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David Fuller and Eoin Treacy's Comment of the Day
Category - Global Middle Class

    ECB Slows Crisis Stimulus in Shift Lagarde Insists Isn't a Taper

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    “This is not a tapering decision, as ECB President Lagarde stressed,” Elga Bartsch, head of macro research at the BlackRock Investment Institute, said in an emailed comment. “Asset purchases look here to stay as the new policy framework paves the way for looser for longer monetary policy in the euro area.”

    Mark Dowding, who oversees $70 billion at BlueBay Asset Management LLP, was less convinced by Lagarde’s protestations. 

    “To me it is just semantics,” he said. “It is a choice of words. It looks like a taper and smells like a taper, so markets will view it as the start of the taper process.”

    With supply-chain disruptions and resurgent virus infections threatening to undermine the recovery and medium-term price pressures likely to remain well below its goal, officials have insisted in recent weeks that the euro-area economy is in a different state than the U.S. and remains reliant on ECB support.

    Yet some governors have started to warn publicly that maintaining an ultra-accommodative stance for too long also carries risks. Austria’s Robert Holzmann and Klaas Knot of the Netherlands both told Bloomberg in separate interviews last week that emergency asset purchases should end in March, hinting at heated discussions about the policy path in the months ahead.

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    Email of the day on food price inflation and political polarisation

    I did notice the surge in fresh fish prices for the past 6 months. For example, dover soles (300-400g size) had been in the 20-25 eur/kg (with an average at +/-23 eur) for +/- 15 years with a few peaks at 30 eur and dips at 18 eur; for the past 6 months, I have never seen the price below 30 euros and it has averaged 35-37eur with peaks at 40+ eur. I wonder whether it has to do with Brexit and therefore less fish available on the EU market. In any case all fish prices have substantially increased (depending on the species 40-70%); the cost of milk, pasta, etc. has also increased, not talking about gasoline or real estate.

    (Here in Luxembourg, I have been made aware that a new project outside the city -at +/- 10 km to the north- a new residential development to be delivered in 2023 has prices at 20.000 euros/sq m for flats of 65-75 sq m) ... [Ed. c.€1890/sqft]

    Wages are not following, and taxes are globally up with budgets still showing too large deficits. This will fuel resentment and populism, maybe revolts when people have nothing left to lose (the situation is dire in France and the split within the have and have nots deepening by the day compounded by and immigration - whether with a French ID or not - separatism being more evident by the day. Wages are not following.

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    How water shortages are brewing wars

    This article from the BBC may be of interest to subscribers. Here is a section:

    Unfortunately, there's no one-size-fits-all solution to water scarcity. In many countries simply reducing loss and leaks could make a huge difference – Iraq loses as much as two-thirds of treated water due to damaged infrastructure. The WPS partners also suggest tackling corruption and reducing agricultural over-abstraction as other key policies that could help. Iceland even suggests increasing the price of water to reflect the cost of its provision – in many parts of the world, humans have grown used to getting water being a cheap and plentiful resource rather than something to be treasured.

    Much can also be done by freeing up more water for use through techniques such as desalination of seawater. Saudi Arabia currently meets 50% of its water needs through the process. "Grey", or waste water, recycling can also offer a low-cost, easy-to-implement alternative, which can help farming communities impacted by drought. One assessment of global desalination and wastewater treatment predicted that increased capacity of these could reduce the proportion of the global population under severe water scarcity from 40% to 14%.

    At the international level, extensive damming by countries upstream are likely to increase the risk of disputes with those that rely on rivers for much of their water supply further downstream. But Susanne Schmeier, associate professor of water law and diplomacy at IHE Delft in the Netherlands, says that co-riparian conflict is easier to spot and less likely to come to a head. "Local conflicts are much more difficult to control and tend to escalate rapidly – a main difference from the transboundary level, where relations between states often limit the escalation of water-related conflicts," she says

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    Powell Says Taper Could Start in 2021, With No Rush on Rate Hike

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Investors took the news of the coming taper in their stride -- avoiding any hint of the so-called 2013 “tantrum” when the Fed surprised markets by unexpectedly announcing it would start to pare back asset purchases. The S&P 500 rose during the much-anticipated address to stand more than 0.6% higher from opening levels. Ten-year Treasury yields nudged slightly lower to around 1.33% and the dollar fell.

    “Chair Powell stuck to the script in his Jackson Hole speech; anyone hoping for a steer on the timing of the taper will have been disappointed, but it was never likely,” said Ian Shepherdson, the chief economist at Pantheon Macroeconomics.

    At the July Federal Open Market Committee meeting, most Fed officials agreed it would probably be appropriate to begin tapering the central bank’s $120-billion-a-month bond-buying program before the end of the year, according to a record of the gathering. Some are pushing for a move as soon as next month.

    Monetary policy makers would like to conclude the purchases before they begin raising interest rates, and several in June saw a possible need for rate increases as early as 2022 amid inflation that is running above the central bank’s 2% target. The Fed cut its benchmark rate to nearly zero and relaunched the crisis-era purchase program last year at the onset of the pandemic.

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    VW and Daimler Going Electric Overwhelms German Auto Suppliers

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Carmakers are exacerbating issues by producing more components in-house. Tesla, VW and Porsche are making car batteries themselves or with a partner from outside the traditional car-parts industry. VW aims to cut procurement costs by 7% and fixed costs by 5% over the next couple years, potentially pressuring suppliers including Continental, Magna and ZF Friedrichshafen, my colleague Joel Levington wrote for Bloomberg Intelligence. During a visit to Germany earlier this month, Tesla CEO Elon Musk publicly called out Bosch for not supplying chips quickly enough.

    The industry’s struggles won’t be over soon. The semiconductor shortage will cut worldwide auto production by as many as 7.1 million vehicles this year, with pandemic-related supply disruptions hobbling output well into 2022, according to IHS Markit. This week, VW's Wolfsburg plant — the world’s
    biggest, employing some 60,000 people — restarted from its usual summer break running only one shift.

    Chancellor Angela Merkel’s government, which has been kind to the industry in past years, earlier this month green-lighted a 1 billion-euro “future” fund to help German regions reliant on autos survive the shift away from the combustion engine. Still, analysts anticipate greater consolidation of the parts industry. So, what can suppliers do? Roland Berger says they must overhaul long-established processes to become leaner, invest more in software and digitization, become more open to R&D partnerships and look to Asia for potential growth.

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    Shortages From Chips to Paper Are Threatening Germany�s Recovery

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    “It’s metal products, it’s plastic products, paper even. And then it’s certainly the pandemic,” he said. 

    Concerns about the outlook come as Germany prepares for next month’s elections that will see the winner succeed outgoing Chancellor Angela Merkelafter 16 years in power. 

    The Bundesbank, Germany’s central bank, said this week economic growth this year may be somewhat lower than the 3.7% it had forecast in June. But Fuest said a lot depends on how long supply shortages will last.

    “What we see in this month is that in manufacturing, things are actually getting worse rather than better,” he said. “If that continues it will be a significant downgrade of the growth outlook.”  

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    Luxury Stocks Sink as China's Comments on Wealth Cause Jitters

    This note from Bloomberg may be of interest to subscribers. Here is a section:

    Luxury stocks sink in Europe, dragging the Stoxx 600 Index lower, after Chinese state media said President Xi Jinping offered an outline for “common prosperity” that includes income regulation and redistribution, putting China’s wealthiest citizens on notice. 

    LVMH -4.3%, Burberry -4%, Kering -3.5%, Hermes -3%, Richemont -2.2%

    “This is a rather nervous market reaction to leadership statements in China about the ‘third wealth redistribution,’” Bernstein analyst Luca Solca says in an email

    “I am not sure there is necessarily a lot to fear from that,” he adds. “Time will tell”

    NOTE: Since Xi took office in 2012, the ruling party has made it a priority to end poverty and build a moderately prosperous society, goals that the party sees as central to promoting well-being and strengthening its governance

    Income inequality in the country is wide -- the richest 20% earn more than 10 times poorest 20% -- and hasn’t budged since 2015

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    Inflation Tempers Americans' Enthusiasm About Red-Hot Economy

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    By global standards, the U.S. has bounced back fast. But as data on the recovery continue to pour in, there’s plenty to support the suspicion that the glass is still half-empty.

    Consumer sentiment fell in early August to the lowest level in nearly a decade by one measure and U.S. retail sales fell in July by more than forecast.

    The following charts help explain why Americans still aren’t clear how impressed they should be.

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    Strong Earnings vs Mid Cycle De-Rating

    Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section: