'..inflation’s resilient and cyclical nature..'

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'History informs us that inflation is not easily contained once the Genie has escaped from the bottle. Inflation will ebb and flow, while retaining a powerful bias for upside surprises.'

'While following Wednesday evening developments, my thoughts kept returning to a Monday NYT article (Chris Buckley): “Speeches by the Chinese leader show how he was bracing for an intensifying rivalry with the United States from early in his rule. When President Xi Jinping of China made his first state visit to the United States in 2015, he wrapped his demands for respect in reassurances. He courted tech executives, while defending China’s internet controls. He denied that China was militarizing the disputed South China Sea, while asserting its maritime claims there. He spoke hopefully of a ‘new model’ for great power relations, in which Beijing and Washington would coexist peacefully as equals. But back in China, in meetings with the military, Mr. Xi was warning in strikingly stark terms that intensifying competition between a rising China and a long-dominant United States was all but unavoidable, and that the People’s Liberation Army should be prepared for a potential conflict.”

“Despite his assurances to President Obama not to militarize the South China Sea, Mr. Xi told his senior commanders in February 2016 that China must bolster its presence there.” “In Mr. Xi’s worldview, the West has sought to subvert the Chinese Communist Party’s power at home and contain the country’s influence abroad. The Communist Party had to respond to these threats with iron-fisted rule and an ever-stronger People’s Liberation Army.”

Panda talk was a nice touch. But it seems obvious that Beijing has decided to play nice only because the nice guy act is today a necessary expedient for the tough guy to be in the most advantageous position to later impose his will. Wolf Warrior in Panda’s Clothing.

At least for a day, we could forget about Xi’s “no limits partnership” pact with Putin, a dictator brotherhood appearing only to have strengthen since Russia’s Ukraine invasion (and associated atrocities). And we can overlook Team Xi/Putin, these days burning the midnight oil assembling their anti-U.S. alliance with a motley crew of countries deserving of the “axis of evil” moniker. No reason to dwell on Hong Kong repression, the crazy Chinese surveillance state and eradication of basic freedoms, or the Uyghur tragedy. Sure will be fun to welcome the Pandas back.


History informs us that inflation is not easily contained once the Genie has escaped from the bottle. Inflation will ebb and flow, while retaining a powerful bias for upside surprises.

CPI (y-o-y) began 1968 at 3.6% and traded as high as 6.2% during December 1969. CPI had dropped back down to 2.7% by June 1972, only to shoot to 12.3% to end 1974. Inflation then reversed sharply lower, with a reading of 4.9% during November 1976. Despite market and policymaker optimism, the inflation fight was anything but mission accomplished. CPI reached 9.0% in 1978, 12.2% in 1979, and then peaked at 14.7% in April 1980.

The Fed funds rate began 1968 at 4.6%, only to reach 9.2% by August 1969. It was back down to 3.50% by February 1971, before reversing higher, with the policy rate surpassing 10% in July 1973. Fed funds began 1976 below 5%, jumped back to 10% in late-1978, and reached 15.5% in October 1979 – only to peak at 20% in Q1 1980. Fed officials are well aware of inflation’s resilient and cyclical nature – along with the dangers of “stop-start” policy tightening.


Deficit spending and bank lending were the key drivers of monetary inflation in the seventies and early eighties. I would argue that market structure these days adds a critical element to inflation risk. Market-based finance is the marginal source of monetary fuel that can either stoke inflation or spur disinflation. Since the March bank bailout, I have chronicled how “risk on” and the resulting loosening of financial conditions usurped the Fed’s tightening cycle.


A few snippets from the week: “Hyundai has joined Honda and Toyota in raising factory worker wages… said Monday it will raise factory worker pay 25% by 2028…” “California Highway Patrol officers are getting a 7.9% wage increase, marking their biggest raise in 20 years. Last year, they received a 6.2%...” “The National Defense Authorization Act (NDAA) for 2024 has been approved by the House of Representatives, allocating an impressive 5.2% pay increase to military members.” “Alaska’s minimum wage will increase on Jan. 1, 2024 from $10.85 to $11.73 an hour…” “Starbucks workers stage ‘Red Cup Day’ strike.”


I believe tighter financial conditions will be necessary to reduce inflation risk. And conditions were tightening throughout September and October. But, once again, when tighter conditions begin to translate into softer market and economic backdrops, markets become susceptible to powerful squeeze dynamics – the unwind of short positions and the reversal of hedges. And in this hyper-speculative marketplace, squeezes quickly entice aggressive “FOMO” performance-chasing buying.

This week provided further evidence of extraordinary correlations – across various markets and globally. Whether it’s “risk on” or “risk off” – it is a highly synchronized world. Major equities indices this week were up 4.5% in Germany, 4.2% in Spain, 3.5% in Italy, 3.5% in Brazil, 3.1% in Japan, and 2.8% in Mexico. Ten-year yields dropped 23 bps in the UK and 22 bps in Italy. EM (local currency) yields dropped 36 bps in Chile, 34 bps in South Africa, 30 bps in Colombia, 28 bps in Brazil, and 24 bps in Hungary. EM currencies were squeezed higher, as dollar bulls took one on the chin. In China, Asia, Europe and the U.S., bank CDS prices have moved sharply lower.

Stocks are always good for upside surprises. And with all the derivatives, hedging, speculating, and leveraging, we shouldn’t be surprised by wild CDS and currency market volatility. But it’s the bond market that I find fascinating. There will be ebbs and flows. Treasuries and MBS were overdue for a “rip your face off” squeeze. But there will be a couple more Trillion of Treasuries to sell over the next year, in the face of more QT and waning international demand. And “risk on” only heightens the risk of upside surprises in economic growth and inflation.

The bottom line is that when the bond market approaches the point of imposing some desperately needed discipline (in the markets and Washington), a confluence of squeezes, unwind of hedges, speculative flows and leveraging spurs looser conditions. Enjoying the whole loosening experience, Gold jumped 2.1% this week and Silver surged 6.5%.

But I expect the bond market to push back against “risk on.” With $2 TN annual deficits as far as the eye can see, it's either begin imposing discipline or watch inflation and supply eat away at system stability.'

- Doug Noland, A Wolf in Panda's Clothing, November 2023


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(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'