Blain’s Morning Porridge, 18 May 2022: Central Banks: Inflation and How they Crashed Boeing
“Corporate greed is killing America, and that’s what we’re battling at Boeing”
This Morning – Two simple questions for Central Banks; what was their plan, and what is it now? The consequences of 14 years of monetary experimentation are upon us. From Macro to Micro, Boeing is a sad illustration of the consequences of central bank policy.
I have two very simple questions for Central Banks this morning:
- What Was Your Plan?
- What is your Plan?
Decisions taken years ago by Central Banks have led us to this critical moment in economic history. It’s the consequences of earlier decisions, and how they have fed the inflation tsunami about to sweep the global economy, that will ultimately matter. Consequences ultimately matter and always come back to haunt us..
I will use just one of these innumerable consequences to illustrate how the connections work. From Macro decisions to Micro consequences! The Tragedy of Boeing will be the subject of a Porridge Summer Special later this year, but Central Bank policies are as much to blame for Boeing now being among the worst companies on the planet as are its discredited management… but this is really about central banks…
This morning’s porridge starts Monday: the Houses of Parliament, London….
There is a story going round The City of London that Andrew Bailey, Governor of the Bank of England, panicked when he overheard a conversation about a massive bank run… and only relaxed when he discovered it was the local food bank.. which have become increasingly ubiquitous across the UK.
Monday’s cringemaking “Armageddon” performance from Bank of England boss Andrew Bailey to a UK Parliamentary committee, begs many questions. First, why do I write cringemaking?
It’s all about TONE. The parliamentary committee and The Bank sounded so blasé they seemed deaf to reality: The coming long-term inflation and cost-of-living crisis is going to overwhelm not just UK consumers, but the globe. It is going to create economic hardship and misery on a massive unimaginable scale… and these guys were talking like it being a temporary shortage of their favourite cheese at upmarket supermarket Waitrose.
Bailey’s testimony, and the questions he was being asked, were text-book illustrations of the institutional behaviours that doom us to repeat, again and again, monetary crises. Politicians postured and preened blaming the Bank for the inflation crisis. Bailey blamed inflation on everything except the Bank’s policies, warning of 10% inflation to come as if it was just a thing… But… definitely not his fault…. He says…
The politicians sought to score sound-bite points as they demanded to know why Central Banks hadn’t anticipated inflation, called the war in Ukraine, prepared for the exogenous crisis triggered by the resulting energy shock, and hadn’t got the Lottery numbers right over last week’s jackpot. Next month they will be telling Bailey rising food prices are his responsibility. It’s all so short-term.
Questioning central bankers or blaming politicians is a road to nowhere.
- Politicians are focused in scoring points and deflecting blame ahead of the next election..
- Central Bankers are focused on keeping their jobs by avoiding mistakes that could be pinned on them..
25 years ago, the Bank of England’s independence was hailed as the solution to political pressure on monetary policy… but as the comments of senior Tory politicians demonstrated over the weekend.. that independence is a tenuous thing. It is a gift that could be pulled at the whim of their political overlords. And as the Governor of the Bank is an appointee of the UK Chancellor – what independence? The Bank is institutionalised.
Yet, I am happy to defend The Bank, (the Bank of England is traditionally referred to as The Bank here in Blighty), and other Central Banks, on the basis the current inflation shock has been triggered by the exogenous forces of War, Energy and Food inflation, and Covid Supply Chain crises.. But let’s be brutally honest – inflation has been in the room since 2008… it’s been hiding in the Bond and Stock Markers; Financial Assets.
And that is attributable to Central Banks.
What the politicians didn’t ask – and what no Central Banker has yet answered – is a far more interesting question: What Was the Bank’s Plan to address the Financial Asset inflation of the Twenty-Teens? The massive market bubbles that have so influenced corporate behaviours? What plan did Central Banks have for unwinding the consequences of a decade of inflationary monetary experimentation?
14 years ago Central Banks around the globe embarked on a massive monetary experiment to save the post-Global Financial Crisis economy. The crisis following the 2008 Lehman failure and the global banking unravel threatened a global depression. The problems were multiple – a dearth of bank lending (caused as much by draconian new capital regulations as risk aversion), economic slowdown, incipient recession…
Their answer was to flood the economy with liquidity in the hope it would stimulate growth.
It didn’t. It created market bubbles.
As I’ve written before, the policies created enormous market distortion. Money – liquidity created by central banks – did not flow into the real economy, but was largely directed into Financial Assets – and drove the bull market that dominated the Twenty-teens. The real world effects have been multiple.
Central Bank managed bank bailouts avoided the collapse of the global market economy. They established the mythos of the Fed Put and a Too-Big-To-Fail mentality seized markets which drove investment behaviours – follow the Central Banks! That was reinforced as Quantitative Easing, Zero Interest Rate Policy, Negative Interest Rate Policy and a host of other monetary distortions pumped enormous amounts of liquidity into markets, pushing up financial asset prices.
In Europe the sovereign debt crisis that followed the banking crisis uncovered the monetary weakness of the Euro, but was solved as the ECB advanced billions to banks through Targets Long-Term Repos and other emergency measures… Very quickly banks and the market realised central bank liquidity was an arbitrage opportunity – if the Banks were buying bonds, buy more bonds to sell to them!
The result was a 14 year Bull market in Bonds and Stocks… Fantastic.. if you owned stocks and bonds.
How did the Central Banks intend to undo the consequences of the distortion they created? Taper? Hah. I guess we will never know now..
Question 2, How are they going to deal with this inflation crisis?
It’s going to be painful. Yesterday UK labour numbers showed more jobs than there are applicants, but wages are not rising. Consumer earnings will not keep up with inflation, therefore demand will drop. And that is probably the hope of Central Banks.. that a managed recession will lower inflationary pressures.
No Chance. The world has changed. Globalisation, and the deflation that hid inflation in financial assets through the Twenty-Teens, while goods prices fell – is so over. Goods, from iPhones to widgets are going to get dramatically more expensive as the global economy changes.
Which leads us to my Third Point – How Macro Decisions Have Micro Consequences..
Let me tell the tale: The Tragedy of Boeing (Warning: this short tale is a massive simplification of Boeing’s hubris. It’s for illustrative purposes only.)
When I was a kid Boeing was the most admired company on the planet. Today it’s a busted flush.
It is moving its corporate HQ to Washington which I reckon reflects a realisation among senior management its only hope is for Military contracts to rebuild the firm. I won’t be in the least surprised if it’s split: the passenger airliner business going bust, and the rump successor firm orbiting the Beltway Military-Industrial Complex.
10-years ago Boeing was making billions as the most successful aircraft maker on the planet. What went wrong? The C-Suite executives saw ultra-low interest rates as the opportunity to enrich themselves and keep shareholders happy. It was a direct consequence of monetary experimentation. The returns being made from the venerable B-737 and B-747 programmes, and promising Dreamliner and B-777 upgrades, looked great.
But management invested all the profits, and borrowed even more cheap money from the bond market – and used it all to buy back their own stock, pushing up the share price with bigger bonuses for management. (Aided by quiescent shareholders snoozing as the shareprice rose..)
Meanwhile, management also cut costs. Build quality fell. They underinvested – ultimately the disastrous B-737 Max programme, and the 346 deaths, were due to Boeing’s sshort-term orientated management stretching a tired old design rather than investing in a new design that could have created the next 50-year profit stream.
Today Boeing is a heavily indebted firm without a single modern airliner design anyone really wants to buy. Passengers will fly for the cheapest cost, but they’d rather fly on an Airbus. Airbus is outselling Boeing. Airbus has the financial capacity to invest in the next generation of fuel-efficient aircraft. Boeing does not. It is bust… and that’s why it’s moving closer to Washington rather than its manufacturing roots back in Seattle.
Why did it all go wrong? Because ultra-low interest rates enabled and made it more efficient for the management (higher bonuses) and shareholders (rising stock price) to embark on stock buybacks rather than invest in new plant and new planes.
Take the same story and apply the lessons to hundreds of thousands of Western Firms that mispriced capital and investment in the Twenty-Teens, from debt-zombies to indebted growth stocks, and you can see Central Banks have left us not just an inflation legacy, but a debt and management crisis also.
Five Things To Read This Morning
Out of time, and back to the day job…
Strategist – Shard Capital