By Michael Every of Rabobank

Oh Sugar!

A spoonful of sugar helps the medicine go down. However, sugar is now up over 40% year-to-date, and the monetary policy medicine is coming up with it. Sugar is usually a cheap ingredient in almost everything we eat or drink – and now it’s another example of supply-side shocks not going away. Olive oil is already echoing sugar, and what if the Black Sea Grain Deal fails too? Rates are going to go higher and stay higher.  

That does not imply an imminent sugary pivot, or even a saccharine pause as precursor. Or so the hedge funds diving into new US Treasury short positions think. Worse, this looks structural.

As the press notes a surge in global defence spending to new record --nominal-- highs, Germany’s pledged EUR100bn hasn’t bought any bang so far, leaving the EU unable to defend itself out of a wet paper bag; Australia’s strategic defence review called its armed forces “not fit for purpose”, requiring massive investment and the development of domestic supply chains; Poland is spending 4% of GDP on defense without knowing where the money will come from; and the US hints it might need to double defence spending. Against this backdrop, Bloomberg underlines ‘What a New Cold War Means for Central Banks’:

“The battle against soaring prices is little more than a year old and central banks need to gird for the next big trial: Serving their nations in a world defined by protracted competition between the US and China. Policymakers will be reluctant cold war warriors - they are more comfortable aiming at inflation targets and tinkering with guidance on interest rates than fending off strategic adversaries. Unfortunately, they don’t have the luxury of sitting this out.”

As Lagarde said last week, and I said years ago, at least partial monetization of fiscal spending on defence and supply chains looms. This changes all your economic and market forecasts unless you are: (1) in denial; or (2) think geopolitical problems just ‘go away’.

On which, here’s where you might need a sugar hit to get through the Daily:

This subject matter -- war risk and global architecture collapse-- is beyond the skillset or mindset of the average market participant, or so overwhelming that they simply don’t know what to do with it. I get that. Taleb-style, everyone is a fat, happy, well-fed Turkey until just before Christmas.

But should they really forecast in a geopolitical vacuum, with the above headlines flashing, the lessons of Ukraine just over a year old, rearmament underway, and central banks now shifting towards a quasi-war economy to fund it before any shooting starts outside Ukraine and Sudan?

Apparently it does. Almost all the market analysis you will read today is counting the same old beans, twiddling thumbs, or rearranging intellectual meme deckchairs on the Titanic. An industry which likes to pretend it can predict the future is looking the other way at key geopolitical risks which AT THE VERY LEAST point to much higher inflation FOR MUCH LONGER than is currently being priced for. Logically, there is no way rates are going to come down again quickly, and stay down, unless that new liquidity is of use against the big picture national security backdrop above.

Then again, the same markets can’t even grasp what’s going on in sugar. Which is why we are all deep in it.