C’mon Man!

By Michael Every of Rabobank

Common good, prosperity, and thinking

US CPI was weaker than expected by the smallest possible rounding down margin, but still uncomfortably high for anyone who focuses on inflation rather than asset prices. Headline was 0.1% m-o-m, driven by falling energy, and 5.0% y-o-y; core was 0.4% m-o-m and 5.6% y-o-y. Nothing in the report suggested the Fed will refrain from hiking a further 25bps in May.

Neither did the Fed minutes from the March meeting where rates were raised 25bps. While some doves favored pausing due to rumbles in the banking sector, some wanted to go 50bps without it. The Fed is keeping an eye on credit conditions, but said it was not going to stop hiking, or pivot, just because the economy wobbles – which looking at trucking around US ports could tell you is happening to some degree. Fed presidents Harker and Daly both said the same after the minutes. Rabobank’s Philip Marey also concludes (in ‘Credit Americain’), that the March CPI report: “underlines the importance of staying the course, because core inflation remains persistent at a high level. In fact, now that the FOMC is outsourcing the final leg of the hiking cycle to credit tightening by banks, we cannot rule out the possibility that the Committee may have to resume the hiking cycle later this year, if credit tightening fails to finish the job.”

Not unrelated, oil also closed up over 2% on the day, with Brent back over $87, and up 18% month-to-date. Headline CPI will need to find something else to drag it lower again in April or May, and core CPI is already sticky – as ECB speakers made clear too. Meanwhile:

• The US announced a one-month budget deficit of $378bn(!)

• Germany may reverse its decision to allow China’s COSCO to buy a controlling stake in the port of Hamburg following a government split; perhaps partly because in a leaked government report states it is going to fail to meet its commitments to NATO in both 2025 and 2027.

• President Macron, whose diplomatic staff just spent days walking back everything he had said, reiterated France will not be a US “vassal”. As I noted, pray France doesn’t need Fed swaplines.

• Russia is again suggesting that the Black Sea Grains Deal may not last much longer.

• China is to close Taiwan’s northern airspace from April 16-18, which will affect 60%-70% of flights going between Northeast Asia and Southeast Asia, as well as flights between Taiwan and South Korea, Japan and North America.

• Brazil’s president is in China to talk business, and new world orders and the flow of agri goods.

On which note, the IMF’s latest World Economic Outlook flags deglobalisation risks yet also expects the world will be back in the New Normal of ultra-low rates and QE from 2025. Does it think 24 months from now the Ukraine War and geopolitical tensions will have been resolved? That’s the underlying assumption – or they are assuming there is no politics in economics.

Moreover, if we end up in the New Normal again, will politicians shrug and say “Let’s push up house prices, stocks, and bonds?”

C’mon man! You don’t think they will lean on fiscal stimulus, protectionism, and populism, more than now? After all, they just learned such policies generate a rapid demand response: they just create inflation if you don’t add supply too. The logic will therefore be to boost supply and demand, which involves more control over the economy than just slashing rates and hoping for the best.

Note well that even The Heritage Foundation sees it the same way. That influential conservative think tank just released an intellectual shift titled ‘Free Enterprise and the Common Good: Economic Science and Political–Economic Art as Complements’. In it, economics is now openly political-economy, and conservatism reaching for a new “-ism” beyond tax and rate cuts and deregulation. (As predicted in 2020.) A new national conservatism is proposed based on Catholic Social Thought (CST): theology as glue to replace what (neo)liberalism dissolves – i.e., only one in five young Americans declare themselves as patriots. As mentioned in a past Global Daily, Schumpeter was a late convert to CST’s emphasis on ‘the common good’ as the only framework in which we should allow free markets to work, which leans on Quadragesimo Anno, a Papal edit discussing the ethical implications of the social and economic order.

I am sure I just lost many readers here because I haven’t said ‘basis points’ or ‘pivot’ for a few sentences. However, such intellectual shifts in think tanks matter, in the same way the one to Thatcherism and Reaganism did in the 1970s, before both assumed power and swept old institutional thinking away. The Tweet of the Heritage report is: “Conservatives are rethinking the relationship between free enterprise & the common good. The question isn’t whether to jettison free enterprise in favour of the common good, but rather how to orient free enterprise in support of the common good.”

The full document stresses: “most American conservatives have held for several decades that protecting markets from government was essential for human flourishing. But that consensus is quickly changing as many elements of classical liberalism are now being challenged.” This means rejecting neoclassical economics, mathematical economists, and traditional Reaganite tropes like tax cuts, rate cuts, deregulation, and free trade. Rather, it says, “Free enterprise is necessary for true liberty, but it is not sufficient…. Combating monopolies, redistributing income, and even guiding production in essential industries are all valid public policy options.” As is “social justice” – but economically, not in terms of DEI identity. Overall, the report contains as many interesting questions as answers, which stimulates my brain more than noting CPI was 0.1% not 0.2%. Indeed, it concludes that a common-good capitalism policy agenda should answer five questions:

• What is the external social or political cost to market resource allocation?

• What is the proposed corrective policy?

• What are the costs and benefits one may reasonably expect from implementing that policy?

• How does the policy affect the scale and scope of government, social cohesion, and family formation?

• Retrospectively, how can society know the policy is working as intended?

Ask yourself if the answers are “Pivot! Pivot! Pivot! QE! QE! QE!”

(Certainly not in Australia, where the latest jobs numbers were +53K, with full-time jobs up 73K, and unemployment at 3.5%. Why did we get the RBA pause in April? The same reason as we got one in Canada again this week: housing prices – which are seen as the ‘common good’ for those with property, and as the common point of contention for those without.)

Of course, there is a more pointed target to this conversation. Tellingly, the Heritage report first asks you if your primary concern is China: if you click ‘No’, you can read it; if you click ‘Yes’, you are redirected to ‘Winning the New Cold War: A Plan for Countering China’, with a comprehensive set of policy recommendations financial markets won’t like either.

In short, it seems like a possible future of ‘common good’ far more regulated Western markets vs. China’s common prosperity, with all that entails. That matters far more than the market’s all-too-common thinking that a 0.1% US CPI print either matters, or will last as a trend.