Thread by @RonStoeferle

I'm reading everything that #ZoltanPozsar puts out for many years...His latest piece "War and Interest Rates" (August 1st) was a true masterpiece...Here are some highlights in a #thread🧵:

War is inflationary

....Wars come in many different shapes and forms. There are hot wars, cold wars, and what @DrPippaM calls hot wars in cold places – cyberspace, space, and deep underwater (see here). ...

Inflation did not start with the hot war in Ukraine…

the low inflation world stood on three pillars:
first, cheap immigrant labor keeping service sector wages stagnant in the U.S.; second, cheap goods from China raising living standards amid stagnant wages; third, cheap Russian gas powering German industry and the EU more broadly.

...By extension, Russia and China have been the main “guarantors of macro peace”, providing all the cheap stuff that was the source of deflation fears in the West, which, in turn, gave central banks the license for years of money printing (QE).

But now that the pillars..

of the low inflation world are changing…
…central banks are done with fighting deflation with asset price inflation, and are now fighting inflation with asset price deflation. Central banks are adapting to a world that’s gone from having too much stuff and not enough demand,

to a world that has not enough stuff and too much demand. Today’s inflation…
…is more about supply and less about demand, and…
…is more about geopolitics than (domestic) politics.

... we should read less Friedman and Schwartz and much-much more Brzezinski and Mackinder, for the special relationship between China and Russia covers most of Eurasia, and Eurasia has most of the stuff needed to meet inflation targets in the West.

Today, it’s time to think more about the risk of inflation staying higher for longer due to economic warfare, and less about inflation being driven by a messy re-opening process and stimulus.

As James Aitken recently noted, “inflation expectations are well anchored when nobody talks about inflation”, and by that measure, inflation expectations are becoming clearly unanchored…

Some market participants like to see the silver lining in today’s environment, arguing that energy prices today aren’t as big a deal as they were in the 1970s, because a service-intensive economy is less energy intensive. That’s nonsense:

what oil is to an industrial economy, people are to a service economy, and when Bill Dudley says that in his forty-year career in finance he hasn’t seen a labor market this tight, I assume he means that the service economy is having its “OPEC moment”.

But perhaps the most unsettling parallel to the 1970s and early 1980s is the Fed’s and the market’s assumption that all it will take to break inflation is hiking interest rates with the resolve and determination of Chair Paul Volcker…

The market can talk all it wants about a “soft landing,” but as explained above, we need an “L”-shaped adjustment in activity, and an “L”-shape has two parts: first an “I” which you can think of as a vertical drop (perhaps a deep recession); second, an “_” which you can...

think of as a flatline (stagnation, as in stagflation).
Regarding the first bit, there is nothing “soft” about a vertical drop. Regarding the second bit, there is nothing that guarantees an interest rate cut after the vertical drop: stagnation, especially when paired with...

inflation (stagflation), means that interest rates may be kept high for a while to ensure that rate cuts won’t cause an economic rebound (an “L” and not a “V”), which might trigger a renewed bout of inflation. To date, I haven’t heard anything from the FOMC that would..

suggest that the Fed wants to avoid a recession (“there will be pain”), or that the Fed would rush to cut rates if we had a recession with high inflation (“we’ll cut when we are confident that rate cuts won’t ramp inflation back up”).

the risk of the Fed hiking to 5% or 6% is very real, and ditto the risk of rates cresting there despite economic and asset price pain."

The full piece can be read here and it's really well worth taking the time: advisoranalyst.com/2022/08/03/zol…

#inflation #war #stagflation #FedPolicy #Gold #ZoltanPozsar #macro