A ceasefire that runs like a summer sitcom, a company that multiplies its profit nineteen times and is sold for it, central banks waving the traffic along, and the one price that was never allowed to rise beginning to rise.
There is a particular kind of week that tells you less about the economy than about the room the economy is being priced in. This was one of them. A war stopped, then paused, then started again on roughly the schedule of a summer sitcom. A company posted the best quarter it has had in years, not a good quarter but the best, and was sold the moment it did. Central banks looked at the highest inflation in three years and, in the manner of a gendarme at the scene of an accident, waved the traffic along: circulez, il n’y a rien à voir. And in the machinery underneath all of it, a price that has spent my entire career quietly falling began, for the first time anyone can remember, to rise.
Regular readers know the conceit this column returns to. On Planet Finance the force that does the work of gravity is cash, and the thing I distrust on sight is novlangue, the fluent and weightless language institutions use to sound informative while committing to nothing. Put those two instincts together this week and you arrive at an uncomfortable observation. The market is no longer a weighing machine that occasionally misbehaves. It is a casino that has learned to punish good news, and a casino is a place where the house has quietly changed the rules while everyone was watching the wheel.
Nineteen times, and sold anyway
Begin with the week’s cleanest absurdity. Samsung, the largest memory-chip maker on earth, reported that its operating profit for the quarter had risen not by nineteen per cent, the figure a sensible person might expect from a good three months, but by nineteen times. Nineteen-fold. From about 4.7 trillion won a year ago to 89.4 trillion, roughly fifty-eight billion dollars, the best result the company has produced in years. The market’s response was to sell it, down almost seven per cent on the day.
Explain why in plain words, with the novlangue stripped out. The share had already risen about 150 per cent in the twelve months before the number arrived. The record was not news; it had been bought in advance, in instalments, by everyone who spent the past year telling one another it was coming. So when the record actually landed, there was no one left to impress. The result beat the published forecast and missed the imagined one, the private and unpublished whisper the room had agreed to expect, and in a casino it is only the whisper that pays. Beat the number on the page and miss the number in the air, and you are marked down for winning.
And Samsung was not alone, which is the tell. In the same week Arm Holdings reported record earnings and fell about seven per cent, its sin being some twenty billion dollars of demand it cannot physically fill. Tesla posted record deliveries and fell about seven per cent. Three companies, three records, three punishments, inside a single week. When a market sells its winners this reliably it is not judging the businesses; it is confessing its own condition: fully invested, richly priced, with nothing left to buy on good news because the good news was the reason it had become so expensive in the first place. A jury that acquits no one is not a jury. It is a mood.
The sitcom that keeps getting renewed
Which brings me to the summer’s longest-running programme. The ceasefire between the United States, Israel and Iran began in April with the confidence of a season premiere and has been cancelled and renewed roughly every fortnight since. It fell apart within hours of its first announcement; it was patched back together; this week it produced two days of live fire before the American president pronounced it “over” while, in the same breath, agreeing to keep talking. Qatari mediators were in Tehran trying to revive a document that had already been declared dead. If you find the plot hard to follow, that is because it is not built to be followed. It is built to be watched.
The market has learned to watch it in exactly that spirit, as episodic entertainment with no consequence that survives the closing credits. Each flare-up moves the oil price for a day; each pause hands it back. But there is a wire running from that studio to everyone’s kitchen, and it is called energy. The spring’s oil shock is the reason the energy component of American inflation is running near eighteen per cent and petrol near twenty-eight. A war treated as a rerun is, at the pump, still an original broadcast. Which is the natural bridge to the thing the central banks would much rather you did not look at.
Circulez, il n’y a rien à voir
American consumer prices rose 4.2 per cent in the year to May, the fastest in more than three years, and they are still accelerating. Core inflation, the measure that strips out food and energy precisely so officials have something calmer to point at, is climbing too. This did not arrive from nowhere. It arrived from the oil the sitcom keeps spilling, from shelter, and from a monetary policy that a fortnight ago this column described as having quietly made its peace with inflation above target: Kevin Warsh’s Fed holding rates while prices run, tolerating with its hands what it will not admit with its mouth.
And the official language for all of it is the register I distrust on principle: contained, well-anchored, expectations remain stable. Circulez, il n’y a rien à voir. It is worth remembering that the last time inflation ran this hot the same institutions called it transitory, a word since retired without a funeral. The reason to disbelieve the reassurance is not that central bankers are foolish. It is that they are cornered, and it takes the next two sections to see quite how tightly.
The thermometer starts to catch fire
Here is the part almost no one says out loud, and it is the most interesting thing to happen all week even though it produced no headline. Ask how inflation is measured and you eventually reach a technique called hedonic adjustment. When a product improves, the statisticians reason that part of any price rise is really you getting more, so they subtract the improvement and count only what is left. Nowhere has this mattered more than in computers. For roughly a quarter of a century the machines (laptops, chips, the whole electronics category) have been the great deflationary anchor of the index. Each year the new model was faster, so its official price was recorded as falling, often steeply, year after year, quietly dragging the entire inflation figure down beneath everything else.
Sit with the irony a moment, because it is almost too neat. The thing that has spent twenty-five years subtracting from measured inflation is the computer. And the instrument used to compute inflation is, of course, the computer. The deflationary anchor and the measuring device are the same object.
And that object’s price has just begun to rise. The artificial-intelligence build-out has swallowed the world’s memory. Manufacturers have shifted their wafers toward the high-bandwidth memory the data centres crave, and the ordinary chips that go into ordinary machines have gone scarce. Memory prices jumped around sixty per cent in a single quarter; the RAM in a consumer PC is up somewhere between eighty and a hundred and thirty per cent on the year; makers of laptops and phones are already raising prices or warning that they must. The one category that has fallen almost every year for a generation, the category that has been silently holding the inflation number down, is about to start pushing it up. In the modern history of the index, that has essentially never happened.
Now close the loop, because it is the whole column in a sentence. Samsung’s nineteen-fold profit and the coming turn in the inflation number are the same event seen from two windows. The record the market punished is the price rise the statisticians will shortly have to admit. The casino sold the messenger while the message was still in the post.
The quiet pin under everything
And if you want to know where a market this leveraged and this richly priced is most likely to be undone, do not watch Wall Street. Watch Tokyo, where something is bending that is not meant to bend. Japan’s ten-year government bond yield has climbed to about 2.9 per cent, its highest since 1996, a level that will sound trivial to anyone raised on Western rates and is anything but, in the country that invented the zero. The long end, the thirty-year, has pushed into record territory above three per cent. For thirty years Japan was the one place on earth where money cost nothing, and that single fact, cheap yen borrowed to buy everything else, has been a load-bearing wall of the entire global market, the anchor of the great carry trade. Yields do not go “exponential,” to borrow the word, without eventually testing that wall.
The reason is the oldest one there is. Japan owes something like two and a half times what it produces in a year, and for decades it serviced that debt at a rate of essentially nothing. Now inflation has arrived there too, the central bank is inching away from the zero it held for a generation, and the government is planning to spend more rather than less. A country that borrows at nothing can carry any debt; a country that must pay three per cent on two and a half times its output is doing an entirely different sum. I will resist predicting the timing, because the graveyard of this trade is full of people who were right too early. But the direction is neither ambiguous nor benign. When the world’s last source of free money stops being free, a great many prices that were set in the age of free money will have to be re-set. That re-pricing has not happened yet. It is, I think, the most important thing that hasn’t.
The house and the players
So: a casino that punishes its winners, a war rerun as summer television, a thermometer that has begun to catch fire, and, beneath it all in Tokyo, a pin. No one of these would be enough on its own to spoil the party; the market closed the half at a record and is, as I wrote last week, still dancing. But the cautious reader will notice that every one of them points the same way: toward a world in which money is about to prove dearer than the prices around it still assume. The house has changed the rules. It has not yet told the players. And the oldest wisdom about casinos is not that you cannot win a hand. It is that you should be very suspicious of a room designed so that winning feels this much like being punished.
Eric Lefebvre
See also: Still Dancing
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