Category Archives: markets

Mistake

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President Donald Trump (R) is pushing Congress to include in its next budget enactment a 50% increase in the US quota contribution to the IMF, a dollar increase of some $55 billion.

The mistake is in this:

the cost to US control over IMF resources, which Treasury conceals with its claim in the budget that the “equiproportional” quota increase “would be fully offset by a reduction in” the use of debt, “all of which will keep the IMF’s overall lending capacity constant.” What Treasury doesn’t disclose is the hit to US power when the IMF gets more of its resources from equity than debt.

That hit comes from voting on IMF lending which depends on the fund’s use of debt via New Arrangements to Borrow which it does in order to raise lendable monies. This is loosely akin to a bank’s need for extending savings accounts to customers in order to raise funds to lend to other customers.  It takes approval by 85% of IMF voting shares for the IMF to borrow, and the US has had, heretofore, 16% of the voting shares, giving us veto power over IMF’s borrowing.

So long as the IMF has to borrow to lend, the US can exercise a large measure of control over IMF lending. But the US quota increase would shift the IMF’s ability to lend to those quota funds, and with that shift, the US would lose its current voting veto power, IMF could lend without serios oversight.

One upshot of all this, if it is passed, is an increase in the People’s Republic of China’s ability to borrow from the IMF and thereby to prop up its own internal excessive borrowing. And helping out an enemy nation like that is a very serious mistake.

Regulating Reputational Risk

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Progressive-Democrat ex-Presidents Barack Obama and Joe Biden used their banking regulators to “encourage” banks to do no businesses that might inflict “reputational risk” on the bank’s soundness and to end existing business relationships with such enities. Those reputation-damaging businesses—according to those administration men—centered on such Nasties as payday lenders, gun retailers, and crypto.

By focusing on reputation risk, supervisors attempt to understand and anticipate public opinion regarding issues and events and then to attempt to directly connect this public opinion regarding issues and events to an institution’s condition in ways that have proven nearly impossible to assess or quantify with accuracy[.]

Those are the words of the Federal Deposit Insurance Corporation and Comptroller of the Currency bosses as they work on a rule that would bar regulators from “reputational risk” evaluations. If regulators can’t quantify what it is they want to regulate, they have no business trying to regulate it—that’s on top of regulators need to be limiting on their regulatory activities in the first place.

Reputational risk assessments in particular are entirely subjective, and that just excuses and enables administrations of whatever stripe to regulate out of business any enterprise of which the regulators or their political bosses disapprove.

The market is fully capable of assessing reputational risk, and it should be left free to do so without government “assistance.”

That’s One Spin

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The DC Circuit Court has denied Anthropic’s appeal of a DoD decision to cut the company out of Defense contracts as a security risk to Defense supply chains. Meanwhile a Northern District of California Federal court judge has upheld Anthropic’s appeal on free speech grounds. This, of course, creates a split of sorts that, ultimately, the Supreme Court will need to resolve, unless the 9th Circuit overrules the District judge wih a ruling that substantially aligns with the DC Circuit.

What’s interesting, though, is Computer & Communications Industry Association CEO Matt Schruers’ characterization of the split.

The DC Circuit’s denial will prolong ambiguities regarding whether political considerations can drive federal procurement[.]

This is Schruers’ conclusory characterization centered on his preferred outcome. It couldn’t possibly be the California district judge’s ruling that is prolonging ambiguities.

Not Sure This Is Correct

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James MacIntosh, writing for The Wall Street Journal, is worried about the Fed worrying too much about its last mistake regarding inflation, when it was too slow to respond to rising prices. For instance,

But there’s a fundamental difference between the new oil shock and the postpandemic boom. Inflation today, already visible in rising prices at the pumps, is driven by restricted supply as Iran cuts off oil and other shipping through the Strait of Hormuz. The 2021-22 inflation was driven by soaring demand as stimulus-rich consumers emerged from enforced hibernation during Covid lockdowns.
Central banks know how to deal with too much demand. They should have raised rates much earlier than their eventual 2022 rises to hold back borrowing and spending. Today, they can’t do anything about the hit to supply, because, as the saying goes, you can’t print oil.

The problem with this, though, is in the relationship between inflation—rising prices—and rising—”too much”—demand. Rising prices occurs because demand is rising faster than supply can rise to satisfy it; it does not occur simply from rising demand. If we want more stuff—here oil—and the production of oil exists to satisfy that rising demand, prices don’t rise; there is no inflation.

Inflation is always and only in the relationship between demand and supply; it is never in demand alone or in supply alone. The only way there can be too much demand if there’s too little supply (the other side of this is true, too: the only way there can be too little demand is if there’s too much supply, which results in falling prices—deflation). More demand than supply can satisfy and less supply than can satisfy demand are the same thing.

So, what can/should the Fed do about today’s too little supply of oil relative to the demand for it and the consequent rise in prices? Its mandate, aside from full employment, is price stability: no change in price level, or via its goal, keeping price increases to 2% inflation. The Fed’s tool for this interest rates, which is to say here, reducing demand by raising the cost of the money that is that demand. Thus: raise interest rates when that inflation gets out of hand/rises too far above that 2% in a sustained upward trend. This is wholly independent of both supply and demand individually and responsive only to the relationship between the two.

The problem here is that “out of hand,” “too far above,” and “sustained” are each individually only hazily defined criteria. My own opinion is that with employment, which is a consequence of stable prices as well as its own economic condition, close to full and stable and currently rising prices not yet out of hand or too far above 2% or on a sustained upward trend, the Fed should do nothing more than keep a watchful eye. Trying to time the market with enough precision to preempt inflation without cutting off growth is as much a fool’s errand as an individual investor’s timing with a view to precise top or bottom picking.

This also is consistent with my view that current interest rates are consistent with (if a bit lower than) interest rates that historically are associated with 2%± inflation, so there’s nothing generally that the Fed needs to do.

Another Issue

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Recall the theft of nearly 414,000 units of KitKat bars while enroute from Poland to Italy. Nestlé and other companies publicized and otherwise reacted to the theft with humor, turning the theft into a marketing success for those companies.

Nestlé, though, has not lost sight of the seriousness of the matter.

Nestlé said it had publicized the incident with humor to raise awareness around the more serious issue of thievery. In this case, it added, the risks are low since the theft won’t affect supply and the chocolate bars can be traced by unique product codes.
“Whilst we appreciate the criminals’ exceptional taste, the fact remains that cargo theft is an escalating issue for businesses of all sizes,” the company said.

My paranoid (or conspiracy theorist) mind has an additional concern, though. For all that the stolen bars can be traced by their product codes, those bars would make excellent devices with which to attack children by inserting nefarious items into the bars, items ranging from drugs to ground glass to metal shavings or staples. Keep in mind the dangers of Halloween candies. This could become an extension of that.