"I Am Become Death, The Destroyer Of Barbie World" Says The Fed, And The PBOC Too
By Michael Every of Rabobank
The Real Barbenheimer
Key emerging markets are ‘bombing’:
Despite rising oil prices, the Russian RUB briefly fell past 102, with an emergency central bank meeting today likely to raise rates.
Despite rising agri commodity prices, Argentina officially devalued ARS by 18% and raised interest rates 2,100bps to 118% - as Bloomberg puts it, “to reassure investors as assets went into free fall Monday after a populist who vowed to burn down the central bank won surprisingly strong support in a primary vote.“
Despite soaring auto exports and a vast trade surplus, China’s CNY and CNH are brushing 2022 lows, with rumours of massive FX intervention to prevent a slump to levels last seen 20 years ago: yet the PBOC worked in the opposite direction in surprising markets today with a 15bps cut to its 1-year Medium-Term Lending Facility Rate to 2.50%.
Yes, Russia has a near war-economy, Argentina’s leading presidential candidate wants to dollarize the economy without holding any dollars, and China has massive economic problems. But JPY is also 145.5 despite a bumper Q2 print of 6.0% y-o-y annualized vs. 2.9% expected, which will put more pressure on the BOJ to allow 10-year yields to drift higher. Indeed, what we are seeing is a market chain reaction that was both predictable and arguably deliberate - it just takes the correct theoretical way of understanding the world to grasp it.
This kind of thinking is not something Mr. Market likes to do because it’s hard and uncomfortable. For example, in the movie Oppenheimer it’s revealed that once Einstein released his Theory of Relativity in 1905 it would inevitably lead to a deadly global nuclear arms race decades later: Ouch! Equally, economic theories implemented since the 1980s which made Mr. Market rich have inexorably led us to exploding financial assets today.
If willing, start by recognizing the global economy has vast structural problems related to neoliberal financialisation and asset bubbles replacing physical production from the late 1970s until the Global Financial Crisis in 2008; then idiotic negative-rates-and-austerity can-kicking to bail out the rich; then a Covid lockdown and fiscal surge with no local supply chains; and now rapid rate hikes, which are straining global asset classes. The results have been simply awful.
‘The Long, Slow Death of Global Development’ outlines how Global South economies used to have industrial sectors as growth drivers until neoliberalism hollowed them out, leaving only volatile commodity and rates cycles and low-productivity services “wage hunters and gatherers”, “too many workers and far too few good jobs to put them in”, and “premature financialization” of a “highly predatory character.” That’s Argentina, and many others. There is no easy fix, which is why ‘dollarisation’ is flagged as well as ‘dedollarisation’, global commodity producers try to move up the value chain, and we see war and coups.
Yet today the West looks like the Global South too. Its YouTubers, TikTok influencers, and gig jobbers can’t afford to buy or rent a home, marry or have kids, or even eat well or stay warm: they flood into digital pyramid schemes. Governments seem incompetent or powerless. Populism is surging. The Guardian argues, ‘Let’s stop kidding ourselves we’re a rich nation and get real… the UK’s gone bust’, and that: “Britain has to start thinking of itself not as a rich industrial country but as a poor country facing first-order economic development challenges. Large parts of the UK are scarcely better off than middle-income developing countries, and on current trends are about to get poorer.” I was saying DM = EM in 2022, if you recall.
China didn’t follow the neoliberal script with its mercantilist state-capitalism, and post-2008 relied on massive debt/over-investment as well as a property bubble. Yet there is a limit to how high property prices can usefully go, how low the consumption share of GDP can fall, how much debt can be carried, and how much investment can be productively absorbed - and those limits have all been exceeded, with everything made worse by a trade and tech war with the US.
Indeed, local government finances and the national economy are reportedly “on the verge of collapse, and the thunder will explode at any time.”; Country Garden just defaulted; Zhongzhi Enterprise Group missed payments on high-yield investment products; recent bank loan data were terrible; and today saw industrial production 3.7% y-o-y (4.3% expected), retail sales 2.5% y-o-y (vs. 4.0%), fixed asset investment 3.4% y-o-y year-to-date (vs. 3.7%), property sales -8.5% y-o-y year-to-date (vs. -8.1%), and unemployment 5.3% vs. 5.2%. Summing it up, China “has fallen into a psycho-political funk,” says the FT, as its youth tell Soviet jokes again or say ‘let it rot’, and a high-earning Beijing worker is quoted as saving as much as he can to prepare for a property crash or a move against Taiwan.
So, yes, theories implemented decades ago are coming home explosively. But what now?
Mr. Market thinks there is an easy way out. There isn’t. Rate cuts won’t help China and will put more pressure on CNY, which will create more global protectionism, while Chinese FX intervention will risk pushing US Treasury yields higher, pushing the dollar up more. More fiscal stimulus into over-priced property or under-utilised infrastructure or capital stock won’t help growth, nor will more consumer debt. Deep structural change is needed, but isn’t politically acceptable.
The same is true for the West. There, Mr. Market sees the solution as rate cuts and austerity. Both will only accelerate metastasizing Brazilification. Stimulus into over-priced property would also be useless, although unlike China it can go into over-utilised infrastructure or capital stock.
So can we project forward using Einstein > Oppenheimer theoretical logic of what might help? Yes.
I mentioned at the beginning that the explosion being seen in EM today was arguably deliberate. Allow me to expand on that.
As ‘The Long, Slow Death of Global Development’ concludes:
Western elites “have not forged a new developmentalism that they can offer the poor world in the aftermath of global deindustrialization. In the absence of a new paradigm… it is the blind who are leading the blind. Indeed, the intellectual exhaustion of the elite “development community” is hard to fathom. In its upper echelons, those who still believe in the hoary orthodoxies of past decades --free trade, democratization, the extraordinary importance of what are nebulously referred to as “inclusive institutions”-- coexist uneasily with more humble types who will admit, in private, that they have no real answer at all.”
And the same applies to the Global North, which also needs to relearn development theory rapidly.
Yet Mr. Market, with the greatest array of intellectual firepower since Los Alamos, is not focused on this theoretical thinking because he now lives in Barbie World and only wants pink plastic rate cuts, higher asset prices, and more China stimulus: welcome to the real ‘Barbenheimer’!
But others outside markets are thinking more deeply. Even though there are Fed doves backing rate cuts, Powell appears to recognize what the Pentagon and White House do: that the US needs to shift to production from financialisation; to higher defense spending vs. China and Russia; to industrial policy; and on-/near-/friend-shore supply chains alongside its green transition. Moreover, while unemployment needs to rise a little, it cannot be allowed to spike for fear of the political consequences. Overall, this process will take years, and it will be inflationary throughout. But the alternative is arguably worse from a national-security perspective.
Ironically, this is a partial reversal to the pre-1971 Bretton Woods pattern of industrial production that neoliberalism rejected, for some at least: expect it to get more intellectual flesh on its bones as time passes. Just not from many in markets.
As such, the one thing that the Fed can do to accelerate this transition is to keep rates higher for longer, at least relative to others. (Like the RBA, who are clearly still very much into over-priced property and financialisation rather than physical production, as their latest minutes show they think they can see rates peak at just 4.1% despite a stronger economy than the UK or US. Property spruikers will be out cracking open the champagne as we speak.)
Via a higher US dollar, the Fed can then help cap commodity prices, which are rising again, risking an inflation upswing in H2 2023 and H1 2024 – and hurting Russia and ‘dedollarization’ rivals to boot; it can push back against bullish China stories and pull capital into US markets; and it will see more headlines bewailing the struggles of the private equity industry, or that the ‘Number of China hedge funds falls for first time since 2012’, as ‘Investors bemoan end of an era for offshore China hedge funds’: wait until the number of US hedge funds falls too, then private equity firms, then other forms of shadow banking predicated on financialisation, not national-security physical production.
"I am become Death, the destroyer of Barbie World," says the Fed as rates rise and stay high; and the PBOC too, as they cut them.
Of course, there is a vast indeterminacy about such global-strategy, theoretical, long-term forecasts, and there is a near-term to focus on. Maybe we get a 2008-style downturn ahead if EM explosions spread to the West, and all bets are off; or maybe markets wobble ahead but the real economy doesn’t, and the Fed cut rates too deeply too soon and then has to backpedal; or maybe ‘Brazilification’ is too far gone to be reversed, and it’s stagflation ahead. (Bill Gross certainly seems to dislike US stocks and bonds right now, and thinks the former should be lower, and the latter at 4.50% for 10 year Treasuries.)
Most importantly, let’s try to be realistic while staying theoretical: it would be fantastic if we could get those in Barbie World to play with facts, not toys, and focus on the next 20, 30, or 40 days, let alone weeks or years. But it’s unlikely to happen.
