No Chicken in Nando's, No Chips at Nissan, No shakes at MacDonald's. Empty shelves are increasing. The head of the Co-Op said food shortages were the worst he has ever known.
Evidently not a war baby, CEO Steve Murrells announced the group was reducing some ranges. The ability to get food into stores was hit by post Brexit migration rules and Covid challenges.
A lack of fruit pickers, food processors and lorry drivers to blame for part of the crisis, businesses are pleading for a relaxation of rules on visas and an acceleration of test and training for new drivers to ease supply problems.
This week, once again, the car industry reported production difficulties. Output fell by 37% last month. It was the worst July performance since 1956. Manufacturers "grappled" with the global shortage of semi conductors. TSMC, the Taiwan Semi Conductor Manufacturer moved to ease the supply crisis by hiking prices 20%.
Will empty shelves damage growth?
Not according to the latest "Forecasts for the UK Economy" published by HM Treasury. The average forecast for GDP growth in 2021 remains at 6.9%. The more expansive forecasts have been tailed back.
JP Morgan is now forecasting growth of 7.1%. Capital Economics expects growth of 6.7%. Goldman Sachs is even more nervous about prospects for the UK. The American Bank is forecasting growth of 7.1%. Our Saturday Economist central forecast, we may lower perhaps to 7.0% on the next data release in September. We still expect growth of over 5.0% in 2022, slowing to perhaps 3.5% in the following year, thereafter reverting to trend growth of around 2% in the years to follow.
Over the next five years, the economy will grow by over 20% in real terms and by over 30% in nominal terms. The additional revenues to the Treasury will be almost £250 billion in the period. The latest borrowing figures suggest the total borrowing this year could fall below £175 billion. In March the Office For Budget Responsibility was expecting borrowing to hit £234 billion.
Inflation fears are increasing. CPI inflation is expected to average over 3% in the final quarter compared to just over 2.5% expected last month. The July 2% CPI level reported is dismissed as an anomaly.
Our Labour Market Chart Book has an update on the latest data. Analysis of wage trends suggests rates of increases will fall towards 3% by the end of the year. We await with interest the end of the furlough scheme. I.6 million unemployed, 1.9 million on furlough and 1 million vacancies in the economy will make for an interesting unwind towards the end of the year …
Taper Tantrum ...
In the U.S. the Office of Management and Budget expects consumer prices to rise by 4.8% in the fourth quarter. This is up sharply from the 2% rise the Biden administration had forecast in May.
Inflation is always and everywhere a transitory phenomenon. Price pressures will ease next year. The consumer price index is expected to increase by 2.5% in the fourth quarter of 2022.
Markets awaited with interest the update from Fed Chair Jerome Powell this week, at the Jackson Hole virtual symposium. The central banker hinted the Fed could start scaling back stimulus this year. The inflation surge is expected to be temporary. There was no prospect of a rate rise anytime soon but some tapering of asset purchases could begin before the end of the year.
"At the FOMC's recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July".
No taper tantrum in the markets. The Dow, S&P and Nasdaq closed up in the week. The S&P and Nasdaq closed at record highs. The Dollar moved lower against Sterling and the Euro. Ten year bond yields moved up six basis points closing at 1.32.
The Fed has made it clear rates remain on hold. The asset purchase tapering may be confined to Mortgage backed securities in the short term. The Central Bank will have to fulfill the role of "Buyer of Last Resort" of government bonds until the level of government borrowing falls within the capacity of the private sector. That may not be for some time yet.
The Warren Buffet Valuation index moved to a record high reflecting a near 90% over valuation compared to historical average. Don't Miss Our Special Update "Red Dots In The Sand: When Will Markets Collapse."
That's all for this week. It's good to be back. We have been working on our series on Digital Accommodation during the break with special updates for Premium Club Subscribers. We will be back with more next week. Want to be sure? Join the Club, become a Premium Subscriber, don't miss out …
"All great deeds and all great thoughts have ridiculous beginnings" Albert Camus.
Wall Street predicts the equity bull run will continue. Some investors worry the market already reflects high levels of optimism. The markets may be subject to "adjustment".
So what can sand pile theory tell us about the behaviour of markets? Imagine, the world is modeled on a simple template, like a steep pile of sand, it is poised on the brink of instability. Avalanches, in events, ideas or markets, follow a universal pattern of change.
At any time markets can achieve the Minsky Moment, the "brink of instability". The moment when speculative activity reaches a critical point that further expansion is unsustainable. Any further move or falling grain of sand, leads to rapid price adjustment and market collapse.
So how can we spot the Minsky Moment, that critical point when over speculation in markets will lead to collapse? It is time to count those red dots in the sand, As Mark Buchanan in his 2000 book "Ubiquity" explains.
The story begins with three physicists playing with sand in America. In 1987, three physicists at Brookhaven National Laboratory in New York State began to play a strange game
Per Bak, Chao Tang and Kurt Weisenfeld were trying to imagine what would happen if someone were to sprinkle grains of sand one at a time onto a table top. As grains pile up it seems clear that a broad mountain of sand should edge slowly skywards. Yet things obviously cannot continue in this way indefinitely.
As the pile grows the sides become steeper. It becomes more probable the next falling grain could trigger an avalanche. Sand would then slide downhill to some flatter region below making the mountain smaller not bigger.
In the process the mountain would ultimately grow and then shrink. A jagged silhouette forever fluctuating in dimension and shape.
What is the typical rhythm of the growing and shrinking sandpile ...
Bak, Tang and Weisenfeld wanted to understand those fluctuations. What is the typical rhythm of the growing and sinking sandpile?
Dropping sand one grain at a time is a delicate and laborious business. So in seeking some answers Bak and his colleagues constructed a computer model which would drop imaginary grains of sand onto an imaginary work top. Using the model, a pile would grow in seconds rather than days.
I was so easy to play, the three physicists soon became glued to their screens, obsessed with the falling grains and watching the results. They were to ask several basic questions. What is the typical size of an avalanche? How big should you expect the next avalanche to be? What determines the trigger point for an avalanche event?
The researchers ran a huge number of tests, counting the grains in millions of avalanches, in thousands of sand piles. looking for the typical number involved.
The result? There was no "typical" avalanche. Some involved a single grain, others, ten, a hundred or even thousands. Others were pile high "disasters" involving millions, which nearly brought the whole sand mountain tumbling down. At any time, anything, literally anything could be about to happen. The pile was completely chaotic in its unpredictability.
To try to understand why this was the case, Bak and his colleagues amended the model to colour the sand pile according to its steepness. Where it is relatively flat and stable, the pile was coloured green, Where it was steep and "ready to go" it was coloured red.
At the outset, the pile was mostly green. As the mountain grew, the green became interspersed with more and more red. With more grains, the scattering red dots grew until a dense skeleton of potential instability ran through the pile.
They discovered a grain falling on a red spot, can by a domino effect, cause sliding at other near by red spots. If the red network was sparse, and all trouble spots were well isolated from each other, then a single grain would have limited repercussions.
When red spots, riddled the pile, the next grain to fall would become "fiendishly unpredictable". It might trigger only a few tumblings, or it might instead, set off a cataclysmic chain reaction involving millions.
The sandpile configures itself into a hypersensitive and unstable condition in which the next falling grain could trigger a response of any size whatsoever. This hypersensitive state is known as the "critical state. This applies to markets, just as it does to piles of sand.
Every Avalanche Starts Out the Same Way ...
The surprising conclusion is that even the greatest of events have no special or exceptional causes. Every avalanche starts out the same way. A single grain falls and makes the pile just slightly too steep at one point.
'What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size." Mauldin
The Hyman Minsky Financial Instability Hypothesis is a model of a capitalist economy which does not rely upon exogenous shocks to generate business cycles of varying severity. The Minsky Moment defines the tipping point when speculative activity reaches a critical point that is unsustainable, leading to rapid price deflation and market collapse.
The Minsky Moment is the critical moment identified in the model of the sand piles. More grains of sand are added. Momentum will lead to a growing pile until the critical point is reached. Many red dots in the sand will lead to a cataclysmic collapse affecting millions. Every avalanche starts out the same way. A single grain falls and makes the pile just slightly too steep at one point triggering a cataclysmic reaction. We can never know exactly when and where the critical grain of sand will fall ... but fall it will ... eventually ...
Ubiquity, Why the world is simpler than we think; Mark Buchanan 2000
Thoughts from the front line ; John Mauldin August 2021
The Financial Instability Hypothesis; Hyman P Minsky 1992
The Saturday Economist
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