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El Erian: Time’s Running Out For The Fed

El Erian: Time’s Running Out For The Fed

Authored by Mohamed El-Erian, op-ed via Bloomberg.com,

The central bank should start pulling back on its $120 billion monthly bond purchases and signal when it will lift rates, but it probably won’t.

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El Erian: Time's Running Out For The Fed

Authored by Mohamed El-Erian, op-ed via Bloomberg.com,

The central bank should start pulling back on its $120 billion monthly bond purchases and signal when it will lift rates, but it probably won’t.

It has been only 17 months since the biggest unthinkable in the oil market - the price turning negative - illustrated vividly that the global economy was experiencing an unprecedented shock that required an exceptional policy response by the government and the Federal Reserve. This week, Fed policy makers will discuss how to unwind two of its three chief components over time.

The oil unthinkable was the result of the collapse in demand that accompanied the first stages of the 2020 Covid-19 economic shock. Stranded by storage facilities that were either full or extremely expensive, holders of oil scrambled to liquidate their excess supply, with some even willing to pay buyers to take it off their hands.

The dominant general theme at that time, that of deficient demand relative to available supply, was not new. It had dogged policy makers since the 2008 global financial crisis, albeit much less extreme but more generalized. It had led central banks to run extremely loose financial monetary policies characterized by unusually low interest rates, huge injections of liquidity through large-scale asset purchases and aggressively loose forward policy guidance. Indeed, what the Fed did in 2020, while remarkable in size and scope, actually built on a decade of extraordinary monetary policy.

Today, the macroeconomic landscape is much different.

The household and corporate sectors — in aggregate though not every member —  have strong balance sheets having benefited from ample fiscal transfers and subsidized debt refinancings. Demand and sentiment remain solid.

The only thing blocking an even bigger demand boom is the Covid delta variant, and even that is not strong enough to hold back retail sales, as last week’s upside data surprise illustrated.

That alone is enough reason for the Fed to detail this week how and when it intends to withdraw two of the emergency measures that are still in place more than a year after the worse of the Covid economic and financial shock. The central bank should announce the immediate initiation of a tapering of quantitative easing with a goal of eliminating the $120 billion of monthly purchases in the first half of next year; and it should signal through its forward policy guidance a gradual lifting of near-zero interest rates starting in the second half of next year.

But while deficient aggregate demand is no longer a problem, the supply side is and will remain so for a while. As detailed here, what ails supply chains, transportation and worker availability goes well beyond temporary and quickly reversible factors. Longer-term structural forces are also in play, raising the specter of inflation that remains higher and more persistent than the Fed has repeatedly forecast until now.

That, too, suggests that the Fed should start gradually easing its foot off its pedal-to-the-metal QE and signal its intention to tap the brakes down the road in an orderly fashion via higher interest rates. This would be best done if, on its side, Congress were to open the door for fast progress on the Biden administration’s infrastructure plan, physical and human, and if financial regulators were to coordinate better, nationally and internationally, to strengthen prudential policies, especially as they pertain to dampening excessive risk-taking among nonbank market participants.

Yet the Fed is unlikely to do so this week for several reasons, from the inability to embrace sufficiently yet the extent to which the demand and supply paradigm has shifted to concerns about triggering a disorderly correction of elevated asset prices after the excessive risk-taking encouraged by years of ample and predictable liquidity injections.

Rather than proceed with a taper now and signal the initiation next year of a measured and gradual normalization of interest rates, the Fed is likely to adopt a more dovish approach. This could include signaling the possible start of a taper later this year or early next year, reiterating that the taper decision is decoupled from the policy rate decision, signaling a delayed and slower interest rate normalization and packaging all of this in highly conditional language.

I suspect that most market participants, including long-term investors, would much prefer this course of action to the alternative, which I believe is necessary and feasible. “QE infinity” remains their top policy choice for the Fed given the extent to which central bank liquidity has turbocharged asset valuations, allowing for such a historical decoupling from underlying economic fundamentals.

Yet as appealing as this seems, it would be rather shortsighted because it would allow economic and financial risks to continue to rise unduly, threatening the long-term inclusive recovery needed not just for sustainable economic well-being but also for underpinning genuine financial stability. Indeed, by the time the Fed finds itself forced to hit the brakes, the window for doing so in an orderly fashion may prove worrisomely tight.

Tyler Durden Mon, 09/20/2021 - 11:40

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Huge Dock Worker Protests In Italy, Fears Of Disruption, As Covid ‘Green Pass’ Takes Effect

Huge Dock Worker Protests In Italy, Fears Of Disruption, As Covid ‘Green Pass’ Takes Effect

Following Israel across the Mediterranean being the first country in the world to implement an internal Covid passport allowing only vaccinated citize

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Huge Dock Worker Protests In Italy, Fears Of Disruption, As Covid 'Green Pass' Takes Effect

Following Israel across the Mediterranean being the first country in the world to implement an internal Covid passport allowing only vaccinated citizens to engage in all public activity, Italy on Friday implemented its own 'Green Pass' in the strictest and first such move for Europe

The fully mandatory for every Italian citizen health pass "allows" entry into work spaces or activities like going to restaurants and bars, based on one of the following three conditions that must be met: 

  • proof of at least one dose of Covid-19 vaccine

  • or proof of recent recovery from an infection

  • or a negative test within the past 48 hours

Via AFP

It's already being recognized in multiple media reports as among "the world's strictest anti-COVID measures" for workers. First approved by Italian Prime Minister Mario Draghi's cabinet a month ago, it has now become mandatory on Oct.15.

Protests have been quick to pop up across various parts of the country, particularly as workers who don't comply can be fined 1,500 euros ($1,760); and alternately workers can be forced to take unpaid leave for refusing the jab. CNN notes that it triggered "protests at key ports and fears of disruption" on Friday, detailing further:

The largest demonstrations were at the major northeastern port of Trieste, where labor groups had threatened to block operations and around 6,000 protesters, some chanting and carrying flares, gathered outside the gates.

    Around 40% of Trieste's port workers are not vaccinated, said Stefano Puzzer, a local trade union official, a far higher proportion than in the general Italian population.

    Workers at the large port of Trieste have effectively blocked access to the key transport hub...

    As The Hill notes, anyone wishing to travel to Italy anytime soon will have to obtain the green pass: "The pass is already required in Italy for both tourists and nationals to enter museums, theatres, gyms and indoor restaurants, as well as to board trains, buses and domestic flights."

    The prime minister had earlier promoted the pass as a way to ensure no more lockdowns in already hard hit Italy, which has had an estimated 130,000 Covid-related deaths since the start of the pandemic.

    Meanwhile, the requirement of what's essentially a domestic Covid passport is practically catching on in other parts of Europe as well, with it already being required to enter certain hospitality settings in German and Greece, for example. Some towns in Germany have reportedly begun requiring vaccination proof just to enter stores. So likely the Italy model will soon be enacted in Western Europe as well.

    Tyler Durden Sat, 10/16/2021 - 07:35

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    Tracking Global Hunger & Food Insecurity

    Tracking Global Hunger & Food Insecurity

    Hunger is still one the biggest – and most solvable – problems in the world.

    Every day, as Visual Capitalist’s Bruno Venditti notes, more than 700 million people (8.8% of the world’s population)..

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    Tracking Global Hunger & Food Insecurity

    Hunger is still one the biggest - and most solvable - problems in the world.

    Every day, as Visual Capitalist's Bruno Venditti notes, more than 700 million people (8.8% of the world’s population) go to bed on an empty stomach, according to the UN World Food Programme (WFP).

    The WFP’s HungerMap LIVE displayed here tracks core indicators of acute hunger like household food consumption, livelihoods, child nutritional status, mortality, and access to clean water in order to rank countries.

    After sitting closer to 600 million from 2014 to 2019, the number of people in the world affected by hunger increased during the COVID-19 pandemic.

    In 2020, 155 million people (2% of the world’s population) experienced acute hunger, requiring urgent assistance.

    The Fight to Feed the World

    The problem of global hunger isn’t new, and attempts to solve it have making headlines for decades.

    On July 13, 1985, at Wembley Stadium in London, Prince Charles and Princess Diana officially opened Live Aid, a worldwide rock concert organized to raise money for the relief of famine-stricken Africans.

    The event was followed by similar concerts at other arenas around the world, globally linked by satellite to more than a billion viewers in 110 nations, raising more than $125 million ($309 million in today’s dollars) in famine relief for Africa.

    But 35+ years later, the continent still struggles. According to the UN, from 12 countries with the highest prevalence of insufficient food consumption in the world, nine are in Africa.

     

    Approximately 30 million people in Africa face the effects of severe food insecurity, including malnutrition, starvation, and poverty.

     

    Wasted Leftovers

    Although many of the reasons for the food crisis around the globe involve conflicts or environmental challenges, one of the big contributors is food waste.

    According to the United Nations, one-third of food produced for human consumption is lost or wasted globally. This amounts to about 1.3 billion tons of wasted food per year, worth approximately $1 trillion.

    All the food produced but never eaten would be sufficient to feed two billion people. That’s more than twice the number of undernourished people across the globe. Consumers in rich countries waste almost as much food as the entire net food production of sub-Saharan Africa each year.

    Solving Global Hunger

    While many people may not be “hungry” in the sense that they are suffering physical discomfort, they may still be food insecure, lacking regular access to enough safe and nutritious food for normal growth and development.

    Estimates of how much money it would take to end world hunger range from $7 billion to $265 billion per year.

    But to tackle the problem, investments must be utilized in the right places. Specialists say that governments and organizations need to provide food and humanitarian relief to the most at-risk regions, increase agricultural productivity, and invest in more efficient supply chains.

    Tyler Durden Fri, 10/15/2021 - 23:30

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    China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

    China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

    One week ago we discussed why the "worst case" scenario for China’s property crisis is gradually emerging; to this we can now add that China’s worst case energy crisi

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    China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

    One week ago we discussed why the "worst case" scenario for China's property crisis is gradually emerging; to this we can now add that China's worst case energy crisis scenario is also about to be unleashed as cold weather swept into much of the country and power plants scrambled to stock up on coal, sending prices of the fuel to record highs.

    Electricity demand to heat homes and offices is expected to soar this week as strong cold winds move down from northern China, according to Reuters with forecasters predicting average temperatures in some central and eastern regions could fall by as much as 16 degrees Celsius in the next 2-3 days.

    Shortages of coal, high fuel prices and booming post-pandemic industrial demand have sparked widespread power shortages in the world's second-largest economy. Rationing has already been in place in at least 17 of mainland China's more than 30 regions since September, forcing some factories to suspend production and further disrupting already broken supply chains.

    On Friday, the most-active January Zhengzhou thermal coal futures closed at a record high of 2,226 per tonne early. The contract has risen almost 200% year to date.

    China's three northeastern provinces of Jilin, Heilongjiang and Liaoning - also among the worst hit by the power shortages last month - as well as several regions in northern China including Inner Mongolia and Gansu have started winter heating, which is mainly fuelled by coal, to cope with the colder-than-normal weather.

    Meanwhile, even though Beijing has taken a slew of measures to contain coal price rises including raising domestic coal output and cutting power to power-hungry industries and some factories during periods of peak demand, so far all measures have failed with coal surging by 40% in just the past three days. Beijing has also repeatedly assured users that energy supplies will be secured for the winter heating season, and went so far as to order energy firms to "secure supplies at all costs." Well, the energy firms heard it, because on that day, thermal coal closed at 1,436 yuan. Two weeks later it is some 800 yuan higher.

    Unfortunately for Beijing, the power shortages are expected to continue into early next year, with analysts and traders forecasting a 12% drop in industrial power consumption in the fourth quarter as coal supplies fall short and local governments give priority to residential users.

    Earlier this week, we reported that China undertook its boldest step in a decades-long power sector reform when it allowed coal-fired power prices to fluctuate by up to 20% from base levels from Oct. 15, enabling power plants to pass on more of the high costs of generation to commercial and industrial end-users. read more

    Steel, aluminium, cement and chemical producers are expected to face higher and more volatile power costs under the new policy, pressuring profit margins.

    Meanwhile, the latest Chinese "data" on Thursday showed factory-gate inflation in September hit a record high; but since thermal coal is the one commodity that correlates the closest to PPI, absent a sharp drop in coal prices in the next few weeks, expect the next PPI print to be far higher. Meanwhile as the power crisis leads to further shutdowns in domestic production, some banks - such as Nomura - have gone so far to predict that China's GDP is set to shrink in coming quarters.

    China, which laughably aims to be "carbon neutral" by 2060 even as its president announced he will skip the COP26 UN Climate Change Conference in Glasgow, has been "trying" to reduce its reliance on polluting coal power in favor of cleaner wind, solar and hydro. But coal remains the source for some 70% of China's electricity needs.

    Of course, China is not the only nation struggling with power supplies, which has led to fuel shortages and blackouts in many European countries. and threatens to send US heating bills up as much as 50% this winter. he crisis has highlighted the difficulty in cutting the global economy's dependency on fossil fuels as world leaders seek to revive efforts to tackle climate change at talks next month in Glasgow.

    China will strive to achieve carbon peaks by 2030, Vice Premier Han Zheng said in a video message at the Russian Energy Week International Forum, according to state-run news agency Xinhua late on Thursday. He also said that China and Russia are important forces leading the energy transition and they should cooperate and ensure smooth progress of major oil and gas pipeline and nuclear power projects.

    Translation: Russia better save that nat gas and not ship it to Europe as China will soon be needed even BCF Russia an provide. As for China

     

    Tyler Durden Fri, 10/15/2021 - 22:50

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