Aurelia Butler

Hello Swampians, and happy new year! It feels like 2022 has to be better than last year, but given Ed’s note about the atmosphere in Washington, perhaps I’m speaking too soon. I wanted to kick off my own first note of the new year by sharing the top three issues ahead that I’m watching most closely, and the questions I’m looking to answer. I’d welcome readers, and of course you, Ed, to chime in with your own thoughts or list for 2022 — it will help me focus my thinking and coverage over the next 12 months. 1. What happens when the Fed raises rates? For years, I’ve been arguing that low rates were benefiting large corporations far more than average individuals. While some quantitative easing was needed post subprime crisis, most of it just jacked up the price of stocks and homes and prevented useful price discovery in markets. The left is as much at fault here as the right politically. Indeed, I’ve pointed out in columns that thanks to buck passing on both sides of the aisle, the Federal Reserve has been stretching out the business cycle artificially for decades, preventing the sort of healthy culling of unproductive loans and businesses that would ordinarily have been happening every few years. The problem is that when the music stops, there will be pain. About two-thirds of the US economy is consumer spending. But people’s spending patterns are not based on their income alone. Our personal consumption is also linked to our expectation of wealth held in assets such as stocks and bonds. What’s stunning is how utterly dependent American fortunes have become on the inflation of those asset prices. Financial analyst Luke Gromen has calculated that net capital gains plus taxable distributions from individual retirement accounts are equal to 200 per cent of year-on-year growth in US personal consumption expenditure. As I wrote in 2020: “That does not necessarily mean that people are pulling money out of their retirement accounts to buy hand-sanitiser, bottled water and face masks.” But as Gromen put it, it does mean that gross domestic product “cannot mathematically rise if asset prices are falling”. 2. Do we get a big market correction, and perhaps even a recession, around the midterm elections? And if so, what does that mean, particularly if it looks like Republicans will win anyway? How should we think about inflation in the middle of a generational economic shift? I’m fascinated by what the Bank for International Settlements calls the “bullwhip economy”, in which inflation dynamics globally are moving in new and surprising ways. Pundits and pollsters tend to look at the effects of inflation in very short-term ways. And I don’t want to downplay those — certainly, higher petrol and food prices make a huge difference in the monthly budgets of working people. But the entire mandate of the Biden administration has been to reward “work not wealth”. That means shifting to an economy that better balances production and consumption, redistributes some wealth, invests in public works and human capital, and encourages savings and equity over financialised, debt-driven growth. All of that is, in the short term, inflationary. But in the longer term, it would be hugely deflationary to have a greater number of better-trained workers, stronger infrastructure and more resilient supply chains.How can the administration find a politically quick and easy way to communicate this to the public? How do we help Americans understand that the shift we need to make is to be measured in years, not months or weeks? And how can we buffer the short-term effects of inflation for those most affected by it?3. Are there upsides to decoupling? What does the post-neoliberal world look like?We are constantly hearing about the dangers of deglobalisation, and how we’ll end up in the 1930s if we aren’t careful. That’s a risk, but going back to the mid-1990s is neither politically feasible nor economically smart (that’s when we started brewing up the global debt bubble that is now just about ready to pop, again). I’ve always thought, à la Raghuram Rajan at University of Chicago’s Booth School, that we probably need a bit less globalisation in order to save what is best about our global world. I have just finished my next book, Homecoming: The Path to Prosperity in a Post-Global World, (Crown, October 2022), which will outline what a better world might look like, and provide some examples of businesses that are thriving within it. I’d argue that a more regionalised world makes a lot of sense at a time when energy costs are high (and will probably remain so as we transition to a green economy), complex supply chains are vulnerable, and China has become both a producing and consuming nation with its own economic orbit.None of this is to say that globalisation is going away. As our colleague Gillian Tett has smartly argued, deglobalisation could well turn into re-globalisation in which countries aside from the US simply orientate themselves towards each other in new ways. But I think that the massive geographic disruption from the pandemic, which has pushed money off the coasts of the US and into the hinterlands, combined with new decentralised technologies such as 3D printing and all sorts of virtual working arrangements, will result in a re-mooring of wealth and place that starts to bridge some of the gap between economic globalisation and national politics. This will be a slow, but welcome process — and a positive note on which to end my first newsletter of 2022. Recommended readingIn my column, I look at what’s real, and what’s hyped, about Web3. In this piece, Tim O’Reilly, who helped popularise the term Web 2.0, does the same. I found this Peter Hessler feature in The New Yorker about how wealthy Chinese are struggling to adapt to success wonderfully melancholic.My husband gave me a copy of this book on Wasps (not the insects, but the traditional American aristocracy) over Christmas, part of his continuing effort to help me understand his people. It was fun but sad. High hopes, doused in too much gin.Edward Luce respondsRana, I’ll also be fascinated to see whether inflation eases because of supply chain improvements or the Fed has to tighten quicker than it wants. Obviously the first would be infinitely preferable. Given the generally poor recent forecasting record, I’m not sure who to trust on this subject. Paul Krugman this week admitted he had been wrong, which was refreshing. Since you’ve asked for what I’m watching, here are three things:1. Will Putin invade Ukraine? This is a far more live geopolitical trip wire than Taiwan given Xi Jinping’s inward focus in a year where he plans to renew his presidency. Should Putin call the west’s bluff, we would face the greatest challenge to our credibility since the end of the Cold War. It would be a very dangerous moment. 2. Will the Department of Justice prosecute Donald Trump? Conventional wisdom says no given Merrick Garland’s innate institutionalism. I am agnostic. The evidence against Trump keeps gaining ballast. 3. Will Covid become endemic? In the answer to this lies the key to the health of the global economic recovery, Democrats’ midterm election fortunes, the recovery of emerging markets and our ability to provide global public goods. As I’ve argued repeatedly, the best thing Biden could do for America’s standing and his own domestic fortunes is step up far more aggressively with global vaccine supply. I remain puzzled and despondent at his lack of urgency on this. Scientists say a new post-Omicron variant is likely unless we take urgent action to vaccinate Africa and other laggards now. Perhaps in 2022 the west will finally grasp this nettle. Your FeedbackAnd now a word from our Swampians ..In response to ‘Why Americans are switched off from January 6’: “I enjoyed reading your article on our democracy. I don’t believe that I have ever responded to an article before but this one got me thinking a bit more than usual, specifically the second paragraph regarding our apathy on the matter. I wonder if the answer is that it feels like the democracy was lost some time ago to special interests and that it does not feel that there is that much more that can be taken away. If by democracy you mean my participation every two, four, six years when I get to choose between a Democrat and Republican candidate, neither of which are ever very palatable, then I’m not sure that’s much of a loss. I realise given some of the living conditions around the world, that is a gross overstatement but I’ve watched things like the Organic food label get corrupted by lobbyists for the agriculture industry, Monsanto sue and win cases against farmers over seeds that migrated unwittingly into their fields, the coal industry sue detractors into silence by outspending them, critical race theory quietly forced into classrooms, pharmaceutical companies that fight legislation against price negotiations that other countries enjoy, PACs that the average citizen can’t possibly hope to compete with, influence by Black Lives Matter, Antifa, Proud Boys, QAnon, George Soros, the Koch brothers, Citizens United, and I wonder, what democracy are you referring to? Feels like that ship has sailed long before January 6. If anything, you could almost argue that January 6 was as much the result brought on by the actions of the aforementioned list of players as it was Donald Trump and his deranged supporters.I have my own business. Most of my time seems evenly split between running the business or dealing with expensive software issues via IT experts, or hours online, negotiating labyrinthian tech support menus. Then there is the never ending arguments with banks whose algorithms place inexplicable holds on my deposits for no clear reasons other than that they are allowed to do so, by law. None of these issues are ever presented at the ballot box or addressed during the debates but they are problems that I and many of my contemporaries have to contend with daily. So, after dealing with that for 10 to 12 hours a day, I’m supposed to care about what Trump and his insane clown posse did? I see more threats to democracy brought on by elitist ideologues in the EU wanting to throw open their borders to anyone as long as they aren’t of European origin, despite the obvious reservations of their citizens. It’s the same thing here in the US at our border. A few elitist ideologues that will never have to face the consequences of their actions, have way more control over this democracy than I do, in fact, if you voice an opposition to this, you are pilloried by the woke so again, what democracy is left for me to give up?I think the actions by Trump and his ilk are despicable and I hope they all end up in jail but I see much more to be concerned with that is done within the law than by some idiot with a bison hat or dragging a podium away. I also find it difficult to believe that I am the only one that feels this way . . . . I hope that I provided you with some insight or an alternate view.” — Frank Hyatt  More

(Reuters) – When Michael Tamasi got to his office Monday after the holiday shutdown, he found nine workers at his small factory were absent — either because they had COVID-19 or had been exposed and were trying to get tested.That’s over 10% of his staff of 81, and by far the greatest single outage he’s seen since the start of the pandemic.The latest wave of the health crisis, driven by the highly contagious Omicron variant, has forced airline cancellations, closed stores, curbed output at meat processing plants, and shut classrooms across the U.S. The surge is exacerbating an already tight labor market and forced government health officials to curb how long it says workers need to isolate once they’re infected. The U.S. economy added 199,000 jobs last month, according to a closely watched report from the Labor Department released Friday, and the jobless rate dipped to 3.9% from 4.2% in November, underscoring the tight supply of workers.The scramble to fill open jobs has boosted wages and fueled a surge of inflation. Friday’s report showed another round of strong gains in paychecks, with average hourly wages up 4.7% from a year ago.Many manufacturers, pressed to stay open throughout the pandemic, have found ways to keep assembly lines rolling. And to be sure, many say they are so far handling the latest wave of illness without major production cutbacks.“It’s definitely worse than it’s been,” said Tamasi, CEO of AccuRounds, a contract manufacturer of metal parts in Avon, Massachusetts. He said he has kept production going by adding extra overtime.“We’re basically opening all hours so we can get the most we can with the people we have,” said Tamasi, who makes parts used in airplanes, robots, and medical devices, including machines that make vaccines.To be sure, there could still be a bigger wave of pandemic absences coming. Family gatherings over holidays have fueled past surges weeks after the events.Jason Lippert, CEO of LCI Industries (NYSE:LCII), the largest parts supplier to the recreational vehicle industry, said his company is seeing positive cases daily, ranging from “five on the low side to 20 on the high side.” It’s a nuisance, he said, but it’s manageable.Lippert’s keeping a close watch, however, since the Omicron variant is just starting to hit harder in the region where he has most of his 100 plants – in and around Elkhart, Indiana.The Omicron variant has hit just when many employers were finally getting factories back to full strength after disruptions and shutdowns early in the pandemic. Jim Kirsh, president of Kirsh Foundry Inc, in Beaver Dam, Wisconsin, said he hasn’t seen a surge of absenteeism at his 110-person operation, although he just saw his first COVID case in six months.He said he only recently got his factory close to full employment after raising starting wages by over 50%, in multiple steps, since March of 2020.He’s passed along those costs to customers, though many objected. “Most asked for examples of our major cost drivers and when you show them that wages are up 57%, natural gas is up 100%, alloys are up 50% to 300%, there is not much they can say,” he wrote in an email.Rising costs and tight labor have pushed many companies to pour resources into new technology, including new automation. Kirsh plans to spend up to $2 million this year on robots that will cut between four to eight jobs.Kirsh said he has little control over most of his costs—such as raw materials and transportation—so he’s focused on boosting how much each worker can produce. ‘The more expensive labor becomes, the less I use.” More

“At this point we are not talking about a macro-economic development,” Yaron told parliament’s finance committee. The economic hit would come from decreased consumption and workers sick or stuck in isolation, he said.”Most estimates are of a relatively short wave – a number of weeks, that is why the cost to the economy per confirmed coronavirus case is not of macro-economic proportions. In such a scenario, pinpoint compensations focused on sectors that have been hurt should be continued,” Yaron added.Yaron said the government should also prepare for a worse scenario in which vital services could be hurt as infections soar. “We’re not there now but such scenarios could bring about macro-economic damage,” he said. He said Israel’s economic growth for 2022 would likely be 5.5% with businesses recovering after the Omicron wave subsides. Omicron has pushed Israel’s daily coronavirus cases to record highs in the past week. Businesses say they are hurting badly and have called on the government to do more to help them.($1 = 3.1162 shekels) More

Investing.com — Rising bond yields continue to put stocks under pressure after a labor market report that showed inflation pressures still bubbling. China’s zero-tolerance Covid-19 policy comes under fresh strain amid evidence of community spread in a key port city. The U.S. and Russia talk down chances of easy progress as negotiations begin on de-escalating the situation in Ukraine, and oil prices stabilize after disruptions in Kazakhstan and Libya ease. Here’s what you need to know in financial markets on Monday, 10th January.1. Yields rise after payrolls; Goldman forecastsBond yields continued their upward march after the U.S. jobs report on Friday again highlighted the tightness of the labor market, with a sharper-than-expected rise in wage costs and a bigger-than-expected drop in the unemployment rate.Analysts at Goldman Saches now predict 4 interest rate hikes from the Federal Reserve this year, and there was no implicit contradiction from Richmond Federal Reserve president Tom Barkin in an interview published by The Wall Street Journal on Monday, saying that a rate hike as early as March is “conceivable.” Goldman also reportedly expects the Fed to start selling down its bond holdings from July.The interest rate-sensitive 2-Year Treasury yield was holding near a two-year high at 0.87%, while the 10-Year benchmark yield inched higher to 1.78%. European bond yields flattened out after rising to their highest in a couple of years last week.2. Omicron roundup: U.K. wave starts to peak; Australia’s zero-tolerance policy in tatters, China’s under strainThe changing nature of the pandemic was evident in fresh data from around the world. Optimists will be cheered by signs out of the U.K., the first advanced economy to record an Omicron-variant wave, suggesting that new infections have peaked in the capital London without overwhelming the healthcare system.Pessimists, however, will point to surging case numbers from the U.S. to India and Australia, along with a parallel rise in absenteeism by front-line workers across the service sector, especially in healthcare.Omicron has effectively wrecked Australia’s zero-Covid policy that had held for two years until last week. However, China is still sticking to that line, with a mass testing campaign in the key port city of Tianjin, after two cases of locally-transmitted Covid-19 were discovered last week.3. Stocks set to open mostly lower. Pot stock earnings dueU.S. stocks are set to open mostly lower, with technology again underperforming against a backdrop of higher bond yields. Higher interest rates raise the opportunity costs of bets on companies with only long-term profit prospects, and the turn in long-term rates has cruelly exposed the sky-high valuations of many such companies.By 6:15 AM ET, Dow Jones futures were flat, while S&P 500 futures were down 0.1% and Nasdaq 100 futures were down 0.3%.Trading is expected to be largely subdued ahead of consumer price inflation data later in the week. Attention may focus on a JPMorgan investment conference ahead of the traditional start of earnings season on Friday, when Wall Street’s blue chips start to report. Cannabis company Tilray (NASDAQ:TLRY) heads up a thin earnings schedule on Monday. Other stocks in focus will include Lululemon Athletica (NASDAQ:LULU), after the yogawear maker issued a profit warning.4. Russia-U.S. talk Ukraine after Kazakh protests are squashedThe U.S. and Russia kicked off talks aimed at de-escalating the tension around Ukraine, but both sides warned that progress would be difficult.Russia is seeking assurances that Ukraine will never be admitted to NATO, while the U.S. maintains that Ukraine should be as free as any other country to choose its political alignment. Over 100,000 Russian troops remain massed on the border between Russia and Ukraine.  Neither the European Union nor Ukraine itself are party to the talks, in contrast to negotiations that happened after the first Russian invasion of Ukraine in 2014 and the subsequent annexation of Crimea.The talks come a week after Russian-led troops largely restored order in the former Soviet Republic of Kazakhstan, bolstering Russian power in central Asia.5. Oil prices ease as output disruptions are overcomeOil prices stabilized as shortfalls in exports from Kazakhstan and Libya last week began to ease. The Chevron-led venture that operates Tengiz, a 600,000 barrel-a-day field in Kazakhstan, said on Sunday that the field is gradually returning to normal production levels after protests disrupted output last week.Meanwhile in Libya, work on an export pipeline that had shaved 200,000 b/d of output from its exports last week is now complete, allowing the country to produce a total of 900,000 b/d. Tensions related to the country’s smouldering civil war are still ensuring that output remains well below the country’s potential.By 6:25 AM ET, U.S. crude futures were down 0.3% at $78.69 a barrel, while Brent crude was down 0.1% at $81.64 a barrel. More