By Michael Every of Rabobank
Lucy in the Markets with Diamonds
The market ‘action’ today is watching US midterm votes be counted, which even emerging markets do more smoothly; and US celebrities roll out on Twitter to back or decry conspiracies about why it is evidently incapable of doing the same.
Apart from that, markets will be echoing a Peanuts cartoon I recall vividly from my childhood (although I sadly failed to find it with a Google search this morning): changing the subject when proved wrong by facts. In said comic strip, Charlie Brown finally shows that some of opinionated Lucy’s statements are unequivocally wrong. Her reply, after a pause, is: “I know a girl who belongs to two book clubs.” A total non-sequitur as denial and shut down.
It’s deeply tragic that what made a 10-year-old laugh is, some four decades later, still the modus operandi for vast swathes of financial markets; but experience across the buy and sell side shows me it is absolutely the case.
Here are some not-too exaggerated Charlie Brown simple questions to markets and many Lucies’ diamond responses:
Charlie Brown: “Did you read that ‘China Downgrades Priority of Economy for Future Legislation’? Future legislation is no longer to revolve around economic development and adhere to “reform and opening up”, but instead now “to the leadership of the CCP,… to the guidance of Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, the Theory of Scientific Development, and Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, to develop a system of socialist rule of law with Chinese characteristics.”
Lucy in equities: “Did you try cronuts? They’re so good they make me feel bullish.”
Charlie Brown: “Did you hear the rumour China might introduce wealth and inheritance taxes --as the UK may now raise the top rate of income tax, not cut it-- and the tax authorities may focus on high net worth individuals (net worth RMB 10m and up) for special audits, and they might even have to pay a de facto ‘exit tax’ if they look like they are decamping abroad?”
Lucy in wealth management: “Wild Wonder is the colour of the year 2023. That makes me bullish.”
Charlie Brown: “Did you see that China is sliding back into deflation even as the rest of the world see high inflation? PPI was -1.3% y-o-y and CPI down to just 2.1%. Doesn’t that imply a much lower CNY to try to export its way out? Isn’t that negative for US dollar valuations of Chinese earnings? Won’t other EM exporter FX get dragged down too? Won’t that make paying for dollar-priced commodity imports harder? Doesn’t that also mean the West faces an imminent choice between deepening reliance on Chinese supply chains again, or putting up tariffs in response slash accelerating friend-shoring? Will they prioritise near-term lower inflation over geoeconomic resilience/security despite rising geopolitical tensions?”
Lucy in markets: “How do you feel about the World Cup being in Qatar? I see it as bullish EM.”
Charlie Brown: “On which note, did you see Xi Jinping state China's security has been increasingly unstable and uncertain, and that it will comprehensively strengthen its military training and preparation for any war?”
Lucy in a Western corporation in China: “Car sales in October were up. I remain bullish.”
Charlie Brown: “Japan is now having to sell Treasuries to fund the FX intervention keeping its yields low. Doesn’t that mean more upward pressure on yields in other parts of other curves? Isn’t there a risk inflation goes down from here but stays around 3-4% for years due to structural supply-side issues?”
Lucy in fixed income: “Star Trek III is better than Star Trek II because it’s got Klingons. That, and this being transitory, makes me bullish.”
Charlie Brown: “Did you see that the French Minister of Economy has stated a “strong response” is required against American green policy to ensure Europe keeps industrial production? That must mean WTO-defying protectionism, and so going green will also mean going more mercantilist. It also therefore means an EU-US trade war when Europe is the net exporter, and as the EU relies on US gas and US guns. How does this add up?”
Lucy in Europe: “Strategic autonomy slash free markets slash Europe slash ESG. I remain bullish.”
Charlie Brown: “FTX is blowing up, and Binance is buying them, and crypto is collapsing again. Didn’t they just run a Super Bowl ad? If they can go, who is next?”
Lucy in Crypto: “I eat one protein bar daily, but on Saturday I have two. That makes me bullish.”
Okay, not all of these are diamonds, but you get the idea on how much so many Lucies’ heads are up in the sky right now.
Now back to watching Americans struggle to count lots of small pieces of paper as a precursor to more ‘Lucy-ness’ to come .