This week we are talking about:
Looking Backwards
- PMI reading Flash US PMI falls sharply in to contraction territory in October as optimism and demand slumps | S&P Global (spglobal.com)
- Protests in Europe regarding cost of living
- Congress of the Chinese Communist Party: Ex-president being escorted out Hu Jintao: ex-president escorted out of China party congress – BBC News
Looking Forwards
- UK having a new prime minister Rishi Sunak Is Britain’s New Prime Minister | Time
- ECB interest rate hike
- FED -potentially- slowing down interest rate hikes Two-Year Treasury Yields Fall Amid Hopes Fed Will Slow Interest-Rate Increases in December (wsj.com)
Happy hump day, and welcome back to Looking Backwards Looking Forwards. I’m C Thomas Printer and I’m here with Austerity Jones.
Happy Wednesday C Thomas. I want to ask you 3 items and what did you think of them.
First, PMI came out on Monday. Kind of a disaster. What do you think?
C Thomas: If 50 is the magic number, and the manufacturing PMI is 49.9 (down from 52), and services PMI is 46.6 (down from 49.3). What does that tell you? We have a really strong economy? That’s what my politicians keep telling me and they’re probably right, cause they’ve nailed it right through. No. I think you are starting to see this economy slow down on lots of different fronts. These things take time. We have been raising rates for 7 months now. And it still takes time. Most of these won’t be felt for another 5-6 months. And that’s just the beginning of the rate hikes. Housing market: 7% rate on morgatetes now, it’s just too much. People are not gonna be buy houses. They are not going to be able to switch houses. It’s just gonna take some time to be felt.
Austerity: And did you see all the protests over the weekend in Europe? It was mainly about the cost of living. What did you think of?
C Thomas: It takes a little while, just like we talked about the, the rate hikes to work their way through the economy. And now they’re starting to feel this. And this was a decision by their government right to side with the us. They had plenty of gas. This is a decision they made and this is what happens. This is the, the consequences of it. It’s gonna lead to unemployment, higher gas prices, which basically funnel into every other sort of price.
Austerity: Then, I will move on to a place where voicing criticism is a little more difficult.
C Thomas: Oh, you mean the United States and Kanye West?
Austerity: No, no. I wanted to say China. In China, they escorted, out of the party Congress, the ex president. They said, quote and quote, he was feeling unwell.
C Thomas: Yes, if you believe that. I think it was almost symbolic of Xi. He has finally removed all the competition. That’s what he’s been set out to do for quite some time now. And now he is officially premier for life. And the markets finally saw what it looked like and on Monday they were down. Alibaba, down 12, 13%. Some of the tech companies were down 15, 20%. On literally the day that he gets to be premier for life, the competition and the ex president being escorted from his presence. So, I don’t think it was well received.
Austerity: With that, now it’s time to look forwards. I will go to UK again. Our top topic nowadays. They have a new prime minister. What is awaiting him?
C Thomas: We’ve already done this episode. Remember?
Austerity: It was Liz Truss.
C Thomas: Oh my. Yes. So as we mentioned last week, Rishi Sunak. He came back as the former chancellor and now he is going to be the next Prime minister. Boris Johnson and a couple other people showed a little bit of interest, but I think this is the guy that the markets trust. His policies are not friendly. There’s a reason he didn’t get elected, and Liz Trust did. Because she was gonna cut taxes and give them more money for energy. And now he’s saying, “nope, you’re we’re gonna have to start taking our medicine”. Which is the best thing for them long term. It just stinks in the near term and it stinks politically. So hopefully he can last long enough to put some of these things in play because that’s what they really need, Austerity. Some austerity. They need some tough measures and say we are going to try to balance the budget. We’ve got a 40 billion hole in our budget and we’re gonna try to fill it where that means raise some taxes. That means we’re not gonna be giving as much away as what we promised in the past. And that’s probably the best thing for all governments going forward. So I’m very anxious to see how this experiment goes. Because they were the first one to break. And hopefully this, if it goes well, this can kind of be the recipe for the other countries that are gonna have the same issue down the road. This is how you fix this. It’s not spend, spend, spend and print more money. It’s, you know, tighten your belt. Buckle down here, people. Hopefully he can last long enough, longer than 44 days.
Austerity: And the EBC is expected to raise interest rates. 75 basis points this week.
C Thomas: Yes. Um, most people already have that kind of figured in the three quarters of basis points. But, what they have to realize is they’re behind (ECB). Their target inflation is at 2% and I think they’re gonna get to 1.5%. Inflation was 10%. Literally every single person in that room needs to file out of the room, be fired for being really, really bad at their jobs. That’s what should happen, and they should bring in brand new people off the streets. And some of the protestors because I just don’t think they could do much of a worst job. If your goal is 2%, you’ve missed it by 400% and we’re not done going up yet either. Don’t think about that for a long stretch. We’re gonna be higher soon, and I just think they’ve totally missed the boat. They missed the boat when they headed at negative rates, and this is just exactly why you have Liz Trust last 44 days in the UK. They just had to act and they’re gonna have to act in the ECB because you’re gonna see the ECB start to splint. You’re gonna have the southern states, Spain, and the traditional ones from 2012, Spain, Italy, Portugal, and Greece. And then you’re gonna have them pushing back against the Northern European countries and it’s gonna cause a lot of stress over there. And part of it is just bad policy decisions and. I mean, at least they’re making a step. But you know, they’re six months behind the US.
Austerity: Finally, speaking of the US, Nick Timiraos wrote on Wall Street Journal that Fed might slow down interest rate hikes.
C Thomas: He happens to be the current Fed whisperer. He is the person that waits patiently outside Powell’s house with his glass up to the door, listening, trying to get insights. And basically the insights that the Fed had were, it’s about time to slow down. We’ve been raising a 75, 75, 75. This will probably be a 75. But eventually they need to slow down from 75. That doesn’t mean they need to stop raising rights. Number one, they can just do it a slower rate, and that doesn’t mean that they’re gonna pivot and go lower, which I think a lot of people have been hoping for. And when that article came out and the stock market ripped on Friday and followed up on Monday, I think a lot of people are thinking: Hey, this is the time for the pivot. Listen, the pivot will probably come down the road, but we’re not there. There is not nearly enough stress in the system today for that to happen. So I think what we’ve got is we’ve got a Fed that’s going to start floating the, the balloon out there and trying to read the room and find out. How are the markets gonna react when this happens? And I think you saw that, and I think that’s the worst thing that can happen because the last thing the Fed wants is all of a sudden the market’s to go up and everybody to get all fired up again, that just means they’re gonna have to keep raising for longer.
So it was kind of a bad response to the article, but you know, I think they will have to start slowing down. So I think we can see 75 and maybe the 75 that they thought was gonna hit December might be only 50. But the fact that the matter is, is we’re still going higher for a while. At the beginning of the year, if you’d have said “we would’ve pulled off this many 75 basis point hikes”, nobody would’ve believed we’ve gotten this high. And I just think that, we thought we couldn’t get this high. All I know is the only way to break inflation is to take these rates and put them on top of the inflation rate. That’s how it’s always been done. That’s probably the way a drill will always be, and that’s what we’re gonna have to do.
So we need to help put the inflation coming down a little bit to help us. If not, we’re gonna have to keep going higher on these.