Washington Insider-- Friday

Fed Inflation Approach Criticized

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

USDA's Perdue Likes China Ag Buys, But Wants to See Shipments

USDA Secretary Sonny Perdue this week said he is hopeful that China can meet its purchase commitments of U.S. farm products via the Phase One trade deal by February, the end of the first year of the deal.

Perdue said “it is going to be tough to meet those numbers ($36.5 billion first year). This is just purely a guess; we may reach it by the end of January before Brazil and South America come back into the marketplace.”

While there are hefty export sales on the books, Perdue said he wants to see shipments, saying China is known for booking and later cancelling sales. “It does appear they are trying, but it remains to be seen if we will make those numbers or not.”

Data for the week ended September 17 from USDA included the following export sales figure for China for 2020/21: Net sales of 566,427 metric tons of corn, 262,400 mt of sorghum, 1,879,091 mt of soybeans, 39,482 running bales of upland cotton, but net reductions of 600 metric tons of wheat. For 2020, USDA reported net sales of 3,396 metric tons of beef and 8,161 metric tons of pork.

Shipments of U.S. ag products to China also continues, with exports the week ending September 17 including 58,370 mt of wheat, 204,368 mt of corn, 71,552 mt of sorghum, 769,309 mt of soybeans, 117,690 running bales of upland cotton, 1,200 mt of beef and 10,943 mt of pork.

WTO Members Press U.S. On Farmer Aid

The U.S. Coronavirus Food Assistance Program (CFAP) and Market Facilitation Program (MFP) efforts have caught the attention of WTO members, as Canada, the EU, India, Australia, Brazil, Paraguay, New Zealand, Uruguay, Paraguay and Colombia used a WTO session this week to criticize the U.S. efforts.

They are calling on the U.S. to explain the around $34 billion in what they consider trade-distorting payments in 2019. The WTO cap for those “amber box” subsidies is $19.1 billion. The countries also raised the latest up to $14 billion CFAP 2 program announced last Friday.

But countries also raised questions about aid the EU is providing to its farmers in response to the COVID-19 situation, indicating that all countries have taken actions to help their farmers in the wake of the pandemic.

Washington Insider: Fed Inflation Approach Criticized

Bloomberg is reporting this week that the Fed's new “hot” approach to the economy is raising questions “in some quarters.” Asset managers who've guarded against inflation during a decade of easy money and ballooning deficits have little to show for their efforts. That's still not stopping some from hedging that risk, Bloomberg says.

Thirty-year market veteran Matthew McLennan of First Eagle Investment Management is among those warning that price pressures are coming down the road. He's betting easy money and further hits to productivity will spark inflation, making bigger companies with pricing-power and competitive advantage a good wager. He's also piling into gold as a pure hedge against the erosion of value caused by inflation.

However, Bloomberg thinks McLennan is in the minority. The Federal Reserve's aim to let inflation run hot draws mostly derision across Wall Street after the central bank has failed to lift prices toward its 2% target for years. Even Fed officials themselves made clear Wednesday that they can't do it all, stressing that fiscal stimulus is critical to sustaining the economic recovery. Even so, some still see increased potential for inflation bubbling up.

“If you think about what the Fed's inflation averaging means, it means they might be happy to see inflation move over time from 1% to 2% to 3% to 4%, while interest rates remain close to zero,” said McLennan, head of the global value team at First Eagle, which manages about $101 billion in assets. “That also means that real interest rates go down more.”

What might make things different this time is that secondary impacts of the pandemic may add to growing productivity bottlenecks and America's deficit keeps surging, says McLennan. Add to that the fact that the U.S. dollar is losing its luster, he said.

The fresh wave of deglobalization underfoot and second phase pandemic impacts both bode poorly for productivity, said McLennan, who was co-portfolio manager of the global equity partners group at Goldman Sachs Asset Management in London prior to joining First Eagle in 2008. That means, for him, that inflation reignites amid a backdrop of slow economic growth. Continued weakness in the dollar, with the Bloomberg Spot Dollar Index down about 9% from this year's high in March, buoys inflation through rising import prices as well.

Among the array of products McLennan helps manage is the $43 billion Global Fund, which had gold as its biggest holding at about 13%, according to Bloomberg data as of Aug. 31. Another one he steers, the U.S. Value Fund, had Oracle Corp., Comcast Corp and Colgate-Palmolive Co. as it top three holdings.

The Fed targets inflation as measured by the personal consumption expenditure price index. It also pays close attention to a core reading of that gauge which strips out volatile food and energy prices. Both barometers have plummeted since the pandemic.

There are other notable investors and corporate heads warning on inflation, also, Bloomberg observes. Earlier this month Stan Druckenmiller said there's a chance that inflation could hit 5% to 10% in the next four to five years. Druckenmiller was the founder and manager of Duquesne Capital – and managed the Quanturn Fund with George Soros.

McLennan prefers gold over other favored fixed-income hedge vehicles like Treasury inflation-protected securities, given there's a limited supply of the shiny metal. The Fed's monetary stimulus already pushed key measures of the U.S. money supply up by double digits.

“The rate of supply growth of gold is less than 2% a year, bringing us back to the idea of scarcity value,” McLennan said.

Traders see consumer price inflation averaging about 1.6% over the next 10 years, based on so-called breakeven rates garnered by TIPS and nominal Treasuries. That's down from an 8-month high on Sept. 1. Gold prices have also ebbed, both likely driven lower in part on the inability of Congress to agree on a phase four fiscal stimulus package.

The global recovery also risks losing steam as virus cases rise and some nations roll back reopening measures, Bloomberg said. And, it sees the U.S. presidential election as another wild card.

“If we get a Democrat clean sweep it's more likely than not we are going to see more rapid growth in the federal register and regulation” which tend to reduce productivity, McLennan said. Slow grow and rising inflation are probable with “these productivity bottlenecks coming with a Fed that's willing to let inflation run hot.”

So, we will see. Clearly, inflation is a trend deeply feared by many who remember bouts in the recent past. However, the current priorities are economic growth and jobs recovery and the Fed is likely to push for its inflation targets to achieve those goals — trends producers should watch closely as these economic debates intensify, Washington Insider believes.

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