Friday, March 12Hamish Risk | March 12, 2021
The big question for investors is whether rising yields are a warning sign that reflation could turn into inflation that has the potential to prompt tightening that could cut off the recovery; or just another step along the road towards that recovery. To that end, in today’s Macro Briefing, TS Lombard explains what it takes reach a secular turning point in inflation, why we are not there yet and why central banks simply don’t have the levers to achieve it anyway. Meanwhile, Liberum explains how we can all too easily be fooled into believing we are witnessing rising price levels and Societe Generale sets out why a much heralded supercycle in commodity prices is unlikely to materialise. Elsewhere, Eurizon SLJ outlines why currency investors should focus on the China’s capital account when it comes to RMB and why Beijing is in a good position to contemplate re-opening its capital outflows. Also, Sustainable Market Strategies highlights the frothy nature of the green investments and why investors with as ESG bent should be focusing on the “blue” economy.
Inflation TS Lombard
1. Secular turning point in inflation?
History shows what central banks can and – more importantly in the current context – cannot achieve, says Dario Perkins at TS Lombard. He says the Fed and other central banks can all desire higher inflation – a welcome shift from their deflation bias of the last 30 years – but unless there is a secular increase in the equilibrium interest rate, or r*, they will struggle to achieve this outcome. There is no doubt there has been a profound shift in monetary objectives over the past 12 months, says Perkins, however, history suggests that is a necessary condition for higher inflation, not a sufficient condition. Click here to contact us for the full report and discover why he thinks it’s seriously premature to say we are on the brink of a new inflationary era.
behavioural finance inflation expectations Liberum
2. Why inflation feels higher than it is
Joachim Klement at Liberum believes when people say inflation “feels” much higher than the official numbers, there is likely to be some behavioural trap involved. In fact, citing research from behavioural finance superstar Ulrike Malendier, he says when it comes to inflation there are two biases at work simultaneously. First there is loss aversion, with people having a natural tendency to overestimate inflation as they are much more concerned by the cost of prices rising than the benefits of prices falling. Second, there is the illusory truth effect of people believing something is true because they see it again and again – whether or not it is in fact true. The foundation of conspiracy theories, in the case of inflation Klement says it occurs when the prices people see often, such as groceries, rise, they assume that inflation is rising across the board even though that represents just a small fraction of their overall spend.
commodity cycle SG
3. Usual cyclical upturn or commodity supercycle?
Michale Halgh at Societe Generale notes that commodity markets have been in the headlines as prices for some have reached highs not seen since 2009, with some going so far as to say they are entering a new supercycle. He says much of the argument as to whether to brace for a new commodity supercycle is centred on the effects of green-intensive infrastructure packages globally. While this process is massively metal intensive, click here to find out why Halgh is very reluctant to say commodities are entering a new commodity-wide supercycle.
Capital flows China Eurizon SLJ Research
4. The world is underweight China, and vice versa
In thinking about the RMB, Steven Jen at Eurizon SLJ Research says it is much more important to understand the evolution of the capital account than the current account. For China, he sets out why there is a unique configuration of very large pent-up demand for foreign assets as well as a just as large pent-up demand in the world for Chinese assets, of at least USD3 trillion in each direction. Jen believes the Chinese government and the PBOC will use policies and ‘macro-prudential’ measures, such as capital controls, to negotiate the confluence of these opposing flows in the coming years. Indeed, he explains why China is now in a good position to contemplate re-opening its capital outflows, and why fixating on only trade balances or interest rate differentials is an insufficient perspective on the RMB.
ESG ocean economy Sustainable Market Strategies
5. Blue is the new green
The past year has all been about green investments, says Sustainable Market Strategies, and bubble or not, it is becoming increasingly difficult to justify investing in some of the green themes at currently inflated valuations. The firm says green is not the only colour in an ESG-minded investor’s palette, however. The blue economy, which represents different investable industries related to the oceans and the services they provide, is rapidly gaining in popularity and now is the time to start riding that wave, according to SMS.