Good Results in US Inflation Outlook and Retail Sales — UK Failed State of Poor Leadership — IMF and World Bank Warnings — US Dollar Hegemony Threatened by Indonesia and Saudi Arabia - [10-16-2022]

Direct from BOOM Economics at the links below - note - BOOM uses American English whereas AP uses British English.

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THIS WEEK’S EDITORIAL

GOOD RESULTS IN US INFLATION OUTLOOK AND RETAIL SALES:  In the last few weeks, BOOM suggested readers watch closely on 13th October and 14th October for the US data releases for September inflation and retail sales.

The annual inflation rate in the US slowed for the third month running to 8.2% in September, the lowest in seven months, compared to 8.3% in August. That was not a great result but it could have been far worse and suggests that the CPI inflation threat may be over its peak. The CPI Index was static for the 4th month at 296.8. The Core Inflation Rate rose by 6.6%, a touch above the expected consensus figure of 6.5%.

Cost of energy in the US increased at a slower 19.8% Year-on-Year in September, easing from a 23.8% rise in the previous month. That was the lowest reading since March of 2021, amid a further slowdown in gasoline costs (18.2% from 25.6% in August) and electricity (15.5% vs 15.8%). The cost of food fell (slightly). US consumer inflation expectations for the year ahead fell for a third consecutive month to 5.4% in September, the lowest in a year, from 5.7% in August.

Most of those results were relatively good news. Why? Because they could have been much worse.  In response, the stock market roared upwards through the day.  But, worryingly, services inflation increased to 7.37% in September from 6.81% in August. Services inflation must start to fall before the “all clear” can be reliably called.

The core PCE annual rate, which is the Federal Reserve’s preferred gauge of inflation, will be released on Friday 28th October. It rose slightly in August.  If that falls in September, then everyone can breathe more easily.

The US Retail Sales report came in at Zero growth, unchanged in September Month on Month. As the US economy is heavily reliant upon consumers, that is also a relatively good sign indicating a slowing of economic growth. Retail sales Year on Year fell to 8.2 % That is a promising result. Personal Spending numbers for September will also be released on the 28th October. If that falls in September, then everyone can breathe more easily.

So, overall, the inflation statistics and retail sales figures were a good result, offering some firm evidence that the peak of CPI inflation may be in the past. If we are past the peak, then the prices of stocks and bonds should start to rise from here and the Federal Reserve can put further interest rate increases on hold or reduce the rate of rise. Watch closely for Core PCE inflation annual rate and Personal Spending releases on 28th October.

UK FAILED STATE OF POOR LEADERSHIP:  BOOM has often written about the United Kingdom’s poor leadership and the poor outlook for the UK economy. Boris Johnson’s Prime Ministership was a constant source of bemusement but Boris is now thankfully gone, replaced by Liz Truss. Last week’s editorial included this sentence — “The UK may be headed towards a Failed State situation along with South Africa. Poor political leadership and gross incompetence from selected leaders is the cause.”

However, even BOOM did not predict that within 5 days the UK Chancellor of the Exchequer, Kwasi Kwarteng, otherwise known as Akwasi Addo Alfred Kwarteng, would be removed and replaced. His “banker led recovery” strategy lasted for just a few short days before the people of the UK demanded his resignation.

The Prime Minister, an “old friend” has now thrown him under the bus. He has been replaced by another poorly selected, ambitious “leader”, Jeremy Hunt. He is a fifth cousin of Queen Elizabeth and a descendant of Sir Streynsham Master, a pioneer of the infamous East India Company. He was educated at Oxford University where he became involved in Conservative Party politics at an early age and was close to Boris Johnson. When Boris Johnson became Prime Minister, he said “I think Boris will be a great Prime Minister”. That statement reveals very poor judgement. He was a strong supporter of Britain remaining in the European Union. His support for a return to the EU will soon be tested now that he is the Treasurer of the UK.

Last week, BOOM referred to an hypothesis that incompetent Western politicians have been carefully selected when they are young on the basis of being recklessly ambitious, energetic, inadequately educated, uninterested in factual analysis, essentially immoral and willing to do “whatever it takes” to solve ill-defined problems. Hunt’s public admiration for Boris Johnson is an indication that he is cut from the same cloth.

We shall soon see if Jeremy Hunt can meet the challenge of his new job. It is highly likely that his Prime Minister, Liz Truss, will soon be gone. The door will then be ajar. Will Hunt rise to the Prime Ministership and take the UK back into the European Union? That is surely a possibility.

The original proponents of the EU are not happy to see the UK gone and they will fight hard to get it back. They seek to control all of Western Europe including the United Kingdom. They also seek to control the entire planet.

In BOOM’s estimation, Hunt’s assessment that Boris Johnson would make a “great Prime Minister” and his enthusiasm for the European Union taken together show him to be a man who lacks the ability to rescue the United Kingdom from its predicament. All the advanced Western economies need wise, thoughtful Statesmen in the current circumstances. They do not need more incompetence from brash, ill prepared, reactionary leaders. Hunt must prove himself in the most difficult of circumstances. The world will be watching. BOOM is not expecting a good outcome.

IMF AND WORLD BANK WARNINGS:  The International Monetary Fund (IMF) and the World Bank have both warned of a global recession. Kristalina Georgieva, the Bulgarian Managing Director of the IMF and David Malpass, the President of the World Bank used almost the same words last week. “There’s a risk and real danger of a world recession next year”. And “the risk of recession has increased”.  BOOM agrees with this assessment and expects signs of global economic contraction to appear in the third quarter of this year.

However, these two institutions are famous for getting things wrong about the future. Their economic forecasting teams almost always make mistakes, being either too optimistic or too pessimistic. Optimism is their most common fault.

In its latest World Economic Outlook report, the IMF cut its forecast for global growth next year to 2.7%. In July, they had forecast 2023 growth at 2.9% and in January, they expected 3.8%. So they are progressively becoming more pessimistic about the future outlook. They added that there was a 25% probability that growth will slow to less than 2%.

However, these official forecasts are more optimistic than their Managing Director stated last week. She is not expecting a slowing of growth but a contraction.  Since early this year, BOOM has been consistently predicting a significant global recession beginning towards the end of 2022. It looks like the IMF and the World Bank are slowly joining BOOM in this assessment.

US DOLLAR HEGEMONY THREATENED:  The central bank of Indonesia has expressed deep concerns about the dominance of the US dollar being used to effect trade transactions. It has called for a switch to local currencies in international payments to reduce dependence on the greenback.

Most of Indonesia’s international trade transactions are conducted in foreign currencies, predominantly the US dollar. In fact, 90% of their export-import settlements are in US dollars, when the value of Indonesia’s direct exports to the US is only 10%, and the value of US imports is only 5%.

A spokesman for Bank Indonesia made these statements at a conference on Utilizing Local Currency Settlement (LCS) to Increase Export-Import Efficiency. He said four countries have agreed to utilize LCS with Indonesia so far, namely China, Japan, Thailand and Malaysia. He indicated that Singapore will be next and soon the Philippines. The implementation of Local Currency Settlement with Saudi Arabia is also being explored.

SAUDI ARABIA MOVING AWAY FROM US ALLIANCE:  Saudi Arabia’s decision last week to cut its oil production has caused great tension with the United States. In the so-called “rules based international order”, this is a slap in the face to the US. Remember, cynics say that the US makes the rules and you must follow the orders. Or else.

US senator, Bob Menendez, chairman of the Senate Foreign Relations Committee, wishes to block all future weapons sales to Saudi Arabia. He is also urging the Biden administration to “immediately freeze all aspects” of U.S. cooperation with the kingdom in response to its decision to cut oil production. In a statement last Monday, Menendez said the decision helped to “underwrite” Russian President Vladimir Putin’s war.

BOOM has often written about Saudi Arabia’s increasing connections to Russia and China, particularly in regard to making large investments in the Petrochemical industries in both nations. China is now Saudi Arabia’s major trading partner and Saudi Arabia has been increasing its investments in Russia and China for some time. In March, after a long period of negotiation, it made the final investment decision to develop a refinery and petrochemical complex in northeast China at Panjin. Panjin is a large port city North of Dalian and North East of Beijing. The Panjin facility is a US$10 Billion investment in total.

At the time, a Saudi representative said that China was key to their plans to expand in Asia. Another Gulf nation, the United Arab Emirates has also recently strengthened relations with Russia, China and Iran. Rumors of Saudi Arabia joining the BRICS group of nations continue.

The Senate’s second-ranking Democrat, Dick Durbin of Illinois, made the following statements — “the Saudi kingdom has never been a trustworthy ally of our nation” and “it’s time for our foreign policy to imagine a world without this alliance with these royal backstabbers.”

Other Democrats have suggested legislation to force the removal of U.S. troops and equipment from Saudi Arabia and the United Arab Emirates within 90 days. The bill calls for relocating forces and weapons to other Middle Eastern nations.  This year, Saudi Arabia has started lecturing the US in regard to its failures on human rights.

Saudi Crown Prince Mohammed bin Salman was reported as commenting on US “mistakes”. He said:  “…regrettable incidents took place and other journalists were killed in other parts around the world”. “The United States also made a number of mistakes like the incident of Abu Ghraib prison in Iraq and others.” And “trying to impose those (US) values by force could have the opposite effect, as happened in Iraq and Afghanistan, where the US was unsuccessful”.

If this is all true, then we are seeing a decisive move away from US global hegemony.

Saudi Arabia is the biggest importer of weapons from the US and the United Arab Emirates is the second biggest — all paid for with US Dollars. If that trade stops, then the US Dollar settlement stops and Saudi Arabia will begin to sell its oil in return for other currencies. That would spell the beginning of the end for the US Dollar Empire, an historical economic event of huge significance.

In economics, things work until they don’t.  Until next week.  Make your own conclusions, do your own research.  BOOM does not offer investment advice.

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