By Alejandro A. Tagliavini *
Uncertainties are growing again in financial markets because, predictably, politicians are not willing to disarm the power they won – state controls and restrictions – with the excuse of the “pandemic” and, therefore, the global economic recovery slows.
At the same time, a withdrawal of stimuli is foreseen in the US (the “tapering” of the Fed, a reduction in debt purchases, which would be announced at the September meeting) with which, in the face of less issuance, the market knows the dollar will strengthen.
In case some clueless have not yet realized that inflation is the devaluation of the currency because of an excess of supply over demand, the following graph shows how, as the central banks increased issuance (exceeding the demand), currencies depreciated compared to gold:
Devaluation which, as can be seen, was the inverse of the issuance (exaggerated, on supply):
In addition, the dollar has benefited from widening interest rate differentials between US and foreign bond yields. And there the capital flows, by the way, hurting the emerging economies that are seen with less investment and with the prices of raw materials falling, in dollars, such as oil and copper that have fallen sharply in recent weeks, and both have plummeted more than 15%.
Thus, the euro depreciates 5% from the maximum of USD 1.23 on January 6 and is already close to the minimum zone of the last year, specifically at November 2020 levels, below 1.17. While the experts at BofA Global Research estimate that it will be around USD 1.15 by the end of the year.
Personally, I believe little in graphics like the following one and in mathematics applied to economics -econometrics- since the human being and, therefore, the market cannot be mathematized. Studying mathematical analysis in the engineering faculty, I understood that mathematics is not strictly a science but a scientific language and, as the excellent economist Juan Carlos Cachanosky said, prose language is much more appropriate, flexible, and rich to express human behavior than the mathematician who applies to inert and, therefore, physically immobile bodies.
With the clarification made, the dollar index, although it started the week down to around 93, has been going up for weeks and, according to Michael Kramer, it would be right now in the process of breaking a critical level of resistance, and once that break is complete , it should have plenty of room to move up and create a technical bullish formation known as the “double bottom” pattern that was created when the dollar index bottomed in January and again in May 2021. The dollar index would need to overcome resistance around 93.50 to confirm the double bottom and break out of this pattern. A rally to around 94.60 in the index is likely to be driven, but a breakout could take it as high as 98 over time, according to Kramer:
By the way, considering the significant advance of the S&P 500, it might not be immune to its long-term effects. In fact, the Buffett indicator is very “bubbly”. Given high inflation – in US historical terms – equity markets have decoupled – rising above – the real economy. World market capitalization now equals 139% of global GDP, well above Buffett’s 100% bubble threshold:
Although, on the other hand, without spending cuts and without the sale of state properties, the US government cannot lower the emission much either since it does not have as much room to continue raising taxes without severely damaging the economy, that is, without causing the GDP to fall, which, in a vicious circle, would cause a fall in the demand for currency and, therefore, a rise in inflation even with less issuance. The number of wealthy Americans who renounce their citizenship in pursuit of lower taxes and greater freedom is rising dramatically: 6,705 in 2020, or 260% over 2019 when 2,577 resigned.
In short, as for Argentina, as Roberto Cachanosky points out, so far this year the official exchange rate has increased by 11% and the CPI by 29.1%. Although the government denies it, “Hopefully the earthquake is after the elections,” says Cachanosky:
The truth is that the recent decline in official “inflation” (variation in the CPI calculated by Indec, strictly speaking) is based, in part, on the sharpening of the regulated prices freeze. To put it in numbers, in the July CPI, which gave a 3% increase, core “inflation” was 3.1% while that of regulated prices registered a variation of 1.4%. For the period of the last 12 months, against a general “inflation” of 51.8%, the “core” was 55.4% while regulated prices rose 37.1%. While the REM of the BCRA estimates an “inflation” -increase in the CPI- of 2.8% for August, 2.7% for September and November October 2.7% but a break in the trend is already expected with upward momentum.
Now, precisely because of regulated tariffs, as pointed out by Invecq, the item with the fastest growth speed in public spending is energy subsidies, which had an annual variation of 59.3%. In contrast – and in open contradiction to the official discourse – the main saving was the drop in spending for pensions, which are 5.5% below 2020. This implies that subsidies already represent 19% of public spending. Ultimately, everything points to the fact that the gap between free and regulated prices will not only remain, but also has a high chance of widening.
Meanwhile, the “blue” dollar -which, without being perfect, is the best indicator of real inflation since it is the one that most freely expresses the devaluation of the peso- remains relatively stable since the issuance is still not so excessive compared to a demand that increases due to the economic rebound and, ironically, due to inflation that requires more currency to buy the same good. In July, the BCRA transferred $ 180,000 million, or 6% of the monetary base, which, if we discount the rise in the CPI and GDP, is close to zero.
According to Indec, there would be a strong recovery in the industry, so the use of installed capacity in June was 64.9%, which means an increase of 11.6 points compared to last year. If we compare it with May, utilization shows an increase of 3.4 percentage points. While the Government aspires to end 2021 with rebound growth that exceeds 7% of GDP. Rebound that goes to show that, precisely, to the extent that the economy is freed- with respect to the restrictions due to quarantines in this case – it grows.
By the way, another indirect way of measuring inflation or, rather, the results of inflation are the wages that depreciate as the economy falls – ergo, productivity – because of the excess emission that means resources taken from the market. – by depreciating the currency – to spend them inefficiently by the State.
The wage index grew 2.3% in June compared to May, the lowest so far this year. Once again, the total wage index for June was below the “inflation” – the rise of the CPI, strictly speaking – for that month, which was 3.2%, that is, a fall in the real wage index of almost 1% compared to the previous month. While, compared to June of last year, total nominal wages have increased 43%, which implies a real fall -in terms of local purchasing power- of 5% but a rise compared to blue that increased only 32%. In other words, globally – in a world without customs – the Argentine worker would have seen his purchasing power grow.
This shows that the rise in the CPI, strictly speaking, is not showing real inflation, but rather the updating of delayed prices (from last year’s strong money emission, inflation) precisely due to the fixed official exchange rate and regulated prices. In other words, the pegged exchange rate and regulated prices are causing a lag and a drop in consumption because of the drop in wages compared to the CPI, which is, ironically, inflationary since it supposes a drop in GDP, ergo, in the demand for money.
As can be seen in the following graph -measured in pesos, in blue dollars it would be different-, the only way to increase real wages is to increase productivity, the increase has never been achieved by a government decree, in fact, trying to increase it by decree or by fiscal “stimuli” always tends to end in inflation, ergo, in devaluation of wages:
*Senior Advisor, The Cedar Portfolio