Plus, the Fed’s Continued Newspeak on Inflation
Welcome to your Sunday digest…my weekly breakdown of the things we’re thinking about and talking about in the Global Intelligence world.
First up, this week…China.
In September, China’s manufacturing purchasing managers index fell to 49.6.
The PMI is based on surveys of senior executives across a swath of sectors and is a key indicator of how a nation’s economy is performing. And 49.6 is not a good result.
A PMI index below 50 means the economy is contracting, rather than expanding.
This was the first time that China registered a sub-50 score since the pandemic was raging there in February 2020.
There are a number of factors causing this economic negativity, such as global inflation, the semiconductor shortage, supply-chain disruptions, and a domestic real estate crunch.
But the biggest issue for China right now is coal…or rather a lack of it.
China relies on coal to generate electricity. In recent years, the country has worked to reduce this reliance, but it’s estimated that China still produces more than half its electricity from coal.
Now, coal prices are soaring globally, and this has led to widespread power outages across China.
These coal problems are partly of China’s own creation.
In recent years, the Chinese government has, justifiably, imposed tougher safety restrictions on the country’s coal-mining sector following a series of horrific accidents. This has made domestic production more expensive.
But China is also the world’s largest importer of coal. And in this regard, it has shot itself in the foot.
China has imposed an unofficial ban on Australian imports over Canberra’s calls for a wide-ranging probe into the origins of the COVID pandemic. Australia is the world’s second-largest exporter of coal.
That means China is now dependent on other, higher-cost foreign producers.
The Chinese government has attempted to shield the public from its own folly by ordering energy companies to absorb the higher coal prices, rather than pass them on to consumers.
However, energy companies complied with this order by tapping into their coal stockpiles, hoping that global coal prices would eventually fall. But prices didn’t fall. They’ve risen.
Now, energy companies are basically rationing electricity, leaving millions of homes and factories without power amid rolling blackouts…which has obvious knock-on effects with manufacturing.
Analysts believe the situation could take months to resolve.
That’s a big deal for the global economy (not to mention the people of China, who may have to endure winter with limited heating).
These outages will probably mean supply shortages due to reduced production from Chinese factories, which in turn will mean higher prices in the U.S. and elsewhere.
That’s further fuel for the inflation fire.
And before we get too smug…wondering how China could mismanage its energy sector so badly…know this: Coal is not the only commodity that’s experiencing massive price spikes.
So is natural gas.
And that’s going to have a major impact on the U.S. and Europe as winter approaches and energy demand spikes.
Next up…America is a house divided against itself on crypto.
In the U.S., government attitudes toward crypto are as chaotic and unpredictable as the crypto market itself.
In September, Securities and Exchange Commission Chairman Gary Gensler revealed concerns about stablecoins and said that the SEC is working with banking regulators in order to get expanded authority from Congress to regulate then. This is despite the fact that the U.S. Comptroller of the Currency allows banks to settle financial transactions using stablecoins.
Also in September, we learned that Coinbase, the largest crypto exchange in the U.S., has signed a three-year deal with the Department of Homeland Security’s Immigration and Customs Enforcement agency to provide software services to monitor crypto finances and trading.
This deal was signed even though, according to Coinbase, the SEC recently threatened to sue the company over its plans to launch a crypto-lending platform. This forced the company to abandon these plans, even though platforms like this already exist all across the cryptoconomy.
And all the while, the Treasury Department is continuing to drag its heels on developing a digital dollar…even as other countries push full steam ahead.
China, Canada, the European Union, Russia, South Africa, Nigeria, and others already have CBDCs in various stages of development.
The bottom line is that crypto is here and it’s already reinventing finance, even as the U.S. looks like a turtle stuck in the middle of a superhighway, unsure of where to go or what to do.
Since 2013, crypto’s total market capitalization has risen from $1.3 billion to about $2 trillion. That’s just the start of what’s to come.
This is a revolution and it’s happening now.
If the U.S. wants to lead this revolution, as it led the world into the internet age, it badly needs to tackle its hodge-podge of regulatory contradictions and inconsistencies and develop a clear framework for crypto.
Finally, a word on inflation.
Every time Federal Reserve Chair Jerome Powell speaks about inflation lately, he seems to do two things:
- Confirm that inflation is much worse than the Fed anticipated.
- Argue that #1 doesn’t matter because this inflation is transitionary and will certainly return to manageable levels once we just get over this next hill (or maybe the one after that; or maybe it’s two hills away, or three…).
To wit, this week Powell was speaking on a panel hosted by the European Central Bank when he said:
The current inflation spike is really a consequence of supply constraints meeting very strong demand. And that is all associated with the reopening of the economy, which is a process that will have a beginning, middle, and an end.
That quote sounds pretty reasonable. I mean some inflation was likely as the economy reopened. But then Powell added this:
It’s very difficult to say how big the effects will be in the meantime or how long they last.
Now, you’ve lost me.
So, you have no idea how big the inflation spike will be or how long it will last…but we shouldn’t worry about it.
To be honest, that sounds like something I should definitely be worried about.
Here’s my two cents—if the Fed says it doesn’t know how long something will last, don’t expect it to up and disappear any time soon.
It’ll probably be around longer than a drunk dinner guest who can’t take a hint.
My advice: Prepare for prolonged high inflation by owning precious metals and commodity investments such as those you’ll find in the Global Intelligence Portfolio.
That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, please reach out through the contact form on the Global Intelligence website. I’d love to hear from you.
Enjoy the rest of your Sunday.