“Temporary inflation” is dead, long live temporary inflation


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Good morning.A few words from yesterday’s Covid article, it expresses that the United States may go to Austrian road This winter. Many readers wrote that the key difference is that Austria has a higher population density. Maybe will. But as my colleague John Burn-Murdoch pointed out, if a higher population density can explain the current outbreak, why was Austria’s infection rate so low before October? Its population has not suddenly become denser. Second, some of the states with the highest rates of new coronavirus infections in the United States are low-density states such as Alaska.

You will notice that neither Ethan nor I are epidemiologists, so now we return to familiar areas: the Federal Reserve and the environment, society and governance, or ESG, investment. Email us: [email protected] with [email protected].

RIP “temporary”

It’s time to abandon “tempority,” the Fed Chairman Jay Powell Tell the U.S. Senate on Tuesday. This term statement, coupled with the expression of support for faster downscaling, has stabilized the yield curve. As the two-year period was flat, the 10-year US Treasury bond fell by 9 basis points. Expectations of interest rate hikes are also moving forward: Tuesday, the market will faithfully set prices until March 2022. The stock market is irritable.

We have written in Temporary or permanent debate forward. No matter what word Powell uses, it will be angry. But considering that the word has generated all the heat, is it a bad idea to include “transitory” in the dictionary from the beginning?

Discussions on this term began to heat up in April, when the core inflation rate exceeded 3%. Powell told reporters that “these one-time price increases may only have a temporary impact on inflation.” By May, the word had entered the public consciousness. This is Google’s search for “transitory” in 2021 ( index Relative to the highest point on the chart):

But this concept has appeared before that, back to May 2019. At that time Powell used this word to describe a completely different situation. The inflation rate is about 1.6%, which is lower than the Fed’s target. Questions about the U.S. Central Bank’s commitment to a symmetric inflation target are growing. Powell was wary of this skepticism. He told reporters:

“We suspect that certain temporary factors may be at work… I will point out things such as portfolio management, service prices, clothing prices, and other things. In addition, the revised average inflation index has not dropped that much. In fact, Dallas The average pruning is 2%.”

Sound familiar? The suspects are different-portfolio management rather than used cars-but the story is the same. “What we are seeing (anti-)inflation is due to the disappearance of traits and keeping the underlying price trend intact. Also look at the trimmed average index.”

In Powell’s view, the appeal of “temporary” is obvious. Its message is that the Fed will not tighten policy due to an abnormal spike in inflation. This is a way to lower future interest rate expectations and ensure that the market does not have the classic “Fed error” without committing to a specific response to any data threshold.

But this concept can be misunderstood, as Powell said in his testimony in the Senate on Tuesday:

“So I think the word ephemeral has different meanings to different people. For many people, it carries [sense of] Time, feeling [being] Short-lived. We tend to use it to indicate that it will not leave a permanent mark in the form of higher inflation. I think it might be a good time to give up the word and try to explain our meaning more clearly. ”

“It will not leave a permanent mark in the form of high inflation” is clear enough: it means that after the inflation event ends, trend inflation will return to historical normal levels. This interpretation is consistent with the way Powell has always used the term. But this use is also compatible with inflation events that last for a period of time. But neither the market nor the public has heard of this degree of subtlety. So in the end, this short story is more confusing than enlightening.

It is a mistake to use this word like Powell, but it is just a small mistake.Powell has shown a willingness to adapt and invest at any time Data is above dogmaRemember: Powell’s patient response to inflation and his view that inflation will not last are still correct. If the inflation rate slows to 2-2.5% by the middle of next year at the latest, there will be no short-term feeling. But from a historical point of view, a period of inflation that lasted only a little more than a year—a real possibility—does seem very short-lived. (Wu Yusen)

Glencore and Bluebell

Bluebell is a smaller activist investor fund that has had some success in harassing companies such as Danone and GlaxoSmithKline. want to Commodity group Glencore divested its coal business into a separate entity. It believes that the split will increase the overall value because coal drags down the valuation of Glencore’s non-coal assets (mainly from mining and trading metals).

Bluebell believes that the coal business has a high capital cost to the rest of the business:

“Because of its coal business, Glencore is not an investable company for investors who put sustainability at the core of the investment process. This is a huge obstacle to investing in Glencore’s former coal business more broadly. ..

“It is necessary to clearly distinguish between carbonized assets and decarbonized assets in order to increase shareholder value and eliminate the’coal discount’.”

Bluebell believes that, regardless of sustainability, coal is a dying industry, and the ultimate value of Glencore’s coal assets is highly uncertain, which is another drag on the cost of capital.

Bluebell believes that the existence of ESG-driven coal discounts is likely to be correct (although this is not obvious: Glencore’s P/E ratio is similar to the multiples of EBITDA, which is similar to that of coal-free counterparts Anglo American and Rio Tinto. Before tax, depreciation and amortization). The rate of decline of the coal industry may be faster than market expectations, which is also very likely to be correct.

Bluebell’s view that Glencore’s divestiture of its coal assets will help fight global warming is completely wrong. Glencore has pledged to gradually reduce and close its coal assets over the next 30 years, but Bluebell stated:

“The simple concept that thermal coal should continue to be part of Glencore’s portfolio before 2050 is morally and financially unacceptable for us as shareholders of the company.”

The inevitable implication is that it is morally better to divest coal assets than not to divest them. Why?

“The world is turning to net zero, and capital allocation is the key driver to accelerate this transition, because carbonized and decarbonized assets have begun to attract distinct capital pools at very different costs. By separating different businesses [carbon-dioxide] Footprints will likely promote the redistribution of global capital to more sustainable companies, which in itself is a powerful force for decarbonization. The reverse is also true. By preserving a low-impact and high-impact carbon dioxide asset portfolio, it is almost impossible to use capital redistribution (that is, through the capital market) as an engine for sustainable development. ”

The idea here is that when coal assets are in a separate entity, that entity will have a higher cost of capital (lower stock price, higher yielding bonds), and therefore less funds are invested in coal mining, resulting in Less coal burns less carbon in the air. This is nonsense from front to back.

How much a hypothetical new entity will invest in coal assets also depends on the rate of return on capital for mining coal, not just the cost of capital. Divestment activities drive these returns by reducing the purchase cost of coal assets and limiting coal supply (assuming stable demand). Obviously, the balance between the cost and return of mining capital in the next few years will lead to a decrease in coal mining.

In addition, there is no reason why capital cannot be redistributed from coal to non-coal in a compound investment portfolio. Bluebell complained that such cross subsidies are economically inefficient, which is controversial and is a separate issue anyway.

Lanling also tried another argument:

“By transferring existing internal coal expertise to a separate entity-committing to apply the same (and possibly more stringent) coal ESG policies currently implemented at the Glencore Group level-it is possible to remain unchanged Spin off coal (and possibly improve) the company’s existing commitment to responsible ownership.”

The argument is that when the coal business is separated and all shareholders who do not like to own coal are sold to investors who are completely happy to own coal, the sustainable development policy of coal companies will not get worse, and may even be improved. This is a lunatic.

Glencore’s divestiture of the coal business is ethically neutral and has nothing to do with the environment, but it may be a good move financially.

A good book

Unhedged learned from a colleague who wanted to remain anonymous for some reason that pop star Avril Lavigne died in 2003 and was replaced by a stand-in, which shocked Unhedged. Wild stuff.

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