No, not US natural gas above $8 too, the highest since 2008, and rising. No, not fears of global rice prices also rising, one of the last food staples not to have soared so far, and potentially bringing global food (and geopolitical) insecurity to a whole new level. Neither am I talking about “unified and militant” Californian grocery workers’ getting 19-31% pay raises in a new contract — although it is significant alongside increased US union activity, from a very low base.

I am instead referring to the fact that 75bp Fed hikes are now the new 50bp: so says the St Louis Fed’s Bullard, who won’t rule out taking that kind of step as he targets getting Fed Funds to 3.5% by the end of this year. The last time we saw a 75bp Fed hike was November 1994 – the final blow in the Great Bond Massacre and the trigger for the Mexican Peso Crisis, which snowballed to the Asian Crisis of 1997-98 and the Russian Crisis of 1998. Before that, a 75bp hike was seen in February 1989 – and in October 1989 we got a stock market crash and a recession in 1990. Before that, we are in Volcker land (with a slew of 75bp hikes from January 1981 to July 1984) — and that changed the face of the US and world economy. And before that it was the 1970s. is your base of comparison.

So, bond yields are high — US 2-year Treasuries are currently little changed at 2.45% but 10-years are at 2.85% — and the curve is steepening again, with 2s-10s back at 40bp. Yet if the Fed takes this as a signal that all is well, recession-wise — and Bullard also said any recession talk is premature(!)– then prepare for serious pain ahead.

For example, in FX, USD/JPY was at 127.1 at time of writing when it started the year at 115.1. That’s a 10.5% shift, and over the past 12 months it’s 17.6%. This is not a small FX cross we are talking about! Historically, when JPY slumps, KRW slumps too: the latter is down 3.7% in 2022, and 10.5% over 12 months — with more to come(?) Eyes then turn to CNY — after all, CNY/JPY has shifted 19.9% over the past year. For now, China is running enormous trade surpluses regardless due to booming exports, which is about to subsidise further, and slumping imports. However, the tail risks for just how far CNY would drop if that trade position shifted, either due to global downturn or geopolitics, is worth considering by all the people who don’t seem to consider anything else when it comes to China “because China”.

On which, for those out yesterday and catching-up today, Chinese Q1 data were far better than expected –as should always expected whenever China is under pressure– but with higher than usual scepticism. My favourite was econ commentator @doumenzi, who noted: “.”

What else can one conclude when Q1 fixed-asset investment surged, yet property investment did not, and steel and cement output collapsed y/y? The official narrative is a sudden, vast shift to new higher value-added productive investment. I have several barely used bridges to sell you if that’s finally true. The World Bank had just downgraded its outlook for global GDP growth, blaming war in Ukraine, from 4.1% to 3.2%: China forgot to loop them in on the miracle underway.

Yesterday also saw Russia’s Putin reiterate there is still time for gas importers to shift to paying in roubles: although this had appeared to be settled by artificially injecting a new layer of RUB liquidity into European USD and EUR gas payments, EU lawyers believe the mechanism proposed breaks EU sanctions — which is why Russia proposed it. The Netherlands has stated it will not comply, if so; and oilprice.com reports ‘German Industry Fears Immediate Russia Gas Ban’, not adding, ‘and so do German unions’.

On a related front, Putin called Algeria yesterday, a large energy provider to the EU. I don’t think they discussed the weather. Indeed, recall the incredible interview with Russian minister Glazyev shared yesterday, where he backs:

the imminent destruction of the US-based global financial system; its replacement with a digital New World Order (NWO) reserve currency based on the weighted purchasing power parity of the GDPs involved –when PPP is in DOLLARS!– every commodity they sell, from oil to water to sugar(!); and Encouraging the NWO to default on USD, EUR, GBP, JPY debts and to nationalise foreign firms — he says in the commodity sector, but why stop there?

What do EU lawyers have to say about that? Or politicians?

The Washington Post reports, ‘US, allies plan for long-term isolation of Russia’, noting “.” I am not sure precisely allies this encompasses, because Berlin is still hoping this all blows over and we go back to BAU, as it does its best interim impression of Reg from the People’s Front of Judea in ‘The Life of Brian’ (). And do you think long-term isolation can stop at Russia if others continue to deal with it? That seems highly unlikely — at least based on what the US and EU themselves say. In which case, * will really need a miraculous shift to new higher value-added productive investment to replace exports ahead.

Meanwhile, underlining the views of the other base, Russia’s state RIA Novosti carries an op-ed saying:

Mobilization means mass conscription. It means a war economy. It therefore means war: as noted, import substitution, nationalization, and deliberate destabilisation of opponents. Yes, the ability to mobilize is questionable, both demographically and economically. There are not enough young men or spare parts/machines. Russia has already had to stop production of key weapons systems due to shortages of goods usually imported from the West. (That’s not a new problem: the heroic sacrifice of the Soviet Army in WW2 are always downplayed in the West; and the Soviet reliance on US lend-lease military aid, , is likewise always downplayed in Russia.)

Yet the tone of the Russian op-ed does not suggest retreat or surrender. Quite the opposite. The same is true of China’s Global Times with its recent op-ed saying: “‘Voldemort’ of global order: America is the ‘Dark Lord’ set on destroying international order” (and please buy more Chinese goods!) Regardless, the Germans, out of understandable fear of having Russia as an enemy again, losing Russian gas, and exports to China, are procrastinating; and the West is thinking it might be able to fight this war ‘on the cheap’. Can’t we see the era of ‘cheap’ is over?

And in the physical, not moral, spiritual, or economic, war, Putin just decorated the Russian army unit accused of committing atrocities in Bucha, and Ukraine announced Moscow has begun a new attack in Donbas: although there are some doubts over that given the to-be-expected mud on the ground this month, one is certainly coming.

Comparing bases in a different manner, former President Trump, who could still crash the 2024 party, has sent out a message stating: He had previously called what Putin was doing genocide too, of course.

Yet we therefore have the German government, Noam Chomsky, and Irish MEPs (who argue the only way to win a war is via dialogue) all in agreement with Trump and the Tucker Carlson wing of the Republican Party. What odd bedfellows wars make — as always.

The larger issue is if Team NWO is willing to make a deal or not, or if we are past the Rubicon, as they say they are. Besides rewarding imperialism (just not *US* imperialism) if Ukraine is carved up, if Moscow is going to push for a New World Order and the end of Atlanticism, is there any deal to be done?

Can one imagine Trump, in 2025, sitting down with pencil and paper alongside NWO leaders, and playing Potsdam and Yalta with the world economy, as at the end of WW2? Equally, can one imagine Biden doing the same if the cost to the US economy rises? Or any US leader? Yet, if not, don’t we end up with the global division anyway, as Cold War sets in? In which case, perhaps, just perhaps, we now back in the era of 75bp rate hikes. It’s just that the Fed is right to do so — and it’s two generations of market participants who are wrong to think it can’t and won’t.

The RBA won’t be liking that idea: their latest minutes today were still very ‘new normal’, which to be fair, it took them years after the fact to recognise as what was reality. They saw the Aussie economy in fine fettle and the Board: “.” In other words, wait and see and hope and pray so you don’t have to react to the world not matching the model you based your economy on. This is the first time I can recall comparing the Aussies to the Germans. What odd bedfellows wars make — as always.