Exceptional Publications

August 17, 2023 

When one makes important decisions, it would be very appropriate examining all the facets tied to those decisions.

When one makes "extreme decisions", it would be mandatory doing it and editing those decisions if the expected benefits could get improbable.

This is even more true when the subjects involved are interconnected.

What am I talking about?

The trendy subject is as always the tightening monetary police of Central Banks to tackle the galloping inflation.

We are observing a continuous competition between the Central Banks of the world in increasing interest rates but it seems the desired effects are not reaching the desired extent.

In the previous articles I have shown my doubts about the strategy used by ECB to fight an supply-driven inflation, worsened also by a strong speculation sneaked into the different supply chains.

Now I am going to explain that another factor is being neglected and that unfortunately, but realistically, makes the tools used very unsatisfactory.

Here the interconnection factor comes in.

Banks of England makes use of strong increase in the interest rates into an economy whose strenghts is the service sector that accounts for almost 80% of UK's GDP

In its turn the service sector consists of a large share of financial services and insurance.

Moreover, the United Kingdom is a great exporter of services as you can see by comparing data of paragraph 3.4 to paragraph 4,4 concerning respectively  the data of 

Top 5 UK services exports  of 4 quarters to the end of March 2023 and 

Top 5 UK services imports  of 4 quarters to the end of March 2023

UK trade in numbers (web version) - GOV.UK (www.gov.uk)

Please note that (the insurance services come in immediately after the top five UK service exports 2022 | Statista)

As you can see the Financial Services from this comparison have a general surplus of £ 60 billion.

As far as this feature serve as a basis for my theory, it is important to tell also that since 2005, the United Kingdom is a net exporter of services to the European Union (EU) member states.

Why did I indicated all these data?

In July the inflation in the UK's services sector is still very high even if the core inflation has decreased.

In July the wage increased in UK with a great pace, in particular in the services sector.

If we all bear in mind that an increase in the interest rates is a profit increase of the banks and the insurances (historical analysis shows how over interest rate increase period the profit of insurances becomes higher), wh can also see how a large share of this additional profits translates into higher wages for the workers involved.

In its turn this positive variation of financial/insurance wages goes into the price of the financial/insurance services sold to the customer that become expensice and expensive.

It goes without saying that a spiral effect materializes.

As a result, being the UK a net exporter of services towards the EU, an inflation component is transmitted to the importer Countries.

It's clear that this is another obstacle to achieve the goal to downsize th cost of living through just  continuous interest rate hikes.

Summing up, ECB makes uses of an inappropriate tool to fight against a supply-and-speculation- driven inflation and there is a strong need of coordination  between Central Banks in order not to jeopardise the effects a smoothed weapon in a hyper-interconnected economy.

Hope the ECB's readers of this webpage may take into account what I described so far in tackling a very strong enemy that impacts even more negatively all the economy starting from the common people.

July 14, 2023

As of Today the inflation has decreased just a bit, much lower than one could expect when such a tightening monetary police of Central Banks has been in place for long.

Once the supply-side-powered inflation came to low point and the interest rate hikes to cut the demand-powered one proved not to be effective to the desired extent the most appropriate move should have been of different nature.

Prior to briefly disserting about any potential measure an important clarification needs to be done.

I reason taking into account that the main presumed inflation causes are mixed but with different weighs throughout the world: in USA and UK the most part derives from high wages and in EU it  derives mainly from the energy prices (no longer at moment) and supply side speculations.

At the same time I consider that in the hyperconnected global economy the inflation can be imported from any country trading with the others where the inflation is up and as a result if the inflation is not tackled by the appropriate methods within any country, it will ripple through globally.

In EU the solution, as I wrote in Article 14 on page Economia ed Altro (Italian version of the website) for Italian economy, is to be found into the real economy.

It is to liberalize the Discount Sales and not to limit them at some periods (usuallly the period ends).

This could unleash some mechanisms within the involved supply chains that with few doubts would lead to price decreases, firstly in the industries concerned and progressively in the remaining ones.

Please click this link (in Italian language): Economia ed Altro | The Strategic Controller

As to Usa and UK's inflation where all tha analysts are persuaded the main causes lay in the strong labor market with the high wages that feed continuously the inflation, the solution is even more simple.

It sounds very strange to me that no one, prior to my post on Linkedin of mid-June 2023 (https://www.linkedin.com/posts/carlo-attademo-258683b3_astonished-at-the-us-the-inflation-solution-activity-7077980772959232000-SVHw?utm_source=share&utm_medium=member_desktop), has ever thought of it.

If they strongly believe that the main share of inflation on the demand side consists of the wages, may be it's high time they  talked about a salary cap!!

It's a concept already existing in the american sports and that can be borrowed temporarely to snap that spiral.

A salary cap by industry and by job.

Having said that, the urgency to adopt such measures is increasing and increasing due to further facts that are already happening.

We all can see and fear that the continuous global interest rate hikes are causing, and will do it even more, a sort of "discharge" of the financial expense burden of the businesses (mainly those with a high ratio Debt/Equity) on the prices to their customers, firstly in some sectors where the sensitivity to price is low (foodstuff in primis and industries that shape the core inflation).

Furthermore, the latest news that Crude Oil Prices are on the increase again due to the strong expectations that Saudi Arabia is going to cut its Oil output beacuse of recession fear(the other Opec's Countries will do the same?) make the energy-sector-powered inflation return loom large.

Hope the Central Banks and National Governments hurry up to make the most appropriate and smart steps to make the living affordable again!

June 17, 2023

The behaviour of ECB  (European Central Bank) we have been seeing for almost a year is unbelievable!

It keeps on tightening its monetary policy by endless interest rate increases that, once we have seen the very poor results in lowering the inflation (core inflation in primis), don't make sense and are showing again and again how the strategy is wrong.

All of us know the origin of the inflation in Europe is on the supply side, first of all the energy product price increase, due to the scarcity of the goods and the war in Ukraine.

This consideration would suffice in itself to put in doubt the appropriatness of the severe monetary policy of ECB that would lower the purchase power of the households and businesses without acceptable results in the inflation decrease that remained higher than expected one.

Secondly, the speculation creeped into the energy financial markets by keeping high the related prices of Gas and Oil and you cannot struggle against it through the increase in the interest rates.

At this point we have already seen two incongruities in the choice of the tools used by ECB but the contradiction goes on over the time.

For some time the price in the energy sector have been coming down and this would allow to the strict monetary policy, if it was correct, to display its good effects in lowering the inflation to an acceptable extent.

That didn't happen and the conclusion shows once more that the inflation doesn't come from the demand side.

Then, what is happening?

Firstly, the speculation entered many supply chains and the prices remain higher than many expected and "reluctant" to stop their upward trend, in particular in the industries involved in the core inflation where the goods are necessary for people and businesses and as a result the sensitivity to prices is low.

Secondly, many businesses (particularly the indebted ones) given this endless financial interest increase started to charge their products/services with it and as a result the inflation is intended to hike up and hike up.

In some industries the natural decrease in the price due to the lower customer demand is more than offset by this "discharge", jeopardizing the strict monetary policy.

It's easy to understand how ECB will bring about an endless inflation-interest rate increase spiral if it keeps on with the same insane policy.

It will determine in the medium-term a stagflation that is inflation combined with recession and at a some point in time a strong economic crisis of the european nations, each of heam with its timing and intensity.

Just then the general reduction of inflation to the hoped-for extent (ECB' officers say 2%!) will be achieved but the cost of it will be enourmous.

It goes without saying that for this achievement through this insane monetary police one doesn't need to be an economist but a mere "hired assassin" that is committed to hitting its target without worrying about the side effects even if the latters are worse than the ones deriving from missing the target.

In view of these thought the statements of Lagarde (ECB's President) stands out even more: she maintains repetitevely ECB is data dependent but an intelligent guy when seeing that an action doesn't produce again and again and again the desired effects to the hoped-for extent, then he changes direction because it's clear it isn't the right recipe.

Am I wrong!?

Let's look at BOJ (Bank of Japan).

It's the flip side of ECB since, even if struggling against the highest inflation ever recorded in Japan in decades, it keeps on holding low interest rates and easy its general monetary policy.

Now let's look at FED.

It has now paused the increase in interest rates because the Consumer Price Index increased just 4% for the year ending in May.

That represents a sharp pullback from 4,9% of April. On a monthly basis prices ticked up 0.1%. (Economists were expecting prices to increase by 0.2% from April to May).

This happened because there the inflation derived not only from the supply side,  energy prices first of all, but also from a consistent upward trend of the wage levels. As a result a tightening monetary policy did make sense.

Written that, it's clear how strong the contradictions of ECB's behaviour (and intention to walk this way for long) are in consideration also of the missed results.

In the article 2 on this webpage I indicated some time ago the same doubts on a strict monetary policy in Europe, putting on the table the recipe on how to downsize the increase in consumer prices without a disastrous crackdown on the monetary side, and now the energy prices dropped due to many reasons (last but not least the great investments in clean energy sources that shifted the attention of the speculation as I wrote in the article 1 on this webpage) it is clear that it's time to stop this madness by acting into the real economy.

In this regard I refer you to one of the solutions that is explained in the Italian section of this website, on page "Economia ed Altro" at number 14 Economia ed Altro | The Strategic Controller.

In the end, in view of all I showed with numbers, comparisons and reasonings, I would like to turn the reader's attention to the reasons of ECB's decision to go on with this policy.

May be the ECB's policymakers are incompetent?

No, I don't believe that they are incompetent to the extent they don't see the missed results are not a coincidence.

The evidence for failure is so great that even an economics student in his first years of course would understand the inappropriateness of some decisions.

Then I think that there is a hidden purpose of ECB.

One of my "visions" is that by contiuosly raising the interest rates, ECB provides the States with more fiscal revenue in the short term by increasing the taxable income coming from higher revenues of the most part of banks that see their earnings from the existing variable interest rate loans and mortgages lifting up more than the losses concerning the potential new loans and mortgages.

Such these incredible and endless interest hikes  are in the end a fiscal benefit for the States that offset the lower earnings from a moderate pace in economic growth.

The drawback is that in the medium term these differences are intended to diminish due to the worsening of the economic standing and..........

Then I ask myself: why this behaviour?

Who knows fo sure?

May be the continuous sending from the European Countries of enourmous quantities of weapons and military equipment to Ukraine is pushing them in urgent need of "MONEY"?

I don't own the crystal ball and the real reasons for this insane behaviour of ECB may be more than one but one thing is certain.

ECB is bluffing.

December 28, 2022

In the ending part of 2022 we are observing a decrease in the Natural Gas Price and simultaneously an increase (or oscillations within a high-level range) of the Crude Oil one.

It's appropriate clarifying that important events that impacted the respective prices have been almost absent in the respective markets and if there have been their predicted effect has been minimal and immediately absorbed (I am referring to the sanctions to the Russian oil imports into EU and and the Price Cap on the Natural Gas decided by EU).

Without those single "shocks" we have been watching, as written above, a sort of trade-off in the ending part of November and first of all in December.

 All of this is easy to be verified; it suffices to surf on the numerous internet websites to see that both in Future markets and in the Spot negotiations the price trend of this commodities has been almost always opposite.

Why?

I will try to descant on this in a way as clean as possible.

Let's summarize some of the factors that impact the price of them:

1) The related decisions in the respective markets that affect either the suppliers or the customers.

2) The prediction of the economic growth.

3) The extent of stock that customers have built up.

4) The weather forecast with reference to the winter season.

 .........

All of these factors impact the volume of negotiations and as a result the respective prices.

Having said that, there is in my opinion an element that raises or decreases considerably the trend of the price of Oil and Gas.

It's a common rule that nowadays has become outstanding: the speculation.

Prior to getting started a recall of the functions of these commodities would be useful.

1. Crude oil and natural gas are fossil fuels used for heating.

2. Crude oil or petroleum consists of hydrocarbons and other organic compounds, while natural gas consists mainly of methane and hydrocarbons or ethane.

3. Crude oil and natural gas are used for vehicles.

4. LPG or liquefied petroleum gas shall be derived from crude oil and methane or compressed natural gas derived from natural gas. Both are used for cooking and heating,

5. Crude oil is also used to make cosmetics for women, plastics, rubber and the like, while natural gas is used as fertilizer.

6. Natural gas is the cleaner fuel compared to crude oil and other gases because it produces less carbon dioxide.

7. It is better to use natural gas than crude oil because it is safer for our environment.

As we could see these resources, except for some cases, are used for the same purposes, each of them with its own characteristics and impacts.

At this point it's easy to understand how an investor based on the risk diversification principle of a portfolio doesn't find it, usually, advantageous to hold simultaneosly the same titles/contracts of  both the resources (or in the same quantity).

As a result, when he sees a benefit in focusing on one of these resources on one reason or another, he disposes of the least valued in that moment and purchases/negotiates a larger quantity of the other commodity, increasing even more the price of the latter.

In other words the diversification is the rule that explains the trade-off between Natural Gas and Oil price in absence of consistent and extraordinary interventions on the single markets.

That means, by observing this trend, that if a community is in need of a specific resource rather than the other (for many reasons we cannot and want to judge), should work to keep the price of the other at a medium-high level.

October 30, 2022

On Thursday,  October 26, 2022, the ECB has raised three interest rates by 0.75 points. As a result, the primary rate rises to 2 percent, the deposit rate to 1.5 percent, and the 'marginal lending rate' to 2.25 percent.

In Total the increase is 2 percentage points up in just three months.

The goal is to tackle the high inflation that is hitting the 19-country euro area.

 Are we sure that is the right direction to solve this supply-driven inflation caused by very record prices of the Energy products such as oil and gas and by material scarcity?

Some argue that the inflation is driven also by a reviving demand following the Covid crisis but in my opinion this case concerns just a few industries and for sure it is a small part in the countries importing large quantity of oil and gas.

Moreover, if we go deeper, we will remember how the price increase started to come up  before the Covid outbreak and the war in Ukraine in many commodities due to their scarcity.

As an example we may take the aluminum whose price ramped up steadily until August 2022.

Now it is dropping, but we will be examining this aspect later on.

In addition, the large increase, as a matter of fact, concerning the energy product prices following the war in Ukraine, has been inhereted to a great extent by many products, in the first place the foodstuffs (in this regard the troubles about the export of grain from Ukraine played an important role as well).

As a result of this consideration, the inflation is 90% suppy driven.

A this point some questions turn up:

 Can we face the supply-driven inflation through the same tools used when it is generated by the demand side?

 Will they be effective in the current macroeconomic context where most national economies are plunging into a recession?

My doubts are strong enough.

Businesses will have to pay greatest interests when borrowing from banks and their intention to make any kind of investment, already low in a context of imminent strong recession, will be negatively revised.

Families and individuals will see the financial interests on loans and mortgages increasing, that will drop the consumption level together with the real estate turnover.

Not to say what will happen when some Eu's Countries are very indebted.

Economic crisis is worsening and won't allow to achieve a good basis of fiscal revenues providing sufficient resources to guarantee the usual public service level to their citizens.

In this case the increase in the interest rate will make the necessary resort to the Treasury Bonds more expensive.

The result in the medium term will be an increase in the tax burden to be levied on the citizens and a further worsening in the economic crisis due to a lower level of consumption and the consequent lowering of the output of the businesses.

Not to mention the probability of a consequent loss of Jobs.

In other terms the crackdown in the monetary policy and its current extent would be a further push into a recession, already looming large, very difficult to get out of in the short-medium term.

How to deal with the inflation if the traditional tools to tackle it could be more harmful than beneficial?

The answer is what we have been seeing for one month and a half about.

The lower demand for some products, foodstuffs in primis, has led the respective prices to start to decline.

One example?

The vegetable oil, whose price hit 2/3 months ago some record highs, decreased recently to a more acceptable level.

Another example that concerns a commodity?

Indeed!

Aluminum price as mentioned in the above lines has been steadily decreasing for 2 months after a large increase over the last 2 years.

The other metal prices have stopped to increase as well

Furthermore the container freight rates according to the respective indexes (Freightos Baltic Index for instance) dropped in October 2022 by 2/3, to the level of 2018, and that means the charge on the goods conveyed will be lower than ever.

All this is the result from the poor demand that followed on from all the issues concerning the troubles to get the materials requested and the adjustements in the supply chains involved that led to choose new suppliers or in some cases to a higher demand for substitute products when possible.

In the end, in the absence of a turning point in the current geopolitical situation that is impacting first of all the energy product prices, the answer will be the spontaneous market behaviour to curb the supply-driven inflation of this economic era.

Any kind of restrictive monetary policy should be very moderate in view of the imminent strong recession and even more in the very indebted countries that might plunge into a lethal situation.