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Got a problem? Issue stimulus, problem solved, vote for me!

"Nothing is as permanent as a temporary government measure" as the saying goes!

While some of the pandemic support measures have rolled off as economies try to return to normal, there will always be a temptation to reopen this playbook every time any area of the economy is under stress.

Pandora's box has been opened.

Hints of this already in France, where finance minister Bruno Le Maire said he was in favour of petrol cheques to help with rising energy prices rather than lowering VAT on fuels...

Higher energy prices bring a higher VAT intake, estimated at โ‚ฌ2.5 billion, yet the French government is already committed to spending more than โ‚ฌ5 billion to help households with these energy bills.


Cutting VAT on energy below the 5% threshold also goes against EU rules.

Over the pond, the UK is considering cutting VAT on domestic energy bills now that they are free of those EU shackles.

During the 2016 Brexit referendum campaign, one of Vote Leaveโ€™s promises was that โ€œfuel bills will be lower for everyoneโ€.
โ€œWhen we Vote Leave, we will be able to scrap this unfair and damaging tax,โ€ Johnson and other Brexiters said in a joint statement.
โ€œIt isnโ€™t right that unelected bureaucrats in Brussels impose taxes on the poorest and elected politicians can do nothing.โ€

Cut taxes or dish out 'vouchers'.

Two different levers to produce the same result.

Households are under pressure with higher energy costs.

It wouldn't be surprising to see more of this type of targeted stimulus in coming years, especially in EU countries where rules are made to be broken/ignored and tax cuts are harder to pass.

Same effect, different branding.

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BOE are about to panic, implode and aggressively raise rates (but not really...)

"That's not what I said, you absolute f**kfaces"

It's all kicked off after Governor Bailey's weekend comments that the BOE "will have to act" to curb inflation...

The UK 2 year gilt had a massive 14bps move on the back of this (from 0.586% to 0.748%) as earlier rate hikes were priced in... ๐Ÿ‘‡

Goldman have piled in too, and say that the BOE is likely to raise rates at the November meeting.

Lots of fun to be had but what did the Governor actually say?


Key Point: "IF we see a risk particularly to medium-term inflation & inflation expectations"

Are the BOE currently seeing that?

The minutes for the September meeting specifically referenced some medium term measures of inflation expectations ๐Ÿ‘‡

  • Five-year inflation swap rates, five years forward, an indicator of medium-term inflation expectations, had increased slightly and were around 20 basis points above their 2019 average
  • Indicators of householdsโ€™ medium-term inflation expectations had increased in recent months, with the Citi/YouGov five-to-ten year ahead measure at its highest level since 2013 in September.
  • The Bank/Kantar five-year ahead measure of householdsโ€™ inflation expectations had also increased slightly, but was now around its historical average.
  • There was the potential for short-term measures of householdsโ€™ expectations to rise further in the coming months, as they had tended to move with official inflation outturns previously. Such movements in these short-term measures would not be inconsistent with household inflation expectations remaining anchored

Hardly out of control yet...

Meanwhile, both the BofA & GfK consumer confidence surveys show a drop in morale...

Bank of America economist Robert Wood: "Our proprietary UK consumer confidence indicator continued to drop over the past two weeks, reaching the lowest since February on our 7-day moving average,"
The survey showed inflation expectations rose by 60 basis points from August, with almost a third of Britons now expecting inflation above 5% in five years' time.

Joe Staton, Client Strategy Director GfK: โ€œOn the back of concerns about rising prices for fuel and food, the growth in headline inflation, tax hikes, empty shelves and the end of the furlough scheme, September sees consumers slamming on the brakes as those already in economic hardship anticipate a potential cost of living crisis.โ€

If consumers stop spending due to concerns about the cost of living, will inflation expectations continue to rise or does the focus shift to growth concerns instead?

Besides that, is it the right response and would any decision to hike in November even be unanimous?

Tenreyro said last week: "Typically, for short-lived effects on inflation, such as the big rises in the prices of semiconductors or energy prices, it would be self-defeating to try to respond to their direct effects,"

Doesn't exactly sound convinced...

This change in expectations seems far too aggressive ๐Ÿ‘‡


Four hikes in the next year, and at one point this morning markets were pricing a return to 0.5% by the end of this year!

If the BOE do follow through with a rate hike at the November meeting it will surely be served with a huge dose of cold water for anyone expecting an aggressive hiking cycle.

On the plus side, if they do follow through, it'll be the perfect reason to ditch Bailey and start my campaign to get Tenreyro appointed as Governor... ๐Ÿ˜

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Disruptive Innovations are the backbone of growth and Citi have published their latest edition ๐Ÿ‘‡

Ten More Things to Stop and Think About

  • Innovation in healthcare. mRNA was largely unproven in 2020 despite decades of scientific research, but today has become one of the most powerful weapons against the pandemic.
  • The introduction and increasing popularity of non-fungible tokens (NFTs) coupled with the transition of retail into the metaverse highlights the blending of fintech with both consumer and gaming.
  • Semiconductor manufacturing is on the verge of transforming from two-dimensional to three-dimensional architecture, which could increase the speed of chips by five-fold.
  • Artificial intelligence could be coming to your next flight, protecting both your health and your safety.
  • Removing carbon dioxide for the benefit of the planet
  • Ammonia as a source to fuel jet engines.
  • Finally, we explore how to close the recycling loop using de-polymerization methods that will cut down on plastic waste filling our landfills.

Well worth a read for some ideas on what the future might hold.

Plastic Recycling is a sector that I like a lot.

In my simple model of the world, everything else is inferior, so the incentives don't really exist to use less plastic.

You ban plastic straws & get crappy paper ones that fall apart while you're drinking.

For a solution to last things need to stay roughly the same quality (but you get to feel good about 'saving the planet' while using them) or (ideally) they're simply better than the predecessor. ย 

It looks challenging to really scale up the recycling side although Citi point out that the global polymer recycling market is forecast to grow from $48 billion in 2020 to $162 billion in 2030. ๐Ÿ‘‡

$48bn not $148bn

The share of advanced recycling technologies is expected to grow from ~10% to ~40% from 2020 to 2030.
Demand for sustainable plastics is being driven by both end-consumers and downstream brands.
Large consumer brands have all made commitments to use more recycled materials in their products, including using a minimum of 25% post-consumer recycled plastics by 2025.

Climate change debates will evolve from the generalised/energy focused approach we see currently, and become far more incentivised to address specific issues such as plastic recycling and other less glamorous areas.

Definitely a sector to keep an eye on for the future.

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