Forget the noise, distractions and sausages, the real issue is inflation vs deflation

Blain’s Late Morning Porridge – June 9 2021 – Forget the noise, distractions and sausages, the real issue is inflation vs deflation

“The groaning trencher there ye fill, your hurdies like a distant hill..”

This morning: As the UK and Yoorp prepare for a set-to over Sausages, the real issue remains inflation vs deflation. Are rising PPIs in China due to speculation on commodities boosting prices, is inflation due to supply glitches, and are the longer-term threats of Central Bank taper, growing West-East tension, and the reality of pandemic debt likely to tip us back into a deflationary cycle?

As readers will know I am an entirely reasonable chap, not given to hyperbole.. but after perusing the morning papers, I’m thinking it’s time we gave Yoorp a darn good thrashing.. which would be exactly the wrong thing to do. The current spat over Sausage Sovereignty is at such a level of pointless knavery its guaranteed to inflame passions way beyond the sensible level.

It’s also a massive distraction from the main market themes: inflation, growth and market direction. As Chinese Producer price inflation (PPI) spikes 9% in May, it’s a clear hint wider inflation may follow. Or is China’s inflation threat a hollow one, caused by producers themselves pre-empting global recovery?

But, first back to Europe, where Brussels’ carefully chosen chief negotiator, Maros Sefcovic – who hails from the far end of the union and with apparently little discernible background in the convoluted history of why Britain is not, never has been, and never will be part of the European superstate, is leading the ongoing negotiations. He intends to snub us where it hurts – Sausages. Last time it was fish. Next time, they will probably try to take a pop at the City – again.

If Boris was smart …… he would switch on his charm, ooze smarminess, and be terribly, terribly nice to the Europeans, which guaranteed to inflame them. It’s a good game. Yoorp gets all antsy and upset trying to punish us, and we keep winding them up by ignoring the international agreements and laws they set such store upon…

This time Yoorp is getting terribly upset and threatening to slap on tariffs and quotas on the UK because, temerity of temerities, we are still exporting sausages and Haggis between Northern Ireland (the British part of Ireland) and Britain (the geographic island which comprises England, Scotland and Wales). Norn Iron is still part of the sovereign United Kingdom, but of course Boris sort of agreed Yoorp we would ensure it stuck to European rules to ensure the rest of EU-owned Ireland was not polluted by British after Brexit.

The choice was simple: either Norn Iron stuck to European rules, or it’s a wall along the border – unacceptable to everyone (especially the Americans…) It wasn’t a daft deal – it was a face-saving compromise to get the Brexit deal done. Like all such compromises, it should now be quietly ignored and an accommodation found that suits all parties.

That is not the way Brussels works.

No matter how much the Norn Irish like their Haggis, (half of them are descended from Scots planted in Ireland in the 17^th century, and are more British than the British. (Actually, the whole of Ireland are sausage addicts – the British Isles variety; which is greasy, warm fatty globules of indeterminate meat packed in something unspeakable… They are simply delicious.)), Europe says Norn Iron can’t eat Brit-sausage because overnight, when Britain left Europe, British sausages became dangerous – not meeting the terms and conditions of the 16 volume rules on European sausage product.

We have gone to war for sillier reasons…

The European Union’s Kommisariat’s dictats on punishing the Brits is looking increasingly likely to backfire on them. Fretting about British sausages while the Continent’s electorate frets about vaccinations, jobs, growth, youth unemployment and getting back to normal is a distraction. The UK is still attracting a greater percentage of foreign investment – despite the threat of further EU sanction.

The political classes in Brussels appear more focused on punishing the Brits to distract from the possibility of a swing to the hard right in France, the degree to which Italy is using the distraction of pandemic to stock up on cheap debt covered by German pension savings, or the fact inflation is now at the ECB’s target’s level and the promised growth explosion has not occurred. There is the possibility of a new trade deal with the US, undoing the unpleasantness of the $18 bln of Trump era punative levies – especially on aircraft – and a focus on building new semiconductor capacities – but.. really?

Speaking to global investors on Europe, the response is largely disinterest. A few great companies, some great products, but an economy hamstrung by regulations, bureaucracy and contempt for anything external. Why bother?

Many market observers predict Europe and the Euro is unsustainable – an text-book example of why big government and bureaucracy stifles invention and innovation. Perhaps. It’s certainly true few currency unions survive more than a few decades before internal pressures render them inoperable. However, its far more likely Europe and the Euro will survive – but hardly thrive just to prove how resilient a determined bureaucratic state can be… The USSR lasted 60 years!

Meanwhile, back in China…

The news Chinese producer prices PPI rose at the fastest rate since the 2009, and are up 9% in May will add fuel to fears about global inflation threat. However, the higher prices comes on the back of Chinese manufacturers stockpiling commodities – triggering a series of state warnings about speculation – and rising labour costs. The global inflation picture depends on whether rising commodity price levels prove justified by a real increase in post pandemic recovery spending.

At the moment stories about shortage of everything from building materials to homeware sound more like supply chain glitches. The next few months will reveal whether inflation is real or not. Inflation is a threat, but I’m still more concerned about a long-term deflationary spiral as the heat that’s kept stock markets hot is lessened as Central banks start to taper, and normality returns with a crunch of debt to be repaid after the pandemic…

The threat to China itself is nicely covered in a great BBerg story this morning: “China’s Wolf Warriors Are Turning the World Against Beijing”. Taken together with the rising tide of anti-China rhetoric, the increasing weight given to the story/rumours the pandemic escaped from a China lab, and Biden trying to re-unite the West, the likelihood of rising trade tensions triggering deflation are starting to sound higher than long-term inflation.

Finally – Billionaire Taxes

Gosh – who would have thought the US’s richest billionaires actually pay very little tax. Warren Buffet paid 0.1% on his $125 million income between 2014-18. Bezos, Musk and Bloomberg paid about 3.5%. Staggering stuff – read it here.

Five Stories to read this morning

FT – Big Tech will pay less tax in UK under G7 Plan, says think tank

FT – London’s Ring metals trading floor wins battle to reopen

WSJ – One Oil Company’s Rocky Path to Renewable Energy

Bloomberg – How Softbank’s American House of Cards Collapsed

Torygraph – Bezos battles Branson and Musk as race for space heats up

Out of time, and back to the day job…

Bill Blain

Shard Capital