By Michael Every of Rabobank
As William Shatner finally goes into space at the age of 90 --to give us his renditions of Space Oddity, Lucy in the Sky with Diamonds, or Rocket Man?-- Earth faces a mountain of problems; and markets, once again seizing on only ‘good news’, face the Kobayashi Maru scenario from ‘The Wrath of Khan’: a no-win scenario.
At one point Wednesday, natural gas prices in the UK and EU were up 40% on the day. That is not a supply shock: it’s a photon torpedo. Then Russia’s President Putin suggested he might have some spare gas lying around, and prices retreated to levels still as painful as William Shatner’s singing. Crisis over? Not until gas goes all the way back down again: and even if Russia magically fills the gas gap, it would still underline what an enormous geostrategic error the EU made in thinking energy supplies are not a pressure point on it - just as critics said would be the case when Angela Merkel opted for NordStream 2. When she goes to the dentist, does she opt for the cheapest one possible, or the one she trusts who costs more? As the old joke goes, realpolitik is getting your teeth done but, from the dentist’s chair, grabbing them somewhere important, and saying: “Do we have an understanding?” What else is there to understand?
In Congress, which knows from both pulling teeth and such grabbing, Mitch McConnell ”has blinked” by offering the Democrats a path to a short-term, small-cap debt-ceiling increase out to the end of the year. Except the Republicans are reportedly still going to insist on linking a proper end-year debt-ceiling hike --which would be more embarrassing for the Democrats to have to vote on again-- to reconciliation, which again uses up that bullet there rather than on the desired elements of Progressive spending bills. In short, this crisis isn’t over yet either.
In Zurich, the US and China agreed to set up a virtual meeting between President Biden and Xi Jinping by year end - just as he will be tied up with the debt ceiling again. As the wags ask, is it better held on China’s Zoom or China’s TikTok for maximum security? It’s good for the US and China to be talking; and for the US to repeat it doesn’t want a Cold War, even as it pushes military alliances, tech controls, and threatens tariffs and new trade tools; and for China to say the same as it de facto decouples parts of its economy too. Yet Minxin Pei opines: “as security competition overshadows US-China relations, it will be nearly impossible for them to cooperate even on issues of mutual interest, such as climate change and future pandemics. All bilateral issues will be viewed only through the lens of national security and evaluated in terms of whether modest cooperation might strengthen the other's security.” He adds the historical analogy that the pre-WW1 UK and Germany were tied together by trade --and royal blood-- more than the US and China are today. Meanwhile, as Taiwan claims China will be capable of an invasion by 2025, the Global Times editor tweets: “PLA already has the ability NOW to liberate Taiwan at one stroke, why has to wait until 2025? That the mainland hasn’t taken the action is a goodwill of Beijing to treasure cross-Straits peace. I worry that the goodwill could be abused by Taiwan and the war is triggered suddenly.”
US Secretary of State Blinken, who wasn’t in Zurich, argues the energy crisis underlines the need for a push for green energy, which it does - while overlooking the fact that the green push also precipitated the crisis. Blinken is also asking China to “act responsibly and to deal effectively with any challenges” over Evergrande. On that note, the Financial Times repeats research showing in 2008, 75% of Chinese houses were bought by first-time buyers, but in 2018 this had fallen to 15%, with the rest snapped up by investors - as enough homes to house 90m people sit empty. Is this “responsible”, or Marxist ‘productive capital’? Can markets reasonably expect things to look the same when the dust settles? If so, it says a lot about markets and not a lot about Marxists. But what lies on the other side if not more bubbles? We simply don’t know. Higher growth is not likely to be a key part of it, however.
But of course, the deepest Kobayashi Maru challenge sits with central banks. With inflation raging, what are they to do? Tighten policy? Like that will help on top of tax hikes and higher prices! (**RED ANECDOTE ALERT** My favourite supermarket sushi just hiked prices on my favourite set by 40%. Set phasers to ‘less sushi’, sadly.) How about easing policy? Like that will help either!
We have already seen the RBNZ opt for the former path. In Australia, the rates market is certain hikes are coming. Poland just hiked. The chatter is the BOE will follow: or at least this is reportedly the UK Treasury’s expectation, and more so given the government openly flags it wants a high wage, high productivity economy when the former is the infinitely easier of the two to achieve, historically. And Fed tapering apparently looms. One wonders at how this will play out, and not even in the long term.
Trying the other path, the ECB “will discuss boosting its regular asset purchases once the pandemic-era emergency stimulus comes to an end, but any such increase is by no means guaranteed,” says Governing Council member Muller. In short, while the Eurozone “recovery” --the recessionary energy crisis aside-- will allow the ECB to end its EUR1.85trn pandemic bond-buying program in March 2022, the idea is already being floated of then compensating by increasing QE by another EUR20bn a month! And, of course, the EU is now all for subsidizing energy prices, which will only see those prices increase further, and likewise increase the whip-hand that President Putin now holds.
I repeat, neither monetary nor fiscal policy will be of much help unless they address the supply side of things, which right now they don’t. On which note, our recent ‘In Deep Ship’ report argued that smaller economies would logically start looking at diversifying trade to smaller vessels and/or consider launching national carriers as a response to current shipping snarls. As Splash247.com reports, US carrier Matson has now started a direct Shanghai-Auckland service using 707TEU and 516TEU vessels, on top of a Taiwanese carrier launching a 1,700 and 2,700TEU service between Qingdao, Shanghai, Ningbo, Nansha, Shekou and Tauranga. Moreover, “An extreme shortage of liner calls to New Zealand in recent months has prompted talk among exporters of the need to create a national shipping line.”
Such structural re-workings of the Kobayashi Maru scenario --which themselves open up very worrying geopolitical scenarios!-- are arguably the only way one can defeat it, as Captain Kirk infamously did. Yet for most central banks, and governments, the greater likelihood is that they will boldly go into the mission to ‘Build Back Better’….and then end up like Lieutenant Saavik in her attempt:
“Activate escape pods. Send out the Log Buoy. ...All hands abandon ship. Repeat, ...all hands abandon ship.”