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
Torygraph – Bank of England has made “serious mistakes” former Governor says
WSJ – Powel Says Fed Had Resolve To Bring US Inflation Down
BBerg – Sweden Pensions Manager Who Called Equities Peak Starts Bond Buys
FT – Pimco: Navigating the end of the bond bull market
FT – Peloton loan draws strong demand from private and public lenders
Out of time, and back to the day job…
Bill Blain
Strategist – Shard Capital
13 Comments
Comments are closed.
No chance that a managed recession will lead to lower inflation ? The solution ? Increase supply by lowering import tariffs ?
In UK increase housing by removing planning bottlenecks. Bureaucracy is crimping supply; prices will fall if supply is increased.
Robert Thomas.
If Central Bankers are supposed to be wise enough to decide what the correct interest rate should be you might expect one or more might have concluded it should be higher. But no, they all marched in step and said lower until Draghi marched right past the zero boundary. Any Central Bank that attempted to go higher caused the markets to have hissy fit to get them all marching in step.
That these wise men and women never looked at the wider world and wondered where geopolitical risk might be hiding is another wonder. Maybe I shouldn’t judge a person by their looks but I never liked the looks of V. Putin. He looked mean and now we know just how fearsomely mean he is. OTOH, Xi Jinping didn’t look any more fierce than Hu Jintao but you didn’t have to look hard to see the Hong Kong model was not in China’s future.
Maybe geopolitics are not in a Central Bankers remit but global supply chains certainly are and you can’t intelligently plan economic policy without at least looking at geopolitical risk.
he critique of Boeing is justified but their actions are more complex. Low rates should incentivise management to invest in making “stuff” because that is where returns are made and that is the company’s USP. Boing must have presumed that sales of “stuff” were not profitable and hence (venal) management looked at ways to enhance shareholder returns. From a corporate perspective if they decided that they could not profitably make “stuff” then they should have put the business up for sale so someone else could get value from the assets. If they have confidence to boost shareholder returns then they should increase the dividend. This is the strongest signal of long-term confidence in the business returns. But then we get into the twisted incentives in the US stock market (tax distortions for dividends vs capital gains) and management incentives to boost share option prices. Hence the action to do a share buy-back should have been a massive sell signal!
It is the classic tug of war between short term and long term goals and gains. Management was interested in short term not long term because they got paid in the short term.
So sharp and definitely on the button……
Getting ready for the rollercoaster heading for the big dipper……
A comment from Nova Scotia, Canada: Thanks for taking the time to do these, always gives me something to think about.
The Boeing pigs ate from the trough of greed. All humans are inherently greedy…and thus no change ever happens until ALL the food is eaten, the well runs dry, and the. collapse ensues.
It’s just the “game” of history.
Reset in 3, 2, 1…
As a student of physics, I know the “Laws.” Sir Isaac Newton detailed many of them quite well. When I’m on my motorbike, I keep these Laws in mind, as there will be consequences paid if I break them.
Similarly, money has “Rules.” But, Bill, as you sum things up quite accurately, “14 years ago Central Banks around the globe embarked on a massive monetary experiment …” This experiment violated the two “Rules of Money,” and now humanity will pay the price. “It’s going to be painful.”
Rule #1: Money must have value. It cannot be loaned out at zero cost.
Rule #2: Future Money must have more value than current time Money.
Central Banks have kept short term interest rates on par with long term rates to a large degree. That’s not how things work. It is a “monetary distortion.”
Boeing is in the business of doing four things. They design, engineer, manufacture and sell airplanes. To me, an engineering company needs an engineer with business acumen running it. Boeing was a great company when this was the case.
Their CEO, David Calhoun, has a Bachelor’s Degree in accounting from Virginia Tech. He is a not an engineer.
In 2013 Ben Bernanke and The Fed backed down when the market threw a hissy fit known as the Taper Tantrum. The Fed should have stuck to their guns, reduced their bond buying, and normalized interest rates.
Not only was this terrible monetary policy but it convinced the markets of their ability to bully The Fed.
That was the beginning of the end.
Nailed it on both counts. The CB’s all believed they could manage what’s coming and ended up destroying their credibility and ultimately the market will set the course. In Canada the mandate is inflation. They blew it by the largest margin in 40 years and still think they have a mandate for social justice and climate change.
Boeing had such hubris they couldn’t care less and like you say, they quit making great aircraft. The US won’t let them go broke but it will be split up. No sympathy from me, they destroyed Bombardier with help from an inept Canadian government.
I absolutely love your writing. Thankyou
I’m only an uninformed civilian punter but even to me Bailey’s appointment looked surprising or brave, tempted to think that his job is to take the hit before somebody like haldane rides in to lead us further into the doodoo.
Thumbs up from Queensland. I’m waiting for the sound of the gearbox breaking…..
You are spot on.
Besides the financial consequences of these policies, the real-world effects were 346 deaths. And that is just Boeing
Coupled with the monetary policies of the last 14 years, the financial Anglo-Saxon system , mainly the US one, is also to blame. Maybe even more.
Stock Buybacks, borrowing to pay dividends etc.. all these financial sheenanigans should be forbidden. End of story
How many times have PE companies borrowed to pay themselves dividends while bleeding to death the companies they bought.
Stock buyback only enriches management and shareholders and again, destroys companies in the long run, and sometimes actually kills people