The Federal Preserve, Schumpeter, and "Shh!"

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by Tyler Durden
Thursday, Nov 04, 2021 - 10:45 AM

By Michael Every of Rabobank

As expected post-RBA, we got a ‘dowkish’ Fed move: $15bn of tapering of QE beginning this month and proceeding each meeting ahead; yet Powell underlined rates are nowhere near being raised, failing an inflation surprise, and QE can move in both directions. Our Fed watcher Philip Marey does not believe what some in the market now do – that the fixed monthly schedule of tapering ending in June 2022 means a rate hike as soon as then. He is leaning towards December 2022, based on the expected unemployment rate, and concludes “with an additional $9 for the Atlanta Fed’s swear jar.”

The irony is that being a dowk, and saying tapering is about “risk management” rather than taking away the punch bowl from an aggressive drunk, means the Fed produced its best possible outcome --drunker markets—and yet its worst possible outcome – drunker markets. Indeed, traders continue to act as if we are in the ‘new normal’, where the financial economy does not work, and not the ‘new, new normal’, where the physical economy doesn’t either. US stocks decided a partial removal of liquor-pouring with no true injection of responsibility was the (gin and) tonic needed to hit another record high. The yield curve notably steepened, which you would normally see when rates are being cut…or the Fed is way behind the curve. Pride, like drunkenness, comes before the fall: even when the Federal Reserve could not be clearer that it is the Federal Preserve – for asset prices.

The financial picture elsewhere is not so pretty. Bloomberg bewails that ‘China is Blowing Up One of the World’s Most Lucrative Bond Bets’, as “junk-rated Chinese debt is sliding from boom to bust in spectacular fashion – and investors are bracing for more pain.” In related news, ‘Citigroup Poised to Apply for Wholly Owned China Securities Unit’, joining the list of Wall Street firms eager to look at charts showing the relative pricing of Chinese junk to US junk, and saying “it looks cheap” – or that 40% dividend yields on flailing Chinese property developers look attractive. Tell me, which country is doing capitalism right? One is saying “Schumpeter”, at least for pointless “fictitious” capital. The other one just keeps saying “Shh!” knowing that the central bank is one of their own.

Meanwhile, we head into the ‘new, new, new normal’, where the conflation of failing financial and real economies lead to geopolitical developments accounting for a larger share of Bloomberg headlines. The financial Bible isn’t covering the fight between Algeria and Morocco, which matters for Spanish gas supply. It isn’t talking about the rumblings in the Balkans. Russia-Ukraine doesn’t get a look in, except on gas and coal not flowing. Likewise, the tense India-China border is absent for now. But we do see ‘China Moves to Quash Online Rumours That Taiwan War Looms’, which is kind of a biggie, right above ‘Pentagon Sees China Nuclear Arsenal Growing Faster Than Expected’, which is huge news for those not buying the decoupling argument yet. Indeed, China is apparently about to build 1,000 new nukes, quadrupling its stockpile at vast cost. Why, exactly?

In the background, US Senator Hawley just introduced the ‘Arm Taiwan Act’, to pledge $3bn a year for asymmetric defence capabilities on the proviso that Taiwan matches that spending in kind. It may well not pass Congress, but it shows how US-China tensions continue to escalate. Likewise, as Nikkei Asia reported it yesterday: US GENERAL ANALYSIS - TAIWAN OK FOR 6-24 MONTHS”, reassuringly adding, “China is unlikely to try to seize Taiwan in the next couple of years, even as its military develops capabilities that would enable forcibly retaking the self-ruled island.” Normal times for markets, clearly. At least for six months anyway.

Moreover, we have the exclusive that the EU is to discuss a blueprint to create a military joint intervention force by 2025 and ensure it can be deployed without a unanimous decision by all member states. The proposal will be submitted to foreign ministers on November 15, discussed in December, and a final version endorsed in March. Concerns that the EU’s requirement for unanimity could stymie action see the proposed use of “constructive abstention”. (“I abstain from this war.”) It would also see the EU expand its maritime presence, starting with the Indo-Pacific.

Some may see this as a joke. However, as repeated here regularly, in a Great Power world, a military is essential. It is ultimately there to ensure supply-chain security, as we see above: it’s just that the EU has been relying on the US to do is all for them until now, removing its “strategic autonomy”. Yet at the same time, when you dig into this proposal, it does appear to be a joke. The EU force proposed is 5,000 strong: they could all fit in one cruise liner. That might deal with a tinpot dictator, but could it cope with a mercenary group like Wagner? Vis-à-vis Russia or China it is laughable.

The organization could also not look more Gallic if it wore a beret: why focus on the Indo-Pacific, where the rest of the EU have almost no interests, rather than the Med or Baltic? And recall that it will only take a majority to decide on using it – weighted how? Bloomberg also notes “Countries would provide assets such as strategic transport, force protection and intelligence. Command and control would be entrusted to national operational headquarters, or to an EU arm,” and that while defense budgets should “grow in real terms in the coming years,” there are no concrete commitments. So, no funding to grow past this feeble start; legitimacy problems if there are funds; and for now some will provide vehicles (guess who?!); some news and views; and it is unclear which lucky ones get to do the bleeding. We can at least see who is dying…to control it.

Lastly, Josep Borrell’s realpolitik touch is also evident in the promise that the EU: “Will continue to pursue dialog and consultations with China, especially to ensure respect for the law of the sea and a rules-based international order. Despite China’s growing assertiveness, we will continue to cooperate in areas of mutual interest such as countering piracy and climate and security.”

I repeat my past conclusion on the EU military topic: “Dad’s Not Much of an Army”. Effective militaries are a federal preserve. But the EU proposal points out the way the world is heading, which is hawk and dove fused now into one beast.

Light the blue touch taper and stand well back.