Trapped between the Devil and the deep blue sea

Abraham George Macro View

The first signs of inflation are visible normally in runaway asset prices. We are already seeing that. When the government floods the world with money with no end in sight, the buying power of the money in your pocket gets destroyed. It’s that simple.

The most awaited economic data this week should be the CPI data tomorrow. PPI comes out on Thursday. The inflation data should quickly counter the narrative that has been created out of Friday’s weak jobs report. The weak jobs report is an anomaly and an outlier in the economic data released so far. It is not pointing to waning economic activity, rather it’s clearly demonstrating the destructive role that the government is playing in the labor market with all their hand outs.

The government is winning the competition against employers for labor by paying them more to stay home, than they would make working. But let’s also be the Devil’s advocate here. While we have only highlighted inflationary pressures majority of the times, inflation is a lagging indicator that troughs several quarters after recessions end. In recent cycles, the lag ranged from 6 to 28 quarters. Rebounding productivity, supply chain restoration and technological advancement are all dis-inflationary forces. If the pandemic leads to more domestic manufacturing, the new will employ robots, not people, thereby shrinking labor demand.

Let’s turn more to markets. In 2008, the CRB Commodity Index topped and then crashed losing about 78.6 of its value in 12 years. The importance of that low in Apr 2020 was missed by many. Since that time we have seen dramatic rises in Lumber and copper as they have risen above the previous all time highs of 2008. Dramatic moves have also occurred in soft commodities like soybeans, corn and lean hogs. Outside the futures markets, steel prices have more than tripled and so have food prices.

With the government policies since the pandemic, food producers cannot get people to work for them. Politicians have extended ‘unemployment benefits’ endlessly, and people must give up the free money if they get a job. So people are staying home doing nothing instead of producing. This is utter madness and the whole thing can implode like a house of cards.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.