The Pando appears to be 107 acres of forest, but scientists have concluded that the nearly 47,000 genetically identical aspens share a common root system. It is a unique organism. It is estimated to be around 80,000 years old and weigh something in the range of 13 million pounds. It may be dying.

Many market players also find it difficult to distinguish forest from trees. It is not a personal failure; it’s systemic. The immediacy of the market for many participants demands full attention. Correlations are volatile, and while most of our analysis tools require normal distribution, market returns are anything but. The old model of the market as a place of confrontation between economic agents in search of profit must be rethought. Many participants are not trying to maximize their profits but to lock in certainty. Some hedgers pay to set prices, and others are willing to take the risk with compensation.

While focusing on the immediate trees, the market seems to bounce from one view of the forest to the next. The secular stagnation hypothesis was arguably dying from 1,000 strokes before the pandemic struck. And when it did hit, it seemed like the end of days, and the disruptions cascaded down to even destabilize US Treasuries, the critical ganglia of capital markets. News of the discovery of a vaccine stirred up stimulus trade, but something strange happened. After more than doubling to nearly 1.80% at the end of the first quarter, the US yield fell sharply and hit a double dip below 1.15% in July and August. Over the past two months, the yield has tended to increase. It was approaching 1.60% before September.

The forest of the day is “stagflation”, which evokes a weak economy and strong pressure on prices. This dates back to the mid-1970s-early 1980s. Unemployment hit 9% in May 1975. It fell briefly below 5.5% when the United States came out of the recession, but then fell to nearly 11% as Reagan and Volcker tried to eliminate inflation in a double blow from organized labor and sado. -monetarist policies.

Consumer prices rose about 1% in the first half of the 1960s and topped 5% by the end of the decade. Then the pressures eased and the CPI slowed by 3% in the summer of 1972, before climbing to almost 12.5% ​​at the end of 1974. Two years later, it was below 5%, then increased to reach its peak in March 1980, just under 15%.

This was particularly upsetting as it was believed that it was impossible to have both high unemployment and high inflation. A soft labor market should contain prices through the demand and income channels. Arguably, the Phillips curve, first formulated in the late 1950s, then suffered a fatal blow, though it is still debated over 60 years later. Any fuzzy abbreviated sentence to sum up the conflicting forces and the unprecedented pandemic experience will fail on more than a cursory examination. This is mainly the case with stagflation.

The most important point is that it’s hard to see, say, about 6% growth in the United States this year as stagnant, no matter how much you extend the meaning. The Fed’s median forecast for 2022 growth is just over 3.5%, which would put it in the second strongest year (after 2021) since 2004. Nor is it fit for the future. stagflation forest. Since peaking at the start of the pandemic (14.8% in April 2020), it has fallen faster than expected by private sector officials and economists.

In September, it stood at 5.1%, but standing is not the right picture. It is falling. With more forceful use of the stick to encourage more people to get vaccinated and the recent surge in cases fading, another improvement in the labor market is to be expected. The question seems more about the pace than the direction.

Some experts see stagflation in the UK. Yet here, too, the label is more obscure than revealing. The UK economy is on a pace of around 6% this year and is expected to surpass 5% next year. Both projections may lean towards optimism, but even so, growth is unlikely to stagnate. The Bank of England plans to hit 4% this year and decelerate to 2.5% next year and 2.0% in 2023. The market looks less confident. The 10-year breakeven point (difference between the convention and the rates indexed to inflation) has increased by around 50bp since the end of June to approach 4%. In contrast, it stands at nearly 2.48%, up around 15 basis points so far in H2.

Next week, the world’s two largest economies will report September consumer and producer prices. China will release its figures hours after the release of the U.S. report on October 13. After jumping earlier this year, US consumer prices have stabilized in recent months. Recall that after starting the year at a rate of 1.4% year-on-year, the overall rate tripled to reach 4.2% at the start of the second quarter, then accelerated to 5.4% in June. . It probably stayed in the 5.3-5.4% range for the third quarter in September.

Prices are expected to have risen 0.3% in September. If this is true, then the annualized pace so far this year will slow to around 6.2% from 6.6% in August and 7.2% at the end of the first half. The annualized pace in the third quarter would be 4.4%. The, which excludes food and energy, is important, but not because the Fed targets it, which it doesn’t. The target applies to the overall deflator of. It does not make sense to call the policy rate the Fed’s prime rate when it is not targeting it.

However, the base rate is important because historically, the overall rate has converged towards it rather than the other way around. Until August, the base rate increased at an annualized rate of almost 5% this year. It is expected to have risen 0.2% in September, leaving 4.0% unchanged. Remember that the key rate peaked in June at 4.5% before easing. If last month’s base prices increased as expected, the annualized rate would moderate to less than 4.7%. Another way to capture the underlying pace is to consider the annualized base pace to be above 10% in the second quarter. A 0.2% increase in September would put the annualized rate close to 2.5% in the third quarter.

While acknowledging that price pressures remain higher than expected, most Fed officials continue to argue that they are transient in nature. The increases are a function of the base effect (e.g. about 18 months ago the price of was negative), patchy recovery, and supply chain disruptions. Whether or not the inflation overrun is transient requires perspective, such as seeing the forest, not just the trees. It hasn’t been proven.

We understand that the pressures come mainly from supply constraints. Although confidence in self-regulation has diminished (see Global Financial Crisis), confidence remains that companies, seeing opportunities, will respond quickly to incentives to overcome supply constraints. The larger-than-expected magnitude of the price hike says little about the duration. Moreover, the sharp rise in energy prices is not understood by decision-makers as inflationary but, on the contrary, almost as a consumption tax. It is ultimately deflationary.

Unlike most countries, China is not under strong upward pressure on consumer prices. In August, they were 0.8% higher than a year ago. Consider that in June alone, consumer prices in the United States rose 0.9%. Two critical forces are at work. First, food prices in general, especially pork prices, fell (4.1% year-on-year). Second, non-food prices increased slightly. Remember that in January and February, they were still lower than at the start of 2020. In August, non-food prices increased by 1.9% over one year. In addition, it appears that weak demand may be contributing to low consumer inflation.

Unconstrained by inflation, and given the ripple effect of the disruption caused by Beijing’s actions and the collapse of Evergrande (HK :), (OTC :), the PBOC should significantly reduce reserve requirements . Energy scarcity and deliberate cuts in production to meet emissions targets also indicate slowing growth. While maintaining high growth levels won’t solve Beijing’s challenges, it will make them easier to meet.