Barbenheimer meets the markets
For the first time in many years, there is genuine excitement at movie theatres with the simultaneous release of two very different movies – Barbie and Oppenheimer. Collectively, the biggest cinematic event since Covid shut the screens has become known as ‘Barbenheimer’. Barbie needs no introduction, being the best-selling doll of all time, though it is interesting that her creator, Ruth Handler, thought she would survive only one typical three-year toy cycle. That was more than 60 years ago. Oppenheimer is a film about the life of Robert Oppenheimer, the physicist who played a leading role in the Manhattan Project to develop the first atomic bombs. His work ushered in the nuclear age, but he also eventually became a vocal proponent of arms control.
If nothing else, the box-office boom points to consumers – particularly American consumers – being willing and able to spend on entertainment. Big-name pop stars are performing to sell crowds and sports stadiums are full. And why not? Inflation is falling and real wage growth rising, and there is a stock market rally to boot.
Interestingly, the Barbenheimer excitement comes against the backdrop of a strike by Hollywood actors and writers, with one of the sticking points being future remuneration of the creative class in a world where artificial intelligence (AI) is increasingly likely to script and produce entertainment. Will we need human writers and performers at all? The answers are intriguing and scary, and of course the question can be posed for a broad range of industries, including our own. Oppenheimer himself unleashed forces he probably did not anticipate – the nuclear arms race continues to this day – and it is no coincidence that the Pulitzer-prizewinning biography on which the movie is based is titled American Prometheus. AI may or may not be another form of playing with fire.
In the meantime, however, the big focus area is still monetary policy.
Rates still rising
Jerome Powell is not Robert Oppenheimer. He doesn’t design weapons of mass destruction, and in general is a much greyer character than the charismatic and polymathic Oppenheimer. But there are two loose similarities. In the financial world, Powell, as head of the US Federal Reserve, wields atomic power. When the Federal Reserve raises interest rates, the entire global financial system must adjust. When the Fed raises rates too high or cuts them too low, major economic dislocations are felt in the US and across the world.
Secondly, Oppenheimer achieved a superhuman feat in building a workable nuclear bomb in the space of just over two years, overcoming a range of engineering and logistical problems. Powell’s interest rate cycle was not difficult to do in any technical sense, but still moved at incredible speed. At the start of 2022, the fed funds rate target range was 0% to 0.25% (unlike most other central banks, the Fed’s policy rate is set as a range). Following last week’s hike, it was 5.25% to 5.5%.
Given the speed and scope of this hiking cycle, with rates now higher than at any point in the past 22 years, it is remarkable that the US economy is as resilient as it is. As noted, US consumers are still spending and having a good time as if rates are still low. US economic growth accelerated in the second quarter, with real GDP growth rising to 2.5%.
It is also notable that inflation declined as much as it did, without requiring a rise in unemployment or what economists call ‘slack’. When overall demand is high relative to supply, there is little slack and price dislocations can become self-fulfilling inflation. Firms and workers have pricing power and can protect margins and real purchasing power, respectively. The general thinking in economics has been that reducing inflation requires increased slack of which higher unemployment is a component. And yet, while US inflation (as measured by the Fed’s preferred indicator, PCE) fell to 3% in June and 4.1% excluding fuel and food while unemployment remains at 3.6% in the US, near record lows.
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