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Is high inflation here to stay?

For nearly a half century, global inflation rates were headed one way: down. Since the early 1970s, supported by structural factors that included globalization,…

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By Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge

For nearly a half century, global inflation rates were headed one way: down. Since the early 1970s, supported by structural factors that included globalization, better policy frameworks, big demographic changes, and rapid technological advances, the world achieved a remarkable decline in inflation. But since late 2020, the global inflation rate has risen sharply to over six percent due to unprecedented policy support for inflation, the release of pent-up demand, persistent supply disruptions, and surging commodity prices. The commodity price surge triggered by Russia’s invasion of Ukraine last month is adding to these price pressures. The consequences for growth, stability, and poverty are likely to be terrible.

The end of the last and previous periods of sustained low global inflation are a reminder that low inflation is by no means guaranteed. Inflation has been low and stable before: during the Bretton Woods fixed exchange rate system of the post-war period up to 1971 and during the Gold Standard of the early 1900s (Figure 1). But these two earlier episodes were also followed by high inflation. For example, following the low inflation period until the early 1970s, multiple oil price shocks during the remainder of the decade accompanied a rapid acceleration in global inflation 

Figure 1. Global inflation, 1900-2022 

Source: Ha, Kose, and Ohnsorge (2019); World Bank.
Note: This figure represents the median of annual average inflation in 24 countries where data are available across the full period. 2022 inflation is based on the average of January and February 2022.

The global economy once again stands at a crossroads where recent inflationary shocks could combine with a fading of structural forces of disinflation to usher in an era of higher inflation. What are the prospects for these disinflationary structural forces? And what can policymakers in emerging market and developing economies (EMDEs) do to get ahead of inflationary pressures? We believe that economic history helps to answer these questions.

Prospects for disinflationary structural forces

Globalization, robust policy frameworks, demographic changes, structural factors, and technological advances were instrumental in keeping inflation low until 2020. These factors provide clues to questions about whether the current surge in prices is transitory or more long-lasting. Should these forces recede, increases in short-term inflation may become much more persistent.  

  • Globalization. Over the past three decades, the entry of China and Eastern Europe into the global trading system has greatly reduced the prices of many manufactured goods. Global value chains have contributed to lower inflation through outsourcing and greater competition. Countries that are more open to trade and financial flows have often experienced lower inflation (Figure 2A). Over the past decade, however, the maturing of global value chains has contributed to slowing trade growth. New tariffs and import restrictions have been put in place in advanced economies and EMDEs over the past six years. Thus far, notwithstanding these concerns and some severe logistical bottlenecks, global value chains appear to have remained resilient. However, rising protectionist sentiment and geopolitical risks may slow or even reverse the pace of globalization. 
  • Policy frameworks. Over the past four decades, many advanced economies and EMDEs implemented macroeconomic stabilization programs and structural reforms, improved fiscal frameworks, and gave central banks clear mandates to control inflation. In the context of inflation, these reforms have produced clear dividends: Countries with stronger monetary policy frameworks and more independent central banks have tended to experience lower inflation (Figures 2B and 2C). A shift from a mandate of price stability to objectives related to the financing of government would undermine the credibility of monetary policy frameworks and raise inflation expectations. Mounting public and private debt in EMDEs in the past decade could weaken commitment to disciplined fiscal and monetary policy frameworks. EMDE sovereign credit ratings have continued to deteriorate, with some falling below investment grade, reflecting concerns about rising debt and deteriorating growth prospects. Populist sentiment could inspire a move away from prudent fiscal and monetary policies.  
  • Demographic changes. Rapid labor force growth, due to population growth and increased participation of women, helped dampen increases in wages and input costs. The disinflationary benefits reaped from this process may, however, now be at an inflection point as the share of the working-age population stabilizes even in EMDEs. Global aging is expected to lower saving rates and raise inflationary pressures. Aging in some large emerging markets may amplify this trend. In addition, recent data from advanced economies indicate that a growing proportion of population is choosing to leave the labor force early—the “Great Retirement.
  • Structural factors. In both advanced economies and EMDEs, the large-scale shift of labor and other resources from agriculture to higher-productivity manufacturing offered productivity gains. Over the past decade, however, momentum for productivity-enhancing factor reallocation has faded. Declining unionization of the labor force, smaller collective bargaining coverage, and greater labor and product market flexibility have dampened wage and price pressures over the past decade.
  • Technological advances. Automation, the increasing adaptability of computers, robotics, and artificial intelligence have improved production processes in many sectors. At the same time, these factors have lowered demand for routine production and clerical workers and lowered wage and price pressures. In some advanced economies, disinflation has also been attributed partly to price transparency and competitive pressures introduced by the growing digitalization of services, including e-commerce or sharing services. In contrast to the other structural factors listed here, the pandemic is likely to have given renewed impetus to technological advances that may continue to dampen inflationary pressures.

Figure 2. Factors associated with disinflation 

Factors associated with disinflation charts

Sources: Ha, Kose, and Ohnsorge (2019); Haver Analytics; IMF International Financial Statistics and World Economic Outlook databases; OECDstat; World Bank.
Note: “AEs” = advanced economies; “EMDEs” = emerging market and developing economies. A. Hyphens indicate median inflation in countries with high trade-to-GDP ratios (“Trade”) or financial assets and liabilities relative to GDP (“Finance”) in the top quartile (“high openness”) of 175 economies during 1970-2017. Horizontal bars indicate countries in the bottom quartile (“low openness”). Differences are statistically significant at the 5 percent level. C. Hyphens indicate median inflation in country-year pairs with a central bank independence and transparency index in the top quartile of the sample (B) or with inflation targeting monetary policy regimes (C). Horizontal bars denote medians in the bottom quartile (B) or with monetary policy regimes that are not inflation targeting (C). Differences are statistically significant at the 5 percent level.

What should developing economies do?

EMDE policymakers are facing the first serious global monetary policy tightening cycle after more than a decade of highly accommodative external financial conditions. The tightening cycle might be coinciding with shifts in some structural forces that have been instrumental in keeping inflation low over the past four decades. Should these forces recede, recent increases in short-term inflation may become more persistent, and thus threaten the anchoring of long-term inflation expectations.

In light of the multiple sources of uncertaintyand the time lags in the transmission of economic shocksEMDEs may find themselves in a steep and prolonged monetary policy tightening cycle. Communicating monetary policy decisions clearly, building and leveraging monetary policy credibility, and strengthening monetary policy frameworksincluding by safeguarding and further buttressing central bank independencewill be critical to manage inflation.

Monetary policy does not operate in a vacuum. Inflation expectations are unlikely to remain well anchored when fiscal sustainability is at risk. The withdrawal of pandemic-related fiscal support needs to be finely calibrated and closely aligned with credible medium-term fiscal plans. Policymakers need to address investor concerns about long-run debt sustainability by strengthening fiscal frameworks, enhancing debt transparency, upgrading debt management, mobilizing government revenues, and improving spending efficiency.

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Why Is The VIX So Low? A Surprising Answer Emerges In The Market’s Microstructure

Why Is The VIX So Low? A Surprising Answer Emerges In The Market’s Microstructure

One of the most frequent questions tossed around Wall Street…

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Why Is The VIX So Low? A Surprising Answer Emerges In The Market's Microstructure

One of the most frequent questions tossed around Wall Street trading desks (and strip clubs), and which was duly covered by Bloomberg recently in "Fear Has Gone Missing in Wall Street’s Slow-Motion Bear Market", is why despite the crushing bear market and the coming recession, does the VIX refuse to rise sustainably above 30, or in other words, why is the VIX so low?

As Goldman's Rocky Fishman wrote in a recent note "Option Markets Take the SPX Bear Market in Stride" (available to professional subs), "one of the most popular questions we have received is why the VIX hasn't surpassed its March peak (36) despite the SPX being lower than it was in March and realized vol being higher than it was in March."

Here, Fishman notes that implied volatility was unusually high in March, and the current VIX level (29) is only slightly low for the current level of realized vol. Furthermore, a VIX around 30 typically happens with the 5Y CDX HY spread above 600, and although it has risen steadily it's currently in the mid 500's.

Meanwhile, even as the VIX has fallen moderately since late April, both vol risk premium and skew have both fallen dramatically.

Picking up on this quandary, overnight JMorgan also joined the discussion with its analyst Peng Cheng laying out his own thoughts on why the VIX remains so low (note is also available to professional subs), and similar to Goldman notes that the current bear market, despite being deeper in magnitude, has produced VIX levels well below the peak observed during previous market sell-offs:

However, unlike Goldman which mostly analyzes the VIX in the context of a macro framework, JPM's Cheng offers observations based on his analysis of market microstructure in both equity and options markets.

Cheng starts with the previously noted low realized volatility: as the JPM strategist writes, YTD, the SPX realized vol, measured on a close to close basis, is only 25.5, which means that delta-hedged put options would have lost money in the gamma component. From a technical perspective, JPM believes that return volatility is dampened by a lack of intraday price momentum and increasingly frequent occurrences of intraday price reversal. As seen in the next chart, intraday reversal has only started to become noticeable in the last two years. Prior to that, intraday momentum was the dominant market behavior.

This diminishing intraday price momentum has had a non-trivial impact on realized volatility, according to JPM which estimates that if the intraday return correlation remained the same as pre-pandemic, YTD volatility would be close to 28.8, or 3.3 vol points higher than realized.

As an aside, those asking for the reason behind this change in intraday patterns in the last couple of years, Cheng notes that "this is a complex topic" but in short, his view is that it is a result of 1) crowding in intraday momentum trading strategies and 2) a potential shift in option gamma dynamics as discussed below.

Supply/demand of S&P 500 options: Although the estimation of market level option gamma profile is highly dependent on many factors, including assumptions on open interest, OTC options, and leveraged ETFs, etc., in a report published earlier this year, JPM's quants presented a more dynamic estimation of the gamma profile by using tick level data. Specifically, they assigned directions to SPX and SPY option trades based on their distance to the best bid/offer at the tick level, rather than the constant assumption of investors being outright long puts and short calls. The updated results are shown below.

Tha chart shows that starting in 2020, the put gamma imbalance has fallen meaningfully. This is the result of investors’ changing preference from buying outright puts to put spreads for protection, in JPM's view. And year to date, the decline in gamma demand has not improved. Moreover, and echoing what we have said on several recent occasions, JPM notes that judging from the outright negative put gamma imbalance in early 2022, it appears that investors have been monetizing hedges that had been held since 2021 - note the consistently positive and relatively elevated put gamma imbalance throughout 2021, which suggests that protections were put on during this period.

More in the full note available to pro subs

Tyler Durden Wed, 06/29/2022 - 15:05

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Dr. Stephen Kingsmore receives prestigious Precision Medicine World Conference 2022 Luminary Award

SAN DIEGO, Calif. – June 29, 2022 – Rady Children’s Institute for Genomic Medicine® (RCIGM) today announced that Stephen Kingsmore, MD, DSc, President…

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SAN DIEGO, Calif. – June 29, 2022 – Rady Children’s Institute for Genomic Medicine® (RCIGM) today announced that Stephen Kingsmore, MD, DSc, President and CEO, was presented with the Precision Medicine World Conference (PMWC) 2022 Luminary Award at this year’s conference in the Silicon Valley region of California for his innovation in rapid neonatal molecular diagnoses using whole-genome sequencing.

Credit: Rady Children’s Institute for Genomic Medicine

SAN DIEGO, Calif. – June 29, 2022 – Rady Children’s Institute for Genomic Medicine® (RCIGM) today announced that Stephen Kingsmore, MD, DSc, President and CEO, was presented with the Precision Medicine World Conference (PMWC) 2022 Luminary Award at this year’s conference in the Silicon Valley region of California for his innovation in rapid neonatal molecular diagnoses using whole-genome sequencing.

The Luminary Award recognizes the recent contributions of prominent figures who have accelerated precision medicine into the clinic. Additional PMWC 2022 honorees included Dr. Albert Bourla, Pfizer, for his extraordinary achievement in leading the record-time development of a vaccine and antiviral drug against the coronavirus and Dr. Stephen Hoge, Moderna, for overseeing R&D of the first antiviral synthetic mRNA vaccines ever created, including the one against COVID-19.

“I am honored to receive this award and be among this extraordinary group of past and present recipients focused on the clinical adoption of precision medicine,” said Dr. Kingsmore. “At RCIGM, we are transforming pediatric healthcare through the power of Rapid Precision Medicine™ by offering the fastest delivery of rapid Whole Genome Sequencing™ to enable prompt diagnosis and targeted treatment of critically ill newborns and children in intensive care. We know that time matters – a fast, molecular diagnosis can make the difference between improved outcomes and a lifetime of disability, or even life itself.”

Dr. Kingsmore leads a multi-disciplinary team of scientists, physicians, genetic counselors, software engineers and bioinformaticians who are pioneering the use of rWGS® to enable precise diagnoses for critically ill newborns. In 2021, he led the RCIGM team to set a new record of 13.5 hours for achieving the fastest molecular diagnosis using rWGS, breaking his previous 2018 world record of 19.5 hours. 

PMWC is the largest and original annual conference dedicated to precision medicine. PMWC’s mission is to bring together recognized leaders, top global researchers and medical professionals, and innovators across healthcare and biotechnology sectors to showcase practical content that helps close the knowledge gap between different sectors, thereby catalyzing cross-functional fertilization and collaboration in an effort to accelerate the development and spread of precision medicine.

Rady Children’s Institute for Genomic Medicine

Rady Children’s Institute for Genomic Medicine is transforming neonatal and pediatric health care by harnessing the power of Rapid Precision Medicine™ to improve the lives of children and families facing rare genetic disease. Founded by Rady Children’s Hospital and Health Center, the Institute offers the fastest delivery of rapid Whole Genome Sequencing™ to enable prompt diagnosis and targeted treatment of critically ill newborns and children in intensive care. The Institute now provides clinical genomic diagnostic services for a growing network of more than 70 children’s hospitals. The vision is for this life-changing technology to become standard of care and enable clinicians nationwide to provide rapid, personalized care. Learn more about the non-profit Institute at RadyGenomics.org. Follow us on Twitter and LinkedIn.

Media Contact:

Ben Metcalf
bmetcalf@rchsd.org
+1 (619) 822-8593
 


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Fauci Suffers “Much Worse” COVID Symptoms After ‘Paxlovid Rebound’

Fauci Suffers "Much Worse" COVID Symptoms After ‘Paxlovid Rebound’

Fully-vaxx’d and double-boosted mask-admirer Anthony Fauci is suffering.

Two…

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Fauci Suffers "Much Worse" COVID Symptoms After 'Paxlovid Rebound'

Fully-vaxx'd and double-boosted mask-admirer Anthony Fauci is suffering.

Two weeks ago, we reported that President Biden's chief medical adviser had COVID.

The 81-year-old reportedly had 'mild symptoms' and of course he 'said the words'...

Of course, Fauci followed the CDC guidelines and ingested the government-blessed treatment - Paxlovid - due to his age and possible risks from the virus.

So, that should have been it right?

But no. During an event at Foreign Policy’s Global Health Forum, Fauci admitted he had not had a good experience:

“After I finished the five days of Paxlovid, I reverted to negative on an antigen test for three days in a row,” Fauci said Tuesday .

“And then on the fourth day, just to be absolutely certain, I tested myself again. I reverted back to positive.”

Interestingly, Fauci admitted:

"...this is becoming more and more typical based on more clinical studies..."

As Bloomberg reports, large numbers of patients have reported the phenomenon, often called Covid rebound or Paxlovid rebound, of returning symptoms after taking a full course of Pfizer’s drug.

While Pfizer Chief Executive Officer Albert Bourlasaid in May that doctors could prescribe a second course of treatment to such patients, US drug regulators have said there’s no evidence that a repeat will help.

However, Fauci said he started taking a second course of Paxlovid after experiencing symptoms “much worse than in the first go around.”

Now near completion of the five-day oral treatment, he said he was still enduring symptoms but felt “reasonably good.”

Finally, as we reported less than two weeks ago, Pfizer stopped enrolling in a clinical trial for Paxlovid for standard-risk COVID-19 patients after the latest results suggested the drug did not reduce symptoms or hospitalizations and deaths to a statistically significant degree.

Watch the full interview below: (forward to around 5:26:00):

Not exactly encouraging news...

Tyler Durden Wed, 06/29/2022 - 11:45

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