“It’s Now Hard To See Any Accurate Information On Anything”

By Michael Every of Rabobank

None so blind as those that will not see

There are none so blind as those who will not see: except those who see things that aren’t there because it also suits their book.

“Deflation and Fed rate cuts!” scream the markets selling us ‘transitory’ for two years. Yet US CPI, 0.4% m-o-m headline and core as expected, and 4.9% y-o-y headline, a rounding-error tick lower than consensus, and 5.5% core saw no evidence of that if you dug in rather than stripping whichever elements of high inflation you don’t like this month out. Durable and non-durable goods have stopped deflating on a GDP-style 3-month/3-month annualized basis, which means CPI needs to be led lower by services, which are not doing so ex-housing.

Imagine if agri analysts, instead of making careful, honest forecasts based on the complex factors impacting on supply and demand –and the realpolitik of what producers and consumers are both willing to hear– made deliberately ridiculous forecasts just to push prices higher, so they would get paid more. That’s not how it works there, of course. But it is sadly how naïve economists with mean reverting models combine with shillltastic ‘Dow 36,000!’ types and 0DTE options nowadays.

At least the Wall Street Journal is honest enough to note: ‘We Might be Getting Used to High Inflation, and That’s Bad News: Companies’ ease with raising prices may mean more rapid increases are becoming entrenched’, while the ECB is muttering that it might need to keep hiking rates as far out as September. However, that still leads the same crowd to say the same things. For stocks, it means higher profits, and if rates go up, they have to come down again – because markets. For bonds, higher rates to fight inflation now means lower rates soon and lower long yields now – because markets.

Neither sees the bigger political-economy picture of why firms are able to raise prices, which speaks to a concentrated corporate power that can shrug off monetary policy. Nor are they seeing the inflationary geopolitical-economy backdrop inherent in:

• The Lowy Institute saying what we said years go: ‘Biden’s quiet economic revolution: The guiding hand of the state is back as geopolitics rules’;

• Politico noting ‘Reform or die? If the US gets its way, the WTO might do both’, putting a nail in the coffin of free-trade’s landmark institutional achievement in Trumpian fashion.

• The Wall Street Journal saying ‘Automation Giant Faces US Government Probe Over China Operations: Investigation of Rockwell looks at whether its software might allow access to critical US government and industrial infrastructure’ – spelling more decoupling;

• The Chinese defence minister refusing to meet his US counterpart due to US sanctions;

• US President Biden will sign a defence treaty with Papua New Guinea in person, which had been leaning towards China, in the first ever US presidential visit there;

• China’s official foreign affairs spokesman tweeting: “Pentagon has reportedly made plans for hitting opponents with genetically engineered weapons. The genomic data of Asian Chinese, European Aryans and Middle Eastern Arabs all on a list to be collected by the US military”(!)- while also underlining anger over US engagement with Taiwan;

• Beijing snubbing the German Finance minister, who responds, “We will not let our liberal values be bought for good business deals,” as there is a public pushback at the VW shareholder meeting over its China operations; and

• Dollar-less Pakistan says it wants to pay for Russian oil in CNY.

And that’s just one day in 2023 – NONE OF WHICH IS BEING REFLECTED IN MARKET FORECASTS ABOUT WHAT THE FUTURE LOOKS LIKE. All they think about is when inflation comes down enough for the Fed to cut rates, because some people make more money that way, or sleep better, or both.

At the same time, those long only and forced to be long China by MSCI allocations, and Wall Street firms keen to growth their businesses there until the crackdown on due-diligence consultants started, are refusing to see that China’s problem is structural deflation due to over-supply of everything and not enough demand. Chinese CPI data today was only 0.1% y-o-y vs. 0.3% expected, so deflation looms. It’s already arrived in PPI at -3.6% y-o-y vs. -3.3% expected and -2.5% last month. In short, reopening was a nothing burger. The ‘shift to consumption’ sold for years has been mis-sold for year. China’s exports may be up again, but its import growth keeps slumping y-o-y: which the likes of the IMF are deliberately blind to seeing means China is a net DRAG on global GDP growth, not any kind of addition.

Yes, the West would kill for that kind of deflation right now. But because they have under-supply of everything and over-demand in services, they aren’t going to get it. As such –and given China will keep trying to export its way out– the onus will be on the West to mirror China going forwards. That’s stagflationary or inflationary for longer, and higher geopolitical risks forever.

But of course not seeing, and deliberately seeing what’s not, reflect a larger human failing.

This week already saw former US president Trump ordered to pay a woman $5m for an alleged assault. That was rightly front-page news even in the financial press, and joins a long line of bad Trump headlines. Today, the same media are of course covering the arrest on alleged corruption charges of Republican Representative Santos. Yet they ignore the alleged corruption of the Biden family presented in Congress, as they did the Hunter Biden laptop in 2020, and the orchestrated campaign to ensure that story never surfaced. As US law professor Jonathon Turley notes, Congress “could produce eight heads in a duffle bag owned by Hunter and the media would still demand a luggage tag referencing the President.” That reminds me of the 2016 election, when someone stated that if video were found of Hillary Clinton eating babies, CNN would have decried Trump for eschewing eating nutritious children. And before the inevitable ‘whataboutism’ begins, Fox, Breitbart, etc., obviously do the same the other way round. It’s a universal problem.

That said, Trump was just on CNN for the first time in a long time and made one thing clear: he won’t back Ukraine further if he wins in 2024. Europe might suddenly need to start looking at their lofty rhetoric on values, at their feeble military muscle, and at the US opinion polls, if they still mean anything anymore.

That’s the point: it’s now hard to see any accurate information on anything. But we shouldn’t be blind to that uncomfortable fact, in life or in markets. Rather, we should open our eyes!