| Gridlock, China lockdown and a "super bubble". Record heat will pose the biggest test to the California grid over Labor Day weekend since the summer 2020 blackouts as homes and businesses crank up air conditioners. Officials declared a statewide grid emergency to cope with surging demand for power. The worst dry spell in 1,200 years has gripped nearly every inch of California with drought this summer, leaving rivers and reservoirs perilously low. The Chinese metropolis of Chengdu will lock down its 21 million residents to contain a Covid-19 outbreak, a seismic move in the country's vast Western region that has largely been untouched by the virus. The capital of Sichuan province, Chengdu will be the biggest city to shut down since Shanghai's bruising two-month lockdown earlier this year. Meanwhile, Russia is considering a plan to buy as much as $70 billion in yuan and other "friendly" currencies this year to slow the ruble's surge. The yuan briefly extended gains against the dollar after the news.  | Legendary investor Jeremy Grantham has warned that stocks remain in a "super bubble" that has yet to pop. The co-founder of asset manager GMO said that the net move higher in stocks since June lows is a bear-market rally with new lows ahead. In January, Grantham predicted stocks could plunge almost 50%. Mike Wilson, Chief US Equity Strategist for Morgan Stanley, also sees new lows for stocks in the cards. "June probably was the low for the average stock, but the index, we think, still has to take out of those June lows," Wilson told Bloomberg Markets on Wednesday. Stocks and bonds extended their selloff as a hawkish drumbeat from central banks and the Chengdu lockdown further frayed investor nerves. A global equity index hit a six-week low as Europe's Stoxx 600 slid more than 1.5%. S&P 500 futures fell 0.7% as of 5:40 am New York time. US chipmakers fell in premarket trading, dragging down Nasdaq 100 futures, after a warning from Nvidia. European bonds extended losses and the two-year Treasury yield touched 3.5% for the first time since 2007. For more, watch as Dani Burger and Markets Live's Mark Cudmore break down today's key themes in this short video. It's jobs week in the US, and today brings jobless claims, the Challenger job cuts figure and productivity numbers. The US manufacturing PMI final reading is due, as is construction spending, and there will also be comments from the Fed's Bostic, as well as President Joe Biden's "Soul of the Nation" speech. Earnings include Broadcom, Hormel Foods, Campbell Soup, Lululemon and Weibo. Here's what caught our eye over the weekend. Last year at this time, there was still a debate about whether inflation was "transitory" or not. That debate is mostly over, because the Fed is hiking aggressively, and because the use of the term is now seen as a kind of communications debacle. All that being said, the debate hasn't fully gone away. Mostly it's just morphed. For the last several months, there have been those arguing that inflation can come down relatively painlessly (as various one-time factors fade away) vs. those who argue that we need a significant increase in the unemployment rate (or some other "pain") in order to vanquish inflation. In our recent conversation with Neel Kashkari (which you can read the transcript of here), the Minneapolis Fed President presents another view, which I would call "Entrenched until proven transitory". In other words, Kashkari identifies several seemingly transitory contributors to inflation (the war, the big fiscal jolt that's now fading, Covid-related supply chain disruptions) whose impact will presumably fade. But to him it doesn't matter for policy at this point. Despite the significance of these factors, Kashkari is now the most hawkish Fed official. In fact the message out of Jackson Hole seems to be that it doesn't really matter what's driving the inflation, because the Fed's job is to get it down regardless. If it turns out that these one-time, supply chain, commodity-related factors end up doing the work, then that's great, and it means less need for rate hikes, and less of the burden of adjustment falling on workers. But nobody is taking that for granted. Policymakers assume that the inflation they're fighting is entrenched, and if it turns out that it comes down a lot faster than they expect, well, then that's a happy outcome. Another way to think about this is that perhaps the the degree to which transitory factors are still driving inflation is no longer a policy debate, but a market debate. Policymakers are done hoping for immaculate disinflation. But for investors trying to anticipate how much hiking there is yet to come, it may still be worth thinking about how much inflation will or would fall on its own, regardless of what the Fed does. Follow Bloomberg's Joe Weisenthal on Twitter @TheStalwart | 
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