Aurelia Butler

European Central Bank President Christine Lagarde doubled down on her assessment that euro-area inflation will ease as economies rebound, falling back below the 2% target in the medium term. “As the recovery continues and supply bottlenecks unwind, we can expect the price pressure on goods and services to normalize,” Lagarde told European Parliament lawmakers Monday. “We do see wage growth next year potentially rising somewhat more than this year, but the risk of second-round effects remains limited.”Inflation in the currency bloc is the fastest since 2008, fueled by higher energy prices, supply-chain disruptions and other pandemic-related effects. Many economists agree with the ECB that it will fall back below target in 2023, but there’s consternation in some corners of the region about surging prices. The ECB is set to decide on the future of its monetary stimulus at a meeting next month, when it gets new economic projections. Its 1.85 trillion-euro ($2.1 trillion) pandemic bond-buying program is set to end in March, and a boost to regular asset purchases is being debated. “Even after the expected end of the pandemic emergency, it will still be important that monetary policy — including the appropriate calibration of asset purchases — supports the recovery throughout the euro area and the sustainable return of inflation to our target,” Lagarde said. Complicating the math for central bankers is a fresh spike in Covid-19 infections that may lead to new restrictions on economic activity. Austria has already imposed a lockdown for those who haven’t been vaccinated. German parties that are currently negotiating a coalition agreement are also considering tighter measures. Read our coronavirus updated here. These risks, combined with drawn-out supply interruptions, will probably lead the ECB to maintain its loose monetary policy next month, with an interest-rate increase possibly still a long way off, HSBC economist Simon Wells said Monday in a report to clients.  “The challenge is not over yet,” Lagarde said. “Not only the course of the pandemic, but also the decisions taken by policy makers will continue to determine the strength of the recovery.”©2021 Bloomberg L.P. More

Good morning. Inflation is back at the top of the agenda, if the Sunday papers are any indication. So we have two pieces on it today, along with one about deflation — specifically, the deflation in Cathie Wood’s Ark Innovation fund. Email me [email protected] or Ethan at [email protected] if it’s just a demand shock?This paper from Bridgewater has gotten a lot of attention ever since it was published about a month ago. It’s a fun read, and sums up the views of the inflation-is-not-transitory team very briskly. The core argument is that the supply chain bottlenecks everyone is rattling on about are no big deal. The big deal is the massive demand spike caused by fiscal and monetary stimulus. Here’s the gist:Supply of almost everything is at all-time highs . . . this is mostly [a policy] driven upward demand shock. And while some drivers of higher inflation have been transitory, we see the underlying demand/supply imbalance getting worse, not better . . . There are still large stockpiles of latent spending due to the transformative effects that [policy] has had on balance sheets and the ongoing incentive provided by extremely low real yields, and more fiscal stimulus is on the way. Choking off demand would require central banks globally to move toward restrictive policies quickly, which looks unlikely . . . There are not enough raw materials, energy, productive capacity, inventories, housing, or workers.The gap between demand and supply is now large enough that high inflation is likely to be reasonably sustainedThe piece is full of intriguing charts. Two in particular exemplify the argument. Here is nominal demand vs global supply of goods for US consumption:

(One slightly frustrating thing is that specific data sources for the charts are not given — there is just one big footnote at the end with dozens of data sources in it. More on that below.) Next, a chart of an industrial metals index against a capital spending/GDP ratio:

There are a bunch of other charts making similar points about services, employment, energy, inventories, shipping, housing, and so on. If the argument is correct, how is it important for markets? It certainly suggests that the reflation trade — broadly, the idea that cyclical assets are going to outperform — is going to be around for a while yet (barring a violent, growth-killing intervention by central banks). It’s less clear to me if it suggests an obvious bond trade. We have seen a big move up in the belly of the Treasury curve. The five year is up 46 basis points since mid-September, but the ten year has moved less, and the thirty year is flat. That is consistent with a bulge in demand and a flurry of inflation that subsides in just a few years, a scenario which might fit with the Bridgewater view. In any case, some thoughts and questions on the argument:No one denies that stimulus-driven demand is an important part of what is going on right now. Consumer and corporate balance sheets look great. The interesting question is whether Bridgewater is right that bottlenecks (outside of a few areas like cars) are not an important part of the story. The only bottlenecks that Bridgewater thinks are really important are in labour (a shortage caused by stimulus, that is, by worker “leverage”) and supply problems that predate the pandemic, in energy and US housing. I’m not sure what Bridgewater means by “nominal demand” (they could not make anyone available last week to talk to me about the paper) but if it corresponds roughly to disposable personal income (as suggested to me by Skanda Amarnath at Employ America), it looks like that is going to roll over soon, because there is not going to be another round of stimulus cheques and enhanced unemployment benefits. The paper predicts inflation will be “reasonably sustained” but does not provide a timeframe. Is the argument consistent with inflation subsiding in the second half of next year, which seems to be Jay Powell’s expectation? I’m wondering if some of the Bridgewater data is already a bit out of date, or has sources I can’t see. Here, for example, is their chart of China industrial production:

This is an odd fit with recent China manufacturing PMI reports showing a contraction, and this OECD index of China industrial production showing change versus a year ago:

Similarly, metals prices are not heading straight north. It is surely important to the inflation debate that, for example, aluminium prices have fallen by 14 per cent in less than a month; copper prices have been flat since May; and iron ore prices have fallen by half since this summer. Prices did take a big step up during the reopening, but it’s not clear to me that the supply demand imbalance is set to get worse from here, as Bridgewater believes. A very striking chartOnce again, Unhedged’s wise friend Ed Al-Hussainy of Columbia Threadneedle comes through with a great chart:

People usually quit their jobs when they feel like they have other options and they think the economy is pretty good. Right now, they are quitting in record numbers, but they think the economy absolutely stinks. There is an explanation. Consumers really, really hate sudden jumps in inflation. Here is a longer-term chart of inflation and consumer sentiment:

Growth vs Ark growthA lot of people are shorting Cathie Wood’s Ark Innovation ETF. One can see the temptation. After a spectacular 2020, it has not only lagged the market, but lagged most every other flavour of growth investment. It even fell behind the copycat Goldman ETF launched in September to ride Wood’s coattails:

Why doesn’t Ark’s move like other tech/growth bets? Because there is a difference between growth and bleeding-edge growth. Aside from Tesla (10 per cent of the fund), Ark’s most successful bets during the tech-mad early days of the pandemic included Roku, Invitae, and Crispr Therapeutics. These super-long shots have all fallen from among Wood’s top-five performers to the bottom of the table.

Invitae and Crispr Therapeutics are dealing in gene-testing tech that is promising but not fully mainstream. Roku is growing incredibly fast, but faces massive competition for TV screens from the likes of Amazon and Google. None of these companies yet has a deep competitive moat.By contrast the popular Invesco QQQ ETF, which tracks the Nasdaq 100, is anchored by the FAANGS. Its top performers this year include Microsoft, Nvidia, Alphabet, and Apple. Ark proves that all growth is not the same. (Ethan Wu)One good readA moving and important piece by the FT’s Manuela Saragosa about her partner’s suicide. The holidays are a tough time. Be careful out there, everyone. More

The main distribution centre for Freddie’s Flowers — a floral delivery business focused on London — looks, in most respects, exactly as might be expected.Big stacks of long cardboard delivery boxes stand in one corner of the unit in a high-ceilinged former factory by the River Wandle in Earlsfield, in the south-west of the city. But, in place of delivery vans, this centre has a fleet of long, electric-assisted bicycles, equipped with wide carrying platforms.Freddie’s is one of a growing number of businesses seeking to combat urban congestion, parking restrictions, and the shortage of commercial drivers by making most of its deliveries by bicycle.Couriers stack up to about 45 boxes on the Dutch-built Urban Arrow bicycles, before pedalling off towards destinations across central and south-west London.

Such operations represent a fast-growing niche in many companies’ logistics operations. Express parcel operators such as DHL, specialist low-carbon delivery companies, and some other mainstream logistics companies are all exploiting the flexibility and speed of cargo bikes for some of their operations in many parts of the industrialised world.Oxford’s John Radcliffe Hospital uses Pedal & Post, a local cycle courier company, to rush samples to the railway station, ready to be taken to London for processing.Mark Philpotts, a cycling design specialist in the UK for Sweco, a Swedish-based consultancy, says this mode of transport has particular strengths in handling last-mile deliveries of perishable goods, just-in-time items, and high-value goods.“It’s a direct competitor to electric vans,” Philpotts says. “You can stop where you like. You can service buildings more easily. You can take the bike into awkward locations — and you’ve not got the parking issues or the loading issues.”Alice Scobie, head of UK deliveries, says Freddie’s Flowers happened upon the bike as a delivery method almost by accident after starting deliveries with vans when the business began in 2014.Alice Scobie, head of UK deliveries, says Freddie’s Flowers © Anna Gordon for the Financial Times“We were having issues delivering to central London, especially to offices and to apartment buildings, because our vans deliver from about 2am and access was near-impossible at that time,” Scobie recalls.So, in 2018, the company turned to making the most difficult deliveries via Pedal Me, a bike-taxi service that also carries substantial amounts of cargo.“We realised it was a really good way of delivering because customers were getting their box, and also the fact it was not in a van and not using diesel, which was a huge thing for us,” Scobie says.The company quickly decided to buy its own bikes and run its own operations, she explains. “After seeing the advantages, we thought: ‘Why don’t we do it in-house?’”

A shift to bicycles represents a substantial change for some companies used to relying on vans.David Squire, co-founder of Farr Out Deliveries, which operates a cargo-bike courier operation based in Tollcross, on the edge of Edinburgh city centre, says his company has relied mainly on small local companies for business so far. He would like to see more co-operation between small local couriers to offer UK-wide services to larger companies. In the Netherlands, an association of local couriers offers such a service in the 40 largest towns across the country, where cargo cycle services are better developed.“I think there’s massive potential we see within link-ups of different small couriers,” Squire says.Such an idea could be particularly powerful if the services were also linked up by long-distance rail services, he points out.

Squire, whose service mainly relies on Danish-built Bullitt cargo bikes, says customers are continually surprised by the bicycles’ capacity. They can handle loads of up to 100kg, and there is even capacity to carry up to 250kg if the bike is hauling a trailer. “People often think they can’t carry as much as a van,” Squire says. “But the vast majority of the time vans are 30 per cent full, and 30 per cent of a van — you could almost carry that much on a cargo bike.”Philpotts says cargo bikes will never challenge motorised vehicles for deliveries of bulk goods such as cement. But modern, improved batteries and powerful electric motors have transformed the transport mode’s effectiveness.“The whole issue of people being fit enough to use a bike is a bit different now,” Philpotts says. “E-assist really is a game-changer for all sorts of cycles.”At Freddie’s Flowers, the shift to relying mainly on bicycles in London has had knock-on effects on how the business runs. Because the bikes face fewer problems with traffic congestion, riders work standard, 9am to 5pm hours, whereas van drivers tend to start at 4am or earlier.

Petal pusher: Freddie’s Flowers riders such as Charlie Hill find bikes enable delivery at more social hours and with fewer parking worries © Anna Gordon for the FT

That has encouraged riders such as Charlie Hills, a freelance graphic designer, to join the company. “Because the job is quite flexible, the hours are great, which means we have time in the afternoon to do our other jobs as well,” he says.

Although Freddie’s still uses vans for some deliveries — particularly in its business outside London — its deliveries in the capital increasingly rely on bicycles. It now delivers by bike from both the Earlsfield depot and another in Bermondsey, in south-east London. A planned depot in north London will take the number of deliveries it makes weekly by bike to around 12,000 to 13,000, according to Scobie.At present, the company makes 75 per cent of its London deliveries by bike and aims to have 50 per cent of all of its UK deliveries made by emissions-free means within six months.However, Scobie cites reasons well beyond the environmental benefits for being glad of having made the shift to bicycles.“None of us realised how successful it would be and how positive it would be,” she says. “[That’s] not only the environmental factors but just the service factor is so much better than customers getting them in a van.”The riders all interact well with the customers, she adds. “It’s just really efficient — which, basically, it has to be.” More

Casting off: A tourist watching the Ever Ace leaving the port of Felixstowe in September © Chris J. Ratcliffe/BloombergTwo months ago, the world’s largest container ship, the Ever Ace, arrived at Felixstowe Harbour, on the east coast of England on its maiden voyage. It had taken the vessel, which has a capacity of 23,992 containers, two months to crawl from Qingdao, eastern China, to the Suffolk port. It delivered goods, including computers, games, clothing and food — and then picked up a large number of empty containers to take back to China.These vast new ships require supersized infrastructure, as the grounding of the Ever Ace’s sister ship in the Suez Canal, earlier this year, has shown. That can require expansion in the docks where the ships berth, the dredging of channels to provide access, as well as improvements to roads, heightened bridges and wider canals.At Felixstowe, some of the berths had already been widened and the local Harwich Haven Authority has started work on deepening the channel, at a cost of £120m by 2023.But, if the need to adapt ports to the new mega ships was evident before Covid-19, the supply chain blockages caused by the pandemic have brought fresh urgency to the need for port modernisation and automation.“The pandemic has shown us how vulnerable the supply chain is and how we have lagged [behind] in using technology to increase preparedness for any kind of disruption such as this,” says Christian Roeloffs, chief executive of Container xChange, which provides an online platform for the industry to buy, sell and lease shipping containers.Covid-19 border restrictions, social distancing requirements, and factory closures all wreaked havoc on traditional supply chains, leading to soaring freight rates on the main shipping routes between China, the US, and Europe.A continuing logjam of ships outside ports and a shortage of truck drivers on land have since caused stock shortages and delays to deliveries — raising prices and frustrating consumers at a time when a pandemic-led boom in online shopping has increased demand for next-day delivery.

In many cases, the problems have been compounded by lack of automation and outdated labour practices at ports, says John Manners-Bell, chief executive of Transport Intelligence, a consultancy. This is particularly true on the West Coast of the US at the Los Angeles-Long Beach port complex, where a record 76 ships had to remain at sea waiting to unload in September. In China, many ports operate round the clock. By contrast, many in the US operate just 112 hours a week, with days off.But analysts say that automation could make port services more efficient and safe, cut labour costs by 40 to 70 per cent, as well as reduce carbon dioxide emissions.The automation of container terminals first started in the early 1990s in Rotterdam, in the Netherlands, where they used unmanned gantry cranes and automated guided vehicles. Now, nearly 40 partly or fully automated container terminals operate around the world, according to Roeloffs.Shanghai’s Yangshan Deep Water Port can handle more than 40m containers a year © BloombergOne of the biggest terminal developments is Shanghai’s Yangshan Deep Water Port in eastern China, which opened three years ago and can handle more than 40m containers a year. It replaced an army of workers with bridge cranes, auto-guided vehicles, and rail-mounted gantry cranes — all of which can be driven from a control room at a distance.Other Asian countries are following suit. In Singapore, the Tuas Mega Port — scheduled to open in stages — will be one of the biggest and most automated in the world. Its technology innovations include unmanned vehicles, drones, data analytics, and driverless trucks for port transport. Digital platforms will also be employed to reduce port congestion and bureaucracy.However, while the pandemic has highlighted the need for modernisation, it has also underscored its limits.Although China has some of the largest and most modern ports in the world, Beijing’s tough approach to Covid in the workforce means port operations have been shut down frequently, says Manners-Bell.This has caused significant congestion on the land side as containers stack up waiting to be loaded and ships are left at anchorage outside key ports, such as Ningbo and Yantian.Furthermore, the new technologies that must be acquired to save on labour costs are also still expensive.Tuas Mega Port in Singapore © BloombergA report by the rating agency Moody’s in 2019 questioned the high capital investment cost required, warning of uncertain productivity gains, disruption to operations, and the political risk posed by potential conflict with unions.“Many analyses that compare productivity metrics between automated and conventional terminals indicate inconsistent and, in a number of cases, negative productivity gains from automation,” Moody’s said.There are also questions over who should pay for infrastructure improvements, especially in cases where the ports are privately owned. In the UK, for example, most ports are owned by consortiums of private equity, sovereign wealth and offshore funds.Environmental concerns have added to this debate. This month, the UK Major Ports Group, a trade association for the UK’s largest port operators, called on the government to establish a dedicated “green ports fund” to invest in green infrastructure, alongside the industry.Such infrastructure could include electrical charging points for ships in ports and the new generation of electric- and hydrogen-powered equipment that could help ports meet the UK government’s net zero targets. More