By Michael Every of Rabobank
Navel-gazers in a cul-de-sac
‘Do Androids Dream of Electric Sheep?’ asked Philip K. Dick in 1968, long before AI was on our mobiles and scientists could create artificial human embryos. Markets are very excited about AI now; Replicants will come later. Yet while ethical concerns are raised by some, X is asking questions about the underlying “authenticity of demand” for AI chips: on Wall Street, ‘Do Electric Sheep Dream of Androids?’
Dick’s ahead-of-his-time thinking “made most of the European avantgarde look like navel-gazers in a cul-de-sac.” That dynamic still holds true today in you look around carefully. The safe narratives are rarely right anymore.
How many expected Eurozone’s revised August services PMI at 47.9, despite a tourism boom, while in the US it’s 54.5, with prices paid up to 58.9? Or the Eurozone manufacturing PMI at 43.5 while the US is 47.6, with German factory orders -11.7% m-o-m and -10.5% y-o-y, and auto orders echoing the collapses of Covid, 2012, or 2008?
How many would have expected that despite those data, both the Fed and the ECB are still talking about potentially raising rates again? Not the avantgarde economists who wrote this paper at the Chicago Fed arguing that alongside slowdowns in some sectors --see the Fed Beige Book-- inflation is *finally* ‘transitory’. Maybe the ones who wrote this paper at the New York Fed admitting they have no idea what the post-Covid R* is, but it might be higher.
We flagged stagflation and US outperformance risks earlier this year, and our energy analyst Joe DeLaura is still beating the drum for structurally higher energy prices going forwards. Tellingly, yesterday saw the White House ban oil drilling in Alaska, as Saudi Arabia raises its official selling price to the US to $7.45 above benchmark, and to Asia to $3.60. With a largely-drained US Strategic Petroleum Reserve, if the Fed really are active in oil futures, as some whisper, they need to get busy again soon.
After all, Riyadh needs the money. Not only are they building the world’s least-practical, most-lucrative-for-architects linear city, ‘NFTom’, but they are to host the Asian Winter Games in 2029. Yes, *winter* games. With snow. At a “year-round ski resort” near NFTom - I’m not sure even Philip K. Dick would have dared pen that idea. Re-invented solid-gold wheels are really turning in the region. Likewise, the US, Saudis, and Israelis seem to be moving closer to extending the Abraham Accords which could transform global supply chains. Presumably the White House would expect help in capping oil prices, and a Saudi promise to back away from China and Russia, as a quid pro quo for a NATO-style defence guarantee. Yet how long would BRICS11 bonhomie with Iran then last, and wouldn’t Russia meddle? That again suggests higher, not lower oil prices.
Of course, there is always green tech. But how many expected the CEO of Orsted, the world's largest offshore wind developer, to says he’s prepared to abandon US wind projects entirely unless the White House guarantees more fiscal support? The same thing has already happened in Sweden and the UK. Equally China is having to tell people to remove solar panels from roofs in some areas due to grid overload at peak times. This all underlines the --vast-- expenditure that will be required to make everything green work, and/or higher energy costs, which is inflationary or stagflationary.
A cul-de-sac is also where US-China relations now are. No sooner did we get a slew of ‘Serenity now!’ op-eds from US thinktanks funded by Serenity, Inc., than China announced a ban on made-in-China iPhones and other foreign brands in government offices. Apple being among the most pro-China US firms is more than ironic: who is next, as China’s share of US imports falls to its lowest level since 2005? Meanwhile, China is celebrating achieving domestic 7nm chip technology in its latest Huawei phone. How many US policy hawks expected that? Yet the logical conclusions are that the US will increase trade sanctions further, so more decoupling, and more inflation; and China’s achievements may be at a very high cost per unit, so more decoupling, and more inflation.
Relatedly, the Financial Times has an op-ed arguing that ‘China’s demand dilemma could spell trouble for the world’, making the point that “The other G20 countries should signal consensus against Beijing running a big surplus.” In short, no Japan redux for China in terms of relying on global demand over domestic. However, Xi isn’t even coming to the G20, underlining a rapidly-accelerating Global South – G7 fragmentation underway; which is again inflationary or stagflationary.
More broadly, almost every day now I see a Wall Street Journal, FT, or serious media op-ed or article underlining that we are close to some form of structural crisis; that the global architecture is breaking; that norms are being subverted; that economics doesn’t work as a subject (as if it ever did!); neither does macro forecasting; that science has been corrupted; and that the media can’t be trusted; and neither can social media.
The New Statesman, for example, today offers ‘The great crack-up: We inhabit an economy too small to deliver the social goods British people expect’ and ‘The parallels between Argentina and Britain’s inept political class’ - which sounds a lot like my meme of EM = DM (and so stagflation).
It also says ‘Economic orthodoxy is a trap’ – which it is, Admiral Akbar. Which is largely why we are where we are.
Indeed, the RBA’s Lowe, as often with central bankers, telling the truth on the way out the door, noted today that he sees supply disruptions, global warming, an ageing population, and deglobalisation all leading to more volatile inflation in coming years: either steeper supply curves or more variable supply curves lie ahead. Now let’s all welcome Michelle Bullock, who coming in the door with a declared A$6m personal property portfolio, will no doubt tell us inflation is going back to 2% and don’t panic.
Indeed, those who consider themselves to be avantgarde still prefer the safe consensus of gazing at their navels in a cul-de-sac. On the that note, and playing with another classic Philip K. Dick title, they are saying, ‘We Can Forget It For You Wholesale’, which became the movie Total Recall - in this case though, Total Lack of Recall.