🔥 Dire Straits – Type A?
Many, if not all, of the economic problems the world faces right now, are political in origin. The consequences of politicians politicking could be felt for many years to come. Please find a transcript edited by the MBMG IA team of my recent interview about this. Please let them know if you would like a copy of our Autumn Outlook, ‘Loose Powell Movements’.
Paul appeared on Channel News Asia’s morning show yesterday (August 3rd), when understandably, he was asked about the visit of the Speaker of the US House of Representatives[1] to Taiwan.[2]
Paul explained that the markets had already expressed their views on what he described as the three levels of consequences of Speaker Pelosi’s indefensible actions:
“Anybody who lost money in the markets yesterday might want to send a big thank you to Nancy Pelosi because it’s entirely on her.”
The second level of consequences is that yesterday we got three different senior members of the Fed speaking out saying, that whatever Jerome Powell said last week, there will be more interest rate hikes to come. That connects to Pelosi because the inflation that we’re experiencing at the moment is almost entirely about geopolitics, in that we can very clearly trace it to sanctions.
So, Nancy Pelosi’s visit, in terms of inflation, is unhelpful. Not only did she plunge the markets yesterday, but she also ratcheted up inflation risks.
The third aspect of it is the Chinese response. We don’t know how China is going to respond to a minor invasion of its sovereign territory yesterday by a foreign power.”
Paul was asked why, in view of widespread condemnation and even the White House’s seeming opposition to the visit, did Speaker Pelosi insist on the visit going head and replied that the only reasons he could conceive were that maybe Speaker Pelosi was trying to raise her own political stock and maybe it was possible that her husband, Paul Pelosi,[3] who has recently been in the spotlight for his investing activities, could have perhaps been shorting stock markets yesterday.
Paul was then asked about the direction of US equity markets and specifically the S&P500 index
“This is a key time. Obviously last month was a good month, mainly in the last three days of the month. It had been unexceptional until then, positive, but not spectacularly so. It was really the last three days of the month that took off back above 4,000.
4,200 is a level that everybody should be watching on the S&P 500, because if it breaks convincingly and sustainably above that and stays above that, that could be a really positive sign, setting up a good run for the rest of the year.
If it can’t break above that, then it’s a worry.
And if it breaks below 3,800, that’s an incredibly negative sign, suggesting that there’s far, far worse to come.”
Paul also spoke about why he’s still concerned about deflation, when he also sees Speaker Pelosi’s Taiwan visit as being a potential cause of further inflation, explaining that there are two countervailing forces acting upon the economy right now:
“From an economic point of view, we’re still in very much a deflationary environment or at least disinflationary environment. Growth is contracting, economic activity is contracting, the supply of money globally is contracting in that governments are putting less money into the economies than they did during lockdown and consumers and businesses are borrowing less, so private money creation is now slowing. From an economic point of view, these are deflationary conditions but anybody who goes to the shops today sees a very different effect. They’re going to see inflation in consumer prices because of this effect that I mentioned in relation to Nancy Pelosi’s visit, namely that we’re experiencing a supply shock, in that it’s still hard to get things onto supermarket shelves because of supply constraints.”
He added that monetary policy is therefore absolutely the wrong policy tool to use at this time:
“That’s not even controversial. Jerome Powell himself has admitted that raising interest rates does nothing to deal with the supply problems, yet he clearly feels pressured into raising rates just to make a statement.
So, one problem is that raising rates doesn’t do anything to tackle the problem.
But also, it really is dangerous for quite some time to come because of the lag effect that it often takes six months, if not longer, for the consequences of higher rates to be felt. We’ve titled our latest research piece ‘Looser Powell Movements’ because the Fed are now implying saying that there may be fewer rate hikes going forward, but the damage may well have already been done.”
Paul also touched on why Asia, especially Japan, is in a better economic condition right now than the west:
In Asia, there is more policy space and, and the really interesting place at the moment is Japan, where they actually wanted higher inflation for years but, from a low base, it’s still relatively muted. Japan is in a far healthier situation than America – Japanese policymakers have fiscal space and don’t have an inflation problem. The Japanese consumer is in much better financial health.
American policymakers are digging a very deep hole and it’s a question of which other countries’ policymakers are willing to follow, but ultimately I don’t think too many other countries will follow all the way down to the bottom of that rabbit hole.”
Paul concluded by saying that he didn’t expect significant policy action to emerge from this week’s OPEC meeting, simply because we’ve seen effects of global slow down start to weigh on the oil price, which, other than for geopolitical reasons (yes, we’re still looking right at you Speaker Pelosi), seems likely to fall gradually because of reduced demand.”
[1] Nancy Patricia Pelosi is the scion of an established political family. She has been a major figure in the Democrat Party in California for over 40 years and a member of the House of Representatives (one of the 2 chambers of supposedly elected representatives in US government) for over 35 years. From 2007-2011, she served as Speaker of the House of Representatives and regained this position in 2019. There have been 54 speakers of the House. The other 53 were all male. (https://history.house.gov/People/Office/Speakers)
[2] Taiwan is an archipelago territory, formerly known as Formosa, where the Kuomintang (or KMT) Government in exile was established by its leader General Chiang Kai-shek in 1949. The KMT are typically described as the ‘nationalists’ with their opponents in the civil war that followed the end of Japanese occupation of China in 1945, the People’s Liberation Army, typically described as the ‘communists’. Both labels are massive oversimplifications but resulted in post-war American governments, with their rabid opposition to anything that was or remotely could be labelled ‘communist’, taking an unhealthy level of interest in Taiwanese affairs, which endures to this day (for examples of USG obduracy please see https://fam.state.gov/FAM/08FAM/08FAM040304.html or https://www.scmp.com/news/china/diplomacy-defence/article/2152459/beijings-demand-refer-china-taiwan-still-being-defied The name Formosa was given by Portuguese mariners to the previously uncharted and at that time sparsely populated main island which makes up around 99% of the archipelago landmass. The island may have been previously known as Lesser Liuqiu and was inhabited by indigenous people since pre-history. The most widely accepted neutral terminology in international usage to describe the territory today is Chinese Taipei, which is the name under which the territory is generally represented in international sporting and other events. The landmass is a similar size to Belgium and is today inhabited by around 23 million people, mainly of mainland Chinese origin, and around 62,000 US nationals, although the vast majority of these hold joint-nationality.
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Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
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