I run a business @ExanteData. I have always been thinking of the price of our product/service as only a function of its quality.
But now, as some our our cost rise rapidly (heath care up >10%, IT equipment > 30%), I start thinking that there has to be a cost adjustment too.
It is just an anecdote. But when the supply chain issues and other cost pressure are so broad and long-lasting, it is not crazy to think that there will he 2nd and 3rd round effects from the inflation we observe now.
My inflation expectations have been (in my head) rounding to roughly zero for the last five years. It has not been a feature of my price setting. And now I am observing stuff that makes me think differently about cost, and appropriate pricing.
I am probably not alone. Business managers, CFOs, product managers, etc etc, will all be facing a different reality in this cycle, and their behavior will be affected.
This cycle is FAR from normal.
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First, I am not a person who always worry about inflation. I have been observing how central banks in the period 2008-2019 persistently OVERestimated inflation. Hence, I am always skeptical when I see a confidently aggressive inflation forecast.
Second, the link between money supply and inflation is very far from simple, even if some textbooks (and many observers) pretend it is simple. It is not the money supply growth that is fundamentally new in 2021.
Last week was a serious one. Today, I will try to go in the other direction.
This is partly because a FinTwit guy (see proof below) just said I have ‘humor’ & because I hope to make the next @donnelly_brent top 10 list for funny twitter people.
I may be joking about all this, maybe not (your call)
Economists being funny is all about managing expectations, and I am certainly not joking about that.
I will tell you one brief anecdote, and you will see what I mean.
Here we go...
1/ Some years ago, I went to one of those formal lunches at the Harvard Club (the one in the middle of Manhattan). Lots of mahogany, butler-like staff, and the invited group was sitting around a rectangular table in one of the private dining rooms upstairs.
I had been planning to do a daily China thread this week. But things got a little busy, so I am behind schedule. In any case, here are some observations on why the Renminbi (CNY) is so stable, despite the risk aversion around Evergrande...
Let us start with a recap:
white line is usdcnh (the cnh is holding at around the strongest level since 2018 [low is strong])
yellow line is CNY vs basket (the CNY is strong on a broad basis, around a 5y high [high is strong on this metric]
Hence, while many Chinese assets (from real estate credit to tech equities) have been on the back foot, the currency has been stable, or even strengthening.
Today, I will show some background data on the structural problem in Chinese real estate, and offer some basic perspectives on how the situation differs from the US in 2008 (not better or worse, but simple different)
The memory from the US in 2007-2008 is still fresh. The US housing market was too hot. There was too much leverage / building. And we ended up with a big crisis => the losses had to be allocated (globally), and policy makers were not willing to (or politically able) fill the gaps
There is a huge amount of focus on China contagion/Evergrande at the moment. Hence, it is a time to be precise. I will not do a comprehensive thread (yet). But just provide some specific color on the High Yield credit moves, which themselves are generating a lot of attention.
It is true that China (USD) credit indices moved a lot last week, after stabilizing briefly in early September.
And there are lots of fintwit comments on that: Here is a good (and sober) example:
It is worth thinking about what is going on under the surface, so I am going to plug in the first 10 names (highest weight in the index) and let them tell the story:
The first one is Bank of Communications (2.4%) weight in HY index. Yield is very stable. Not much contagion here.