Juggling Dynamite

Danielle was a guest with Jim Goddard on Talk Digital Network talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.

The 5% US year over year inflation print (CPI) for May was the highest since August 2008–the last cycle peak.  Then, as now, growth bulls were certain that demand would continue to outstrip supply and that asset prices were only headed higher.

Comparing with a cycle low in May 2020, a lot of the latest increase is a transitory base effect, and the Treasury market sees that.  As we expected, Treasury prices are continuing to rally–compared with the end of May, the US 10-year Treasury yield is today 1.47 from 1.58, and the Canadian 10-year is 1.40 from 1.50.

Despite trillions in stimuli thrown at the global demand cycle over the past year, the vast majority of world economies continue to struggle with growth and employment well below 2019 levels.  Bubbling stock and commodity markets notwithstanding, economic recovery will be a process measured in years, not months.  Extreme optimism is evident and likely to prove as hard on capital this cycle as in the 2000-02 and 2009-09 repricing events.

There’s no question that durable goods spending per capita has been incredible in North America.  In the first quarter of 2021, US durable goods spending leapt 41% compared with the fourth quarter of 2020–a 60 year high.  But there are only so many homes, vehicles, furnishings, pools and home gyms that a household can use.  Especially when they’ve heavily indebted themselves in the process.  As the remaining few service sectors of the economy re-open, growth hopes are increasingly focused on small-ticket items:  haircuts, concerts, amusement parks, hotels and restaurants.  And only in the few countries fortunate enough to have mass vaccine programs.  Most of the world does not.

Jeffry P. Snider offers some illuminating insight and charts in Inflation or Deflation, China or U.S. goods.  Here’s a snippet:

There has been this ongoing perception, the very one underneath all the inflationary hysteria, that the frenzy in the US goods economy is representative of conditions first in the rest of the American domestic economy as well as for the entire worldwide system. In truth, as we see time and again in foreign figures – China most of all, a huge marginal chunk of any growth/anti-growth period – the US goods economy isn’t just an outlier it is an extreme one.

The view instead, from China, consistent with that vast majority, is a very lacklustre return from the depths and one that may just have reached its fullest if disappointing speeds already some time ago. This, along with money/liquidity risks epitomized by Feb 24’s Fedwire disruption and its Feb 25 impact on UST liquidity, would more than begin to explain the changing bond viewpoint.

Dealing in probabilities, it would then make perfect sense why global yields which had previously sprung suddenly into reflationary trading almost as suddenly jumped right out of them. Or, more specifically, the balance of probabilities that had been more favorable after last November, risks tilting toward a limited reflationary upside, tilted right back down again and remain steadfastly lower the longer it goes and the more China (and the rest of the world) fails to converge with US goods – despite having been artificially buoyed by that frenzy in US goods.

Each story of criminals using cryptocurrencies to facilitate their activities intensifies the efforts of governments and businesses to stop them.  The US Congress is now considering legislation to ban companies from paying ransoms to reduce the leverage of cybercriminals in exacting payments.  This week, the Chinese Police Arrested 1,100 People for Money Laundering With Cryptocurrencies.

While global crypto mining is currently 75% concentrated in China, this is becoming less tolerable as extreme heat and air conditioning use intensify power shortages and force some factories to shut down GDP-driving production.  See Why China is cracking down on Bitcoin mining and what it could mean for other countries.  In Iran, blackouts and power shortages prompted the government to ban crypto mining on May 26.

As extreme heat and drought intensify globally, these issues are certain to escalate.  At the same time, greenhouse gas emission limits and carbon taxes will drive cities, states, provinces and countries to necessarily clamp down on counterproductive, energy-intensive activites.   When there is only so much emissions budget one can spend, food production, shelter, transportation and essential activities have to take precedence over energy for things like crypto mining.  Those who want to keep mining will need to find emission-free, renewable power sources or move to places that offer them.

This week, El Salvador’s president instructed the nation’s state-owned geothermal electric company to market facilities for cheap, renewable power to bitcoin miners.