By Michael Every of Rabobank
No Oasis; But is There a Masterplan?
Markets took yesterday’s non-committal Fed minutes as relatively dovish. I would say that’s a fair assessment. More worrying is that they were non-committal about what the Fed will do at its March meeting because the Fed has no idea what to do. All its choices are bad. There is no oasis ahead, as markets like to believe. There is no Fed ‘masterplan’ to stop inflation without stopping either the asset-price appreciation we’ve built markets on for decades, or the faux appreciation for the working class we’ve built markets on the backs of for decades, or both.
As my fellow chutzpahnik Philip Marey bewails: "The minutes also noted that a formal framework review would start in 2024 and conclude in 2025. Although the flexible average inflation targeting (FAIT) strategy was reaffirmed at the January meeting, it has caused the Fed to fall far behind the curve. Policy rates are at the zero bound and the Fed is still buying assets when GDP growth is 6.9%, CPI inflation is 7.5% and unemployment is 4.0%. Is this rational monetary policy or are the lunatics running the asylum? There is no need to wait until 2024; the Fed’s groupthink has produced another failed strategy that should be terminated immediately.” But let’s not hold our breath: the Fed will continue to swagger arrogantly around as if it knows best, and things will get thrown and broken.
Taken together, this puts me in mind of cheeky British working-class lads done good of yesteryear, Oasis, and their ‘The Masterplan’. Hum along while you fantasize about Goldilocks scenarios and that somehow the Fed knows what it’s done, what it’s doing, and what it will do.
“Take the time to make some sense; Of what you want to say; And cast your words away upon the waves; Sail them home with acquiesce; On a ship of hope today; And as they land upon the shore; Tell them not to fear no more; Say it loud and sing it proud today; And then
Dance if you wanna dance; Please brother take a chance; You know they're gonna go; Which way they wanna go; All we know is that we don't know; How it's gonna be; Please brother let it be; Life on the other hand; Won't make us understand; We're all part of a masterplan; Say it loud and sing it proud today
I'm not saying right is wrong; It's up to us to make; The best of all the things that come our way; 'Cause everything that's been has passed; The answer's in the looking glass; There's four and twenty million doors; On life's endless corridor; Say it loud and sing it proud; And they
Will dance if they wanna dance; Please brother take a chance; You know they're gonna go; Which way they wanna go; All we know is that we don't know; How it's gonna be; Please brother let it be; Life on the other hand; Won't make you understand; We're all part of a masterplan.”
Likewise, in geopolitics we have market hopes for a ‘no war!’ oasis fading away again, and everyone thinking there is a masterplan - just no agreement which/whose we are seeing.
US Secretary of State Blinken, the heads of NATO, the OSCE, UK Defense Intelligence, Estonian intelligence, and Ukrainian President Zelenskiy all underline they don’t believe the current Russian troop withdrawal is real and is a redeployment nearer Ukraine. They want to know “which way they wanna go; All we know is that we don’t know” - and until then, the threat of invasion remains. The US State Department is setting up a task force on Ukraine to co-ordinate during a crisis and cut across other agencies and bureaus. That doesn’t happen when things are winding down.
Militarily, among information and misinformation, and allegations each is the other, note:
Russian troops in Belarus assembled, then disassembled, a pontoon bridge leading to the Chernobyl restricted area that would allow a rapid tank move towards Kyiv. That’s an odd manoeuvre unless it’s a warning for those Russia knows are watching this by satellite;
Israel, with good relations with Moscow and Kyiv, has reportedly reached out to Russia for help in evacuating its citizens and diplomats from Ukraine, and is publicly preparing for the temporary flight, or even mass emigration, of the 200,000 Ukrainians eligible for its citizenship; and
a senior Central African Republic military officer reportedly says many Russian mercenaries, who have established key footholds across the continent, have recently departed – for Ukraine. In all three cases, “And as they land upon the shore; Tell them not to fear no more”?
Politically, The Kyiv Independent reports the Franco-German masterplan is to “sail them home with acquiesce; On a ship of hope today” and align with Moscow in insisting Kyiv signs the Minsk 2 accords that de facto Finlandize it. Again, no oasis: Ukraine is not willing to. Yet central/eastern EU members now see they can’t rely on French or German security guarantees, which kills off the EU strategic autonomy masterplan. The key question is if the Biden administration holds the same view and is using Paris-Berlin as part of a good/bad cop routine, or if it is taking a Cold War stance at odds with them and Russia.
On which note, Reuters reports the White House will propose a record $770bn US defense budget. Even if that means a real-terms decline, is focused on wages and salaries, and sees a reduction in the size of the US Navy via fewer littoral ships, it suggests a hawkish stance. Indeed, Congress may actually add to it again, rather than subtracting. The macroeconomic impact of this higher spending is negligible for markets: the geopolitical signalling is crucial.
As is US Trade Representative (USTR) Tai criticizing China for not meeting the terms of the US-China Phase One Trade Deal. At the time it was signed we argued it was a win for the US if complied with, but if it wasn’t --and we said I wouldn’t be-- it opened the door to more radical US trade action. The USTR’s China WTO compliance report now states the US needs to pursue new, long-term structural trade strategies *outside the WTO where necessary* to deal with China's "state-led, non-market policies and practices" - you know, the ones Wall Street analysts and US hedge-funds are so wowed by. Only this will "secure a more level playing field for US workers and businesses." (And allow cheeky working-class boys to find their own oasis.)
What could this mean? It depends on how the US approaches the issue, but it seems “The answer's in the looking glass.” Higher tariffs: the China competition bill already passed by the House of Representatives and now before the Senate would expand the use of anti-subsidy tariffs to target cross-border subsidies for Chinese companies that invest in offshore production to skirt US duties. Yet the USTR also suggests setting new trade standards, with the EU, to exclude Chinese firms/products; and to make supply chains more resilient and diversified, which implies cajoling Western firms to leave China. More radical solutions such as US industrial policy or capital controls are not mentioned – but they are logical, if not political, endpoints on the intellectual and realpolitik journey underway. “I'm not saying right is wrong; It's up to us to make; The best of all the things that come our way.”
In short, the Fed is hopelessly stuck; USTR logic is little different to the Trump era’s; so is the US defense budget; and Ukraine is not resolved. Can Wall Street see this masterplan? As the tribute band are named, “No Way, Sis”.