Letter From Shanghai No 871 - Why Is That?

Fed uber-hawk James Bullard was in hawkish mode yesterday, sinking his claws into the doves as he suggested that the Fed’s previously identified “neutral level” of interest rates at 2.4% is too low to bring inflation down, maintaining that there’s “a bit of a fantasy” in current thinking. “Neutral is not putting downward pressure on inflation. It’s just ceasing to put upward pressure on inflation.” Bank analysts’ comments this morning agree with him, seeing 50bps for the next four Fed meetings then continuing with 25bps each meeting following that. However, my simple arithmetic would suggest US Fed funds will be at least 4% below the printed inflation rate. The conspiracy theorist within me considers maybe that’s the point. If the Fed can maintain real inflation?(CPI less Fed funds) at 4%, then taking a ten-year view, the US debt in real terms diminishes by half. Whereas Volker took US interest rates to a level where demand collapsed and inflation disappeared, on a current reading, that is never going to happen here.

As a counterpoint, I thought I should quote the UK Consulate’s travel advice this morning. “The Chinese authorities continue to impose various control and quarantine measures across the country. This includes restrictions on movement, reduced transport, entry and exit controls for cities, towns and villages, and isolation requirements for travel between different parts of the country. Lockdowns can be implemented with little warning and may result in disruptions to medical and other basic services, including food delivery. You should ensure you have prepared additional supplies of food, water and medication.”

I thought perhaps I should highlight the sentiment above by quoting an email from my usual online supermarket. Epermarket brands itself as a “taste of home” with over 300 staff and specialises in serving the “foreigner” market and is Shanghai’s go-to online shop for western food, general grocery and home products. On April 1, Epermarket deferred delivering individual orders and switched to delivering an “emergency box” of 15-20 essential items. (cooking oil, bread, pasta, a selection of fresh green veg, etc.) for a fixed price. With only 100 available staff, many sleeping on-site in their warehouse, the emergency box enabled Epermarket to standardise production and lifted throughput to perhaps 1000 boxes a day. You can imagine that for many households, an Epermarket” emergency box” delivery has been a lifeline. So, I quote from their email yesterday updating customers on the current situation: “Our stock situation is getting increasingly difficult to manage. The majority of our supplier’s warehouses are closed or quarantined, so getting access to this stock is impossible on many occasions. Other suppliers are also struggling too, our bread supplier for example is running low on flour, and unable to source raw materials easily.” Yup, that’s it. We can surmise that unless things change, Epermartket could eventually run out of products to deliver.

So, this morning,?it is with some interest I note the Shanghai Municipal Health Commission announced that from 00:00 to 24:00 on April 13, 2022, there were 2,573 new confirmed and 25,146 asymptomatic infections. Despite enormous efforts, these numbers are not yet falling. Indeed, this morning I read a government pamphlet outlining what to do if you have a family member who is quarantined at home – which is a departure from the usual expectation that they would go to a quarantine facility. Now, why is that?

Have a good day,

John