Why Inflation Looks Likely To Stay Above The Pre-Pandemic Norm

The bad news on inflation just keeps coming. At more than 9% year on year across the rich world, it has not been this high since the 1980s—and there have never been so many “inflation surprises”, where the data have come in higher than economists’ forecasts (see chart). This, in turn, is taking a heavy toll on the economy and financial markets.

Central banks are raising interest rates and ending bond-buying schemes, crushing equities. Consumer confidence in many places is now even lower than it was in the early days of the covid-19 pandemic. “Real-time” economic indicators of everything from housing activity to manufacturing output suggest that economic growth is slowing sharply.

What consumer prices do next is therefore one of the most important questions for the global economy. Many forecasters expect that annual inflation will soon ebb, in part because of last year’s sharp increases in commodity prices falling out of the year-on-year comparison. In its latest economic projections the Federal Reserve, for instance, expects annual inflation in America (as measured by the personal-consumption-expenditure index) to fall from 5.2% at the end of this year to 2.6% by the end of 2023.

You might be forgiven for not taking these prognostications too seriously. After all, most economists failed to see the inflationary surge coming, and then wrongly predicted it would quickly fade. In a paper published in May, Jeremy Rudd of the Fed made a provocative point: “Our understanding of how the economy works—as well as our ability to predict the effects of shocks and policy actions—is in my view no better today than it was in the 1960s.” The future path of inflation is, to a great extent, shrouded in uncertainty.

Some indicators point to more price pressure to come in the near term. Alternative Macro Signals, a consultancy, runs millions of news articles through a model to construct a “news inflation pressure index”. The results, which are more timely than the official inflation figures, measure not just how frequently price pressures are mentioned, but also whether the news flow suggests that pressures are building up. In both America and the euro area the index is still miles above 50, indicating that pressures are continuing to build.

Inflation worry-warts can point to three other indicators suggesting that the rich world is unlikely to return to the pre-pandemic norm of low, stable price growth any time soon: rising wage growth, and increases in the inflation expectations of both consumers and companies. If sustained, these could together contribute to what the Bank for International Settlements, the central bank for central banks, describes in a report published on June 26th as a “tipping point”. Beyond it, warns the bis, “an inflationary psychology” could spread and become “entrenched”.

Evidence is mounting that workers are starting to bargain for higher wages. This could create another round of price increases as firms pass on these extra costs. A survey by the Bank of Spain suggests that half of collective-bargaining deals signed for 2023 contain “indexation clauses”, meaning that salaries are automatically tied to inflation, up from a fifth before the pandemic.

In Germany ig Metall, a trade union, has asked for a 7-8% pay rise for nearly 4m workers in the metals and engineering sector (it will probably get about half that). In Britain rail workers went on strike as they sought a 7% pay rise, though it is unclear whether they will succeed. All this will make wage growth hotter still. Already, a tracker for the g10 group of countries compiled by Goldman Sachs, a bank, is rising almost vertically (see chart). A measure of pay pressure from Alternative Macro Signals is similarly animated. And wage floors are rising, too.

The Netherlands is bringing forward a rise in the minimum wage; earlier this month Germany passed a bill increasing its minimum by one-fifth. On June 15th Australia’s industrial-relations agency raised the wage floor by 5.2%, more than double last year’s increase. Faster wage growth in part reflects public’s higher expectations for future inflation—the second reason to worry that inflation might prove sticky. In America expectations for average price increases in the near term are rising fast.

The average Canadian says they are braced for inflation of 7% over the next year, the highest of any rich country. Even in Japan, the land where prices only rarely change, beliefs are shifting. A year ago a survey by the central bank found that just 8% of people believed that prices would go up “significantly” over the next year (consumer prices, indeed, rose by only 2.5% in the year to April). Now, however, 20% of Japanese people reckon that will happen.

The third factor relates to companies’ expectations. Retailers’ inflation expectations are at an all-time high in a third of eu countries. A survey by the Bank of England suggests that clothing prices for Britain’s autumn and winter collections will be 7-10% higher than a year ago. The Dallas Fed does find tentative evidence that customers are less willing to tolerate price increases than before; a respondent in the rental and leasing business complained that “it is getting tougher to pass on the 20-30% price increases we have received from manufacturers.” But that merely points to a lower level of high inflation.

The big hope for lower inflation relates to the price of goods. Fast increases in the prices of cars, fridges and the like, linked in part to supply-chain snarls, drove the initial inflationary surge last year. Now there is some evidence of a reversal. The cost of shipping something from Shanghai to Los Angeles has fallen by a quarter since early March. In recent months many retailers spent big on inventories in order to ensure their shelves stayed full. Many are now cutting prices to shift stock.

In America car production is finally picking up, which could unwind some of the outrageous price increases for used vehicles seen last year. Falling goods prices could, in theory, help douse the inflationary flames in the rich world, easing the cost-of-living crisis, giving central banks breathing room and buoying financial markets. But, with enough indicators of future prices pointing the other way, the odds of that happening have lengthened. Don’t be surprised if inflation roars for a while yet.

Source: Why inflation looks likely to stay above the pre-pandemic norm | The Economist

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Stock Market Could Crash Another 20% If U.S. Plunges Into Recession

As a growing number of investment banks and company chiefs warn that the likelihood of a recession is increasing, analysts at Morgan Stanley are telling clients that the stock market—despite reeling from a steep selloff in recent weeks—has plenty of room to fall before hitting levels consistent with recession-era lows, which would be especially bad for cyclical industries like travel and hospitality.

Despite major stock indexes plunging more than 20% below recent highs, markets are still only down by about 60% of the average drawdown compared with previous recessions (which denote two consecutive quarters of negative GDP growth), Morgan Stanley analysts told clients in a Tuesday note.

As the Federal Reserve works to combat decades-high inflation with interest rate hikes that will likely stunt economic growth, a recession “is no longer just a tail risk,” analysts led by Michael Wilson wrote, putting the odds of one over the next year at 35%, up from 20% in March.

They estimate the S&P 500 could plunge as much as 20% to 3,000 points, from current levels of 3,770, if the U.S. falls into recession, citing earnings that tend to fall an average of 14% during recessions—a marked turnaround from record profits and 25% growth last year.

“The bear market will not be over until recession arrives—or the risk of one is extinguished,” the analysts said, adding that market weakness will likely continue over the next three to six months in the face of “very stubborn” inflation readings.

With high prices deterring some consumer spending, Morgan Stanley says stocks tied to discretionary spending, like those in retail, hotels, restaurants and clothing, are at higher risk of a downturn, while those tied to the internet, payments and durable household goods (like appliances and computers) are less at risk.

The note comes the same day Tesla CEO Elon Musk said the U.S. economy will “more likely than not” face a recession in the near term, echoing concerns raised by several other top business leaders and financial institutions following last week’s steeper-than-expected hike in key interest rates, which tend to deter spending by making borrowing more expensive.

Morgan Stanley’s not alone in raising recession odds this week. In a note to clients Monday, Goldman Sachs’ chief economist, Jan Hatzius, said the firm now sees “recession risk as higher and more front-loaded,” given the Fed’s more aggressive rate hike, putting the odds of a recession over the next two years at 48%, up from 35% previously. The investment bank estimates tighter financial conditions could drag down GDP as much as 2 percentage points over the next year.

Restaurants are most at risk of a pullback in spending, according to a Morgan Stanley survey of some 2,000 consumers. Roughly 75% of respondents said they’ll cut back on dining out over the next six months, while 60% said they’d do so on deliveries and takeout from restaurants. Though driving much of the inflationary gains, essential items like gas and groceries should see more resilient spending, with roughly 40% of consumers saying they’d cut back on either.

Major stock indexes plunged into bear market territory last week ahead of the Fed’s largest interest rate hike in 28 years, and the gloomy sentiment has ushered in waves of layoffs among recently booming technology and real estate companies. “We don’t believe the Fed can stop the issues that are causing inflation on the supply side without absolutely wrecking the economy, but at this point, it looks like they are resigned to the fact that it must be done,” says Brett Ewing, chief market strategist of First Franklin Financial Services. Goldman Sachs has warned clients it expects another 75-basis-point hike in July.

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill

Source: Stock Market Could Crash Another 20% If U.S. Plunges Into Recession—These Industries Are Most At Risk

The best hope for stocks right now is a recession that crushes inflation and allows the Fed to slow, stop or even reverse rate hikes.

Why it matters: Down 20.5% so far in 2022, it’s the ugliest year for the S&P since 1962. The drop vaporized $9 trillion in paper wealth, delivering a psychological shock to millions whose retirement is mostly in stocks.

Driving the news: Facing persistent inflation, the Fed delivered its largest rate hike since 1994 on Wednesday.

  • The increase is the monetary-policy equivalent of stomping on the country’s economic brakes — sharply increasing the risk that growth contracts.
  • Despite the recent beating shares have taken, the Fed’s announcement was greeted with open arms by investors. The S&P 500 rose 1.5%. The Nasdaq rose 2.5%. Interestingly, the Russell 2000 — which is more closely tied to short-term ups and downs of the economy — rose less, at just 1.4%.

The big picture: A huge rate hike that raises the risk of recession may sound like a bad thing for stocks — but with inflation still rising, it isn’t.

  • Essentially, investors are saying they prefer a big, sharp Fed-induced economic shock now if it quickly gets inflation under control. In theory, that could allow lower rates to return after inflation is vanquished.
  • Low interest rates have been crucial to the performance of stocks over the last decade.

Context: While Americans have a habit of looking at the stock market as an economic indicator, the linkage between economic growth and stock market performance is surprisingly weak, and, some academics say, nonexistent. The most extreme example of this reality arose during the bleakest moments of the COVID-related recession.

  • In April 2020, the U.S. economy was essentially on life support. Unemployment that month was 14.7%. There were, quite literally, bread lines miles long.
  • That month the S&P 500 posted its best month in 33 years, rising nearly 13%.

What gives? Well, in late March 2020, the Federal Reserve had to cut interest rates to zero and restart money-printing programs do deal with the COVID crisis. (The Federal government also began dumping what would ultimately be trillions of dollars into the economy to keep people afloat.)

The intrigue: But don’t recessions hurt corporate earnings? Wouldn’t that make stocks fall?

  • Earnings are one ingredient in stock prices, and they can definitely fall during recessions. But recently, interest rates — essentially the yield on the 10-year Treasury note — have played a more important role in establishing stock prices than earnings.
  • That’s because those interest rates largely determine the valuation multiple — otherwise known as a price-to-earnings ratio — investors use to determine the price they’re willing to pay for those future earnings (effectively, the price of a stock).
  • TL;DR: Higher rates = lower valuations, and vice versa.
  • So, even if earnings are expected to fall, stock prices can still rise, if valuations rise enough. Those valuations are largely determined by interest rates — and those rates are largely determined by Fed decisions.

The Federal Reserve made an aggressive new move in its campaign to bring down inflation Wednesday, raising its target interest rate by three-quarters of a percentage point, the steepest rate hike since 1994 — and indicated another similar move could be coming next month.

Driving the news: In addition to increasing their target for short-term interest rates to a range of between 1.5% and 1.75% Fed officials projected that their target rate will reach 3.4% late this year, far higher than the 1.9% they envisioned in March. Mortgages, car loans and credit card debt are all about to get more expensive.

Yields on U.S. government bonds — known as Treasuries — rocketed in recent days, as Friday’s inflation report convinced many that a combination of persistently high inflation and aggressive Federal Reserve interest hikes, is on the way. The yield on the 10-year Treasury note surged to nearly 3.50% in recent days, a level not seen since 2011……

  Matt Phillips

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ProShares ETF Targets Bitcoin Selloff

BITI, which seeks to obtain exposure through bitcoin futures contracts, will track the opposite performance of the S&P CME Bitcoin Futures Index each day. The launch comes as Bitcoin and other cryptocurrencies have struggled in sympathy with the broader stock market, which is contending with scorching-hot inflation.

The world’s largest cryptocurrency is currently trading around $20,000 per coin on Monday, well off its 52-week high of $68,990.90 hit last year, after briefly falling to a 52-week low of $17,601.58 per coin over the weekend. “As recent times have shown, bitcoin can drop in value,” ProShares CEO Michael Sapir said in a statement. “BITI affords investors who believe that the price of bitcoin will drop with an opportunity to potentially profit or to hedge their cryptocurrency holdings.”

ProShares will also launch BITIX on Tuesday, a mutual fund with the same investment objective as BITI. “With the additions of BITI and BITIX, ProShares and ProFunds will be the only fund families in the U.S. offering funds that allow investors to express their view on the direction of bitcoin — no matter whether they believe the price will go up or down,” Sapir added.

Ticker Security Last Change Change %
BITO PROSHARES TRUST BITCOIN STRATEGY ETF 12.95 +0.23 +1.81%

The launch of BITI and BITIX comes after ProShares launched BITO, the first U.S. bitcoin-linked ETF, in October 2021, which attracted more than $1 billion in assets from the public in just two days. The firm also launched the first bitcoin-linked mutual fund, BTCFX, in July 2021.  ProShares, which offers one of the largest lineups of ETFs, manages more than $50 billion in assets in partnership with its affiliates.

Eight months after establishing the first U.S. bitcoin futures ETF, ProShares plans to launch the first short bitcoin-linked ETF on Tuesday in the U.S., the provider of investment products announced Monday. The ProShares Short Bitcoin Strategy, which will trade on the New York Stock Exchange under the ticker BITI, is designed to give investors a way to profit from declines in the price of the cryptocurrency. It will have an expense ratio of 0.95%.

Bitcoin fell to new a new 2022 low over the weekend of $17,601.58, according to Coin Metrics, after six months of declines amid the broader sell-off in risk assets. “As recent times have shown, bitcoin can drop in value,” ProShares CEO Michael Sapir said in a news release Monday. “BITI affords investors who believe that the price of bitcoin will drop with an opportunity to potentially profit or to hedge their cryptocurrency holdings. BITI enables investors to conveniently obtain short exposure to bitcoin through buying an ETF in a traditional brokerage account.”

BITI will be the first ETF of its kind in the U.S. Horizons ETFs has a short bitcoin ETF listed on the Toronto Stock Exchange. ProShares said BITI is designed to deliver the opposite of the performance of the S&P CME Bitcoin Futures Index and that it seeks to obtain exposure through bitcoin futures contracts. How well-timed the launch is remains to be seen. Markets remain fraught with uncertainty as investors await next steps from the Federal Reserve and signs of peaking inflation, but many are still speculating about the crypto market being at or near a bottom.

On Monday, bitcoin sat about 70% from its all-time high, which it hit in early November just a couple weeks after ProShares launched the Bitcoin Strategy ETF (BITO). Bitcoin quickly reversed lower, and has been falling since then.

12:27
10:21
10:39

07:28Roxe SPACs BlockchainCryptocurrencies

11:38 Mon, 20 Jun
09:38 Mon, 13 Jun
03:40 Tue, 14 Jun

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What Stagflation Is, and How To Prepare For it

Runaway inflation has raised fears that the economy is headed towards a return of stagflation but a host of Wall Street banks such as Goldman Sachs and HSBC believe there remains opportunities for investors to safely navigate this tricky backdrop. Stagflation is a term coined in the 1970s to refer to a combination of high inflation and high unemployment. Recent surveys show economists and fund managers see increased risks of stagflation on the horizon. There are steps you can take now to get in a better financial position in case stagflation or a recession does happen.

The next big risk to the U.S. economy may be summed up in one word. And no, it’s not necessarily recession, though economists are evenly split on the risks one is coming. Instead, 80% of economists in the same survey named stagflation as the greater long-term risk to the economy, according to the Securities Industry and Financial Markets Association. The next biggest risk they identified was deflation, with 13% of respondents.

Moreover, a recent Bank of America global fund manager survey found fears of stagflation are the highest they have been since June 2008. Stagflation is “by far and away the most popular description of what the economic backdrop will be in the next 12 months,” according to the report.

What is stagflation?

Stagflation is a term coined in the 1970s when there was simultaneous high inflation and economic stagnation or high unemployment, according to Jonathan Wright, professor of economics at Johns Hopkins University. While there were some nasty recessions back then, many economists aren’t expecting a return to anything like that now, he said. “The sense in which you had stagflation in the 1970s is not one that I think is at all in the cards,” Wright said.

However, high inflation is prompting the Federal Reserve to raise interest rates — known as tightening monetary policy. With that, it is “quite likely” the unemployment rate will rise “a fair bit” from the 3.6% it is at now, Wright said. The result may at least be a mild recession, he said. Stagflation may happen if a recession sets in before inflation has gone down to where the Fed wants it to be, Wright said.

For example, if unemployment were to go up to about 5% and consumer price index inflation were also at above 5% in 2023, that would be a kind of stagflation, though not to the degree we experienced in the 1970s, he said. “It certainly would mean that the job market would be a lot less hot than it’s been,” Wright said. In the near term, the labor market may cool simply by having fewer vacancies, he said.

How likely is stagflation?

Despite surveys sounding the alarm on stagflation, not everyone agrees it’s inevitable. “It doesn’t seem like a high probability,” said Josh Bivens, director of research at the Economic Policy Institute. To have stagflation, you need both high unemployment and high inflation at the same time, which Bivens does not see as likely.

“If we had a situation where unemployment rose pretty sharply, I actually think that would likely cause inflation to start coming down pretty sharply,” Bivens said. A more likely scenario is that if we end the year with a series of interest rate hikes by the Federal Reserve, we could be in a recession by 2023, he said. “If that happens, I just expect inflation to relent pretty quickly,” Bivens said.

How can you prepare for a recession or stagflation?

A combination of inflation and shrinkflation, where product companies reduce the contents of everything that we buy, is making it so people’s money just doesn’t go as far now, said Ted Jenkin, a certified financial planner and CEO of oXYGen Financial in Atlanta.

Now, stagflation is also a possibility that clients are asking about, Jenkin said. “I think it’s inevitable that we’re going to hit a recession,” he said. “Whether this is a mild recession or we go into stagflation will be the big question.” Consequently, now is a great time to revisit your personal financial plan. “This is the absolute time for people to batten down the hatches and beef up the foundation of their financial house,” Jenkin said.

Try to aim for at least six months’ worth of emergency expenses in case a downturn does happen, he said. Also make sure you have prepared a recent budget to see if there are places where you can cut back. Additionally, take a look at any adjustable-rate debt you may have — credit cards, mortgages, student loans — and see if you can pare those balances down or refinance them. Now that interest rates are poised to go up, those balances will become more expensive.

Moreover, it’s a great time to invest in yourself to be more marketable professionally if layoffs become the norm. “Make sure you’ve really brushed up on your skills and competencies or education so that if the job market gets tighter, you’re marketable,” Jenkin said.

By: Lorie Konish

Source: What stagflation is, and how to prepare for it

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Nobody Wants To Pay For Ultra Fast Food Delivery

Ultra-fast delivery startups are either folding up or leaving markets, exiting the scene just as quickly as they arrived.

Another sign of potential turmoil for these unprofitable companies? Those that stick around continue to rely on giving users freebies. So far, they haven’t been able to convince customers to pay the full cost of delivery in 15 minutes or less. And while more established delivery players like Uber have been able to rely less on discounts in a pivot toward profitability, the ultra-fast delivery startups are trying to grow amid a volatile market in which both investors and customers are growing more wary of opening their wallets.

Nearly 30% of delivery orders from GoPuff, which is the biggest ultra-fast delivery player in the US, were discounted as of April, according to data from YipitData, a research firm. The share of orders discounted is greater outside of the US. For instance, Getir, a Turkish ultra-fast delivery startup, has over 80% of its orders discounted in countries like Germany and France, according to YipitData.

Tech stocks have plummeted over the past three months, and that has pushed investors to prioritize profits. In response, companies are changing how they do business. For instance, Uber rides and restaurant deliveries have become more expensive. (Unlike the newer ultrafast deliver startups, established delivery players like Uber have been able to pull back on discounts to show investors a clearer path toward profitability.)

Attracting customers with cheap Uber rides and food delivery

Discounting is a way for delivery companies, which depend on scale, to quickly attract and retain customers. Over time, as more of the orders come from customers who have been with the firms for some time, the discounting percentage should go down, said Daniel McCarthy, an assistant professor of marketing at Emory University. For rapid-delivery companies, the fact that discounting share remains high implies a less clear path to profitability.

“There is way too much money that went into this sector,” said Mathias Schilling, a founding partner at Headlines, a venture capital firm that invests in GoPuff. “Six months ago, this is the best thing and incredible… and now everything is negative. This extreme exuberance by the people is like ridiculous.”

The rapid growth of ultra-fast delivery companies

In the past couple of years, as the demand for delivery skyrocketed, ultrafast delivery services with abstract-sounding names—Buyk, Getir, Jokr—came onto the scene. Venture capitalists invested $28 billion into rapid delivery globally, more than double the amount in 2019, according to data from PitchBook, a research firm.

Like Uber’s playbook, these companies, flush with venture capital funding, burned cash fast to move into new markets and attract and retain customers with cheap services. The biggest services like GoPuff, Gorillas, and Getir relied on high order volumes and a shift in consumer shopping habits to achieve profitability, said Alex Frederick, a PitchBook analyst. But the model works best when markets are stable and VC funding is plentiful, he added.

It’s hard to make money in food delivery, as the money is split among retailer or restaurant, food delivery company, and worker. It’s even harder for faster delivery, as it requires hiring workers as employees and often comes with no minimum order. That allows a customer to order a pint of ice cream to be delivered in 15 minutes, a costly loss for ultra-fast delivery companies.

The question now is whether these companies will be able to sustain such losses, at a moment when funding is harder to come by, or will they follow in the footsteps of past rapid delivery companies that sprung up in the dot-com boom before going out of business.

Global downloads of the top 10 ultra fast delivery apps have grown 127%, year-over-year in Q1. With a more granular, monthly breakdown we can see a lot of this growth taking place in Q4 of 2021. As you can see in the chart below, this is a faster growth rate than that of the top 10 meal delivery apps (ex: Uber Eats) or top 10 grocery delivery apps (ex: Instacart). Meal delivery still takes the cake when it comes to absolute numbers.

It is reported to be acquiring French startup, Cajoo, which launched in early 2021 and struggled to gain ground in the country ever since Getir formally launched there in June 2021. This will help Flink compete with Getir in France. Flink says its reach in the country will now be greater than Getir’s but Apptopia estimates have Getir’s app usage comfortably ahead of Flink and Cajoo combined.

Ultra fast delivery companies do not just have each other to worry about. Traditional, or meal, delivery apps have massive brand power, user bases and deep pockets. Apps like Uber Eats are starting to enter the market of fast grocery delivery. Apptopia reported in January that meal delivery apps extending into grocery delivery, a faster growing segment of the delivery market.

Traditional grocery delivery apps are not standing still either. Instacart started offering 30 minute meal deliveries (sushi, salads, sandwiches) from supermarkets like Kroger and Publix. It will also begin offering 15 minute grocery delivery in the near-future.

When will supply chains go back to normal?

Supply chains should slowly recover in 2022, assuming overstuffed ports and warehouses finally get a chance to clear out the glut of containers piling up in shipyards and surrounding neighborhoods. But that will only happen if there aren’t any major new disruptions, like another mega-ship blocking the Suez Canal, future covid variants that shutter factories and ports, or other disasters that gum up the mechanisms of global trade.

Source: Nobody wants to pay for food delivery — Quartz

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