By Michael Every of Rabobank
"Just One Damned Thing After Another"
History, some say, is “Just one damned thing after another.” So is most financial markets coverage, just with post hoc ergo propter hoc.
Yet serious historians look for patterns; Marxists see it as pre-written; and Leninists want to speed it up with bullets. In markets there are also serious thinkers looking for patterns; and Marxists; and even Leninists.
Take the death of Wagner mercenary leader Prigozhin, whose plane just ‘crashed’ in Russia. Even market analysts see the Leninist pattern there.
If only they could apply the same analytical rigour more broadly though.
In “just one damned thing after another” terms, yesterday saw appalling PMI data. UK manufacturing printed 42.5 and services 48.7, Europe 43.7 and 48.3 (with Germany worse), and the US 47.0 and 51.0. Yet the surveys also showed signs of inflation picking up again – so stagflation. The result: US 2-year yields -8bp to 4.97% and 10s -13bp to 4.20%, UK 2s -17bp to 4.97% and 10s -18bp to 4.47%, and German 2s -13bp to 2.96% and 10s -12bp to 2.51%; stocks closed up; the dollar DXY index spiked then slipped; oil dropped, then bounced; and gold and bitcoin rose. In market ‘ergo-ing’, the single worst take I saw was ‘people bought bonds because stagflation fears are rising’. But in stagflation bonds are the last place you want to be! Either the central bank raises rates, yet it does nothing; or they don't raise rates and you get financial repression.
Those data were just what central banks didn’t want to see ahead of Jackson Hole, where the message is still likely to be ‘Higher For Longer’ under the umbrella of “Structural change”.
They will need to show new thinking that grasps economic history.
Relatedly, the BRICS just met in South Africa, as Prigozhin was taken out in the ‘R’, the ‘I’ landed a moon rover for a budget less than a bad Hollywood movie about the same, and President Biden cancelled an upcoming trip to BRICS applicant Indonesia, once again abandoning ASEAN as a foreign policy priority. Indeed, the BRICS meeting was frustrated with the US and G7, as those obsessed with microaggressions are blind to their macro transgressions.
Xi Jinping’s speech noted:
“Changes in the world, in our times and in history are unfolding in ways like never before, bringing human society to a critical juncture. Should we pursue cooperation and integration, or just succumb to division and confrontation? Should we work together to maintain peace and stability, or just sleepwalk into the abyss of a new Cold War? Should we embrace prosperity, openness and inclusiveness, or allow hegemonic and bullying acts to throw us into depression? Should we deepen mutual trust through exchanges and mutual learning, or allow hubris and prejudice to blind conscience? The course of history will be shaped by the choices we make.”
And I was told it was all about when we get rate cuts!
A lot of states now want to join BRICS: Algeria, Bangladesh, Bahrain, Belarus, Bolivia, Cuba, Egypt, Ethiopia, Honduras, Indonesia, Iran, Kazakhstan, Kuwait, Morocco, Nigeria, Palestine, Saudi Arabia, Senegal, Thailand, UAE, Venezuela, and Vietnam. That runs like the Welsh village with the longest place name in the world. This unpronounceable group has a GDP larger than the G7. However, as I warned 18 months ago, just looking at the world map and adding up populations and GDPs does not make a functioning ‘New World Order’.
As a parallel, if you ‘add’ a gorilla to a great white shark, you don’t get the king of the sea AND the jungle without a lot of evolution – you just get digestion.
In BRICS+, China is larger than all other members combined, and it exports ever-more value-added goods to them while only importing raw commodities from them.
Yet the BRICS+ want to industrialize, not just sell raw materials to rich countries, as to the G7. Something doesn’t add up.
Also note there was no BRICS+ launch of a promised common currency backed by gold or crypto, just the sensible goal of more development lending in their own currencies.
Which, by the way, the G7 should also be embracing at Jackson Hole if they have a brain, even if it’s bad for inflation near term.
Yet if it’s hard to create a new global system, it's easier to destroy one. If BRICS+ trade invoicing shifts from the dollar to local FX bilateral barter, and then goods flows shift too, it will mean a gradual global 1930's-style fragmentation of supply chains and capital flows, exacerbated by tech and clearing systems schisms.
One key way the West can push back against this trend is via higher rates offering a decent rate of return on the US dollar, or Euro, etc. Capital can be hoovered out of rival political blocks with higher rates. Commodity prices can be pushed lower, or at least capped. We don’t talk about this, focusing instead on data now apparently screaming for rate cuts despite stagflation, but it’s true, and it’s clearly working.
Of course, Wall Street hates it. Then again, it also hates dedollarization and being shut out of the BRICS+. Zoltan Pozsar thinks the US fears dedollarisation because, as quoted in the Financial Times, “The West dreamed of the BRICS as a lapdog, that they would accumulate dollars and recycle them into Treasuries, but instead of that they are renegotiating how things are done.” What he means is Wall Street, not the West. After all, post a serious economic bump, the US economy would do fine in a more fragmented world because it has all it needs – Wall Street wouldn't.
Zoltan’s new ‘Ex Uno Plures’ --Latin for 'Exit Through the Gift Shop’-- offers 50% Fed liquidity and 50% on new ‘dollar-rival’ views. Yet the only Fed plumbing we need to know about is which acronym will be used to fund the Pentagon while rates stay high – again let’s see what Jackson Hole might say; and on the ‘gorilla-shark’ side, Hand-of-Godley Michael Pettis just pointed out that Zoltan misunderstands how the global balance of payments works, saving me doing it again.
2/12— Michael Pettis (@michaelxpettis) August 22, 2023
I don't think he understands at all how the international balance of payments works. If he were the only one, it wouldn't matter, but he repeats a very common confusion.
To say that the west (which, I think, here means the US) wants BRICS to accumulate dollars and...
Frankly, Zoltan could just have listened to both Donald Trump and the Republican Party presidential debate, where there was universal agreement that the US doesn’t want to keep receiving recycled dollars via larger trade deficits, and wants mercantilism and/or industrial policy instead. (Alongside rather too much talk about washing machines and shower head pressure.)
In short, despite weak global data, we have stagflation, which rate cuts would make worse. Moreover, we also have Leninist policy shocks for markets to deal with.
In response, former Goldman CEO Hank Paulson just wrote an open letter to Xi and Biden (‘A deep crisis in China would pose a choice for two leading powers’) that basically begs for a policy U-turn to him bail out:
“The decisions that Chinese and US leaders make in the months ahead could have enormous implications - for the global economy, global security, business and the future of the US-China competition.
First, China… Whether we are witnessing a short-term blip or the beginning of the country’s long-term stagnation will ultimately depend on choices Beijing’s leadership makes…. It could continue on the path of greater Communist Party involvement in business and the allocation of economic resources, limiting access to economic data and arbitrarily enforcing vague legislation such as the national security law. Or it could pivot, making necessary changes to place more reliance on markets and the private sector, competition, and openness.
The choice it makes matters greatly for the security of the world. A failed or low-growth economy has the potential to heighten geopolitical tensions if China opts to stoke nationalism and blames outside forces for its domestic challenges. If nationalist fervour results, the US-China relationship could further spiral toward conflict.
The test for US policymakers will be whether we lose confidence in our own system by continuing to attempt to beat China at its own game - or whether we trust in the economic principles that have made our economy and our companies leaders in the world… Once and for all, China’s economic challenges should put to rest the belief that to compete, Washington should adopt more statist economic and industrial policies. Instead, US policymakers need to do more to reduce our national debt and address our looming fiscal crisis, which is the primary threat to our economic and national security. And we need to resist the impulse to adopt more top-down, bureaucracy-implemented approaches and avoid populist bullying of private businesses.
For the sake of global growth, geopolitical security and our continued prosperity, we should hope China pivots toward policies that encourage competition and openness.
And, here at home, we should remember that our national security depends upon our economic strength and stay focused on what has made our country strong.”
To summarise, "A Greenspan Put for the Greenspan Putz, puh-lease" as Paulson expects China and the US to both cut taxes, cut state spending, cut rates, and cut regulation.
Do you think this is what we are going to hear from Beijing? Rate cuts aside, as George Magnus just put it, “Such moves do not sit comfortably with the Leninist hew of Xi’s China, which is now crossing a river where the stones are too deep to feel.”
Do you think this is what we are going to hear from Jackson Hole either? Will we really see a U-turn from the speech Lagarde gave earlier this year about the fusion of fiscal and monetary policy, of national security with economic security, and of the importance of the supply side in terms of PRODUCTION, just because of a weak set of PMI data? Will Powell throw everyone a big juicy bone?
Maybe, because as Paulson shows, the ‘smartest guys in the room’ are staggeringly ignorant of how the world actually works. However, that he had to write the op-ed at all shows the pattern of history has now changed, and so will that of central banks, and then markets.
In short, the odds of a rates policy pivot are very low – even if the PMI readings are too.