The Morning Call warns that when it comes to inflation, you ain't seen nuthin' yet


The other day, The Market ( conducted an interview with Mohamed El-Erian in which the investment guru fretted about the risk of long-term stagflation.  “The global economy is being subjected to stagflationary winds,” the write-up begins, and “The stronger these winds blow through the global economy, the higher the risk of recession, cost of living crises and, for fragile commodity-importing developing countries, the threat of devastating famine….”

Mostly, El-Erian blames current conditions on the Fed, insisting that Jay Powell, et al. have made several policy mistakes and are apt to make more.  Early in the interview, in an attempt to emphasize how important it is that the Fed handle policy more competently going forward, he drops this gem:

While inflation rates will come down over the next few months, the decline will not be as sharp as many expect, including central bankers. Also of concern, we are likely to see the drivers of inflation continuing to broaden.

The key here, in our opinion, is that last bit, the part about the “broadening of the drivers of inflation.”  El-Erian prattles on about the Fed and other central banks and emphatically declares that “Financial regulators and supervisors need to pay more attention to sources of systemic risk….”

What he doesn’t do is explain what those other drivers of inflation are likely to be and how the Fed and the financial regulators should approach them.  And he doesn’t do this because he can’t.  He doesn’t do it because it would cost him friends, clients, and maybe even one of his jobs.  He doesn’t do it because it would blow his narrative sky high.

Last week, our friend Richard Morrison, a senior fellow at the Competitive Enterprise Institute, penned a long, detailed, and formidable report on the problems with the Securities and Exchange Commission’s (SEC) mandatory environmental disclosure proposal.  Among other problems with the proposal, Morrison details the costs:

The SEC admits that the costs associated with complying with the proposed rule would be “significant,” but tries to downplay the burden by pointing to the large volume of information that some companies already voluntarily disclose. That may count in the agency’s favor in terms of relative costs incurred, but it also cuts against the agency’s claims of benefits generated….

The legal and reputational threat of being officially found non-compliant dramatically increases the amount of time, money, and professional expertise required, compared to voluntary disclosures. Even when it comes to specific quantitative requirements like measuring greenhouse gas emissions, the agency’s proposal states, “we are unable to fully and accurately quantify these costs.”[xviii] The fact that the SEC staff is forced to admit this after more than a year working on this proposal signals that they are not taking the rule’s cost-benefit analysis seriously….

The costs of complying with this rule—which will almost certainly run into billions of dollars per year—will be piled on top of the existing array of federal regulations with which firms must already comply. Managers of public companies already work under a staggering burden of federal and state requirements. That accumulated weight has significant economic effects on individual firms, particular industries, and the U.S. economy as a whole. Recent research by scholars affiliated with the Mercatus Center at George Mason University also suggests that regulatory growth within an industry disproportionately burdens small businesses relative to their larger competitors.[xx]
The Competitive Enterprise Institute’s Wayne Crews estimates that the current total cost burden of U.S. federal regulation comes to nearly $2 trillion per year.[xxi] That accumulated burden also harms innovation, kills jobs, and slows economic growth, resulting in a smaller economy and lower investment returns. [xxii] The SEC’s own estimates suggest that the overall cost of disclosure and compliance for public companies will rise from approximately $3.8 billion per year to over $10.2 billion—a more than 250 percent increase, based on this rule alone.

Read that last bit again, if you have the stomach for it: in an inflationary environment, in which stagflation is a real risk, the SEC wishes to impose AT least a 250% increase in compliance costs on ALL publicly traded companies for disclosures that it doesn’t even know will be beneficial   Talk about “broadening the drivers of inflation.”

But that’s just the beginning….

Note that above, El-Erian is concerned about the price of food and the possibility of “devastating famine.”  Well…you wanna know how to increase food prices drastically?  Slap a Scope-3 emissions reporting requirement on publicly traded companies:

Specifically, the proposed rule requires a registrant to disclose information about its direct greenhouse gas emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose greenhouse gas emissions from upstream and downstream activities in its value chain (Scope 3) under many – if not most – circumstances….

There are an estimated 63,485 companies listed on the SEC website with some sort of registrant reporting requirements, with industries ranging from life sciences to energy and transportation, real estate and construction, manufacturing, technology, trade and services, finance, structured finance and international corporate finance.

Looking further into the companies that are registered with the SEC, each company is classified with a specific industry title and assigned a standard industrial classification (SIC) code that indicates the company’s type of business. Notably, none of the registrants listed on the SEC’s website has an SIC code corresponding to agricultural production. That is, for the SIC codes titled “Agricultural Production-Crops,” “Agricultural Production-Livestock & Animal Specialties,” “Agricultural Services,” “Forestry,” and “Fishing, Hunting and Trapping,” there are no reporting companies that disclose to the SEC. However, all five of these industries produce most of the raw products used by publicly traded companies and is, therefore, part of the value chain of that publicly traded company (i.e., Scope 3). For agriculture, food and forestry manufacturing alone, there are nearly 2,400 companies registered with the SEC that would be subject to reporting Scope 3 emissions from its farm suppliers.

For Scope 3 emissions disclosures, the proposed rule would require public companies to disclose the emissions for each significant category of their value chain, expressed in metric tons of carbon dioxide equivalent. The disclosures would further need to be disaggregated by each constituent greenhouse gas (carbon dioxide, methane, nitrous oxide, nitrogen trifluoride, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride).

For farmers to stay compliant with the companies that purchase their products downstream, this could mean producers will need to track and disclose on-farm data regarding individual operations and day-to-day activities. Unlike large corporations currently regulated by the SEC, farmers do not have teams of compliance officers or attorneys dedicated to handling SEC compliance issues. This could force farmers of all sizes, but particularly those with small and medium-sized operations, to report data they may be unable to provide, which would result in a costly additional expense or a loss of business to larger farms.

Add to this the fact that many farmers with methane-heavy operations (i.e. cattle farms) have already been warned that their “climate impact” will likely mean reduced opportunity for/likelihood of debt financing, and you have a recipe for massive food cost increases, production shortages, and Gaia knows what else.

Mohamed El-Erian can’t talk about this, though, because that would be unseemly.  You see, he, like everyone else who breathes the rarefied air at the intersection of Wall Street and the Ivory Tower, is a climate-change guy.  He believes companies should be “sustainable” and that Net-Zero is a good thing.  Because of course he does.

We suspect that, in private, he knows better – which is precisely the reason that he doesn’t give many details about the “broadening drivers of inflation.”  Why would he?


Comments coming soon