By Michael Every of Rabobank
As we stumble towards the end of Q1, markets continue to ask themselves which is the fairest of them all --stocks, bonds, commodities, and/or gold/bitcoin-- with the answer depending on one’s view of what is going on. And when I say what is going on, I mean *structurally*.
Today is likely to be whippy due to the forced sale of some stocks by Archegos Capital Management fund – but that’s a one-off. It’s no guide to who is the fairest of them all.
One can forget about following cyclical data too. Consider Australia. Large parts of that economy are red hot: there are no yachts, or property with views of yachts, or fancy cars to drive you to your property with a view of yachts to be had; house prices are up around 20-30% y/y, anecdotally; tradies are minting it like US day-traders when stonks are up that much. Unemployment data are back around where they were pre-Covid – the end of the government’s JobKeeper scheme yesterday aside. I don’t pay attention to those jobs data because they are silly; but it seems the RBA don’t either. Local gossip is that rather than tightening monetary policy, the RBA is likely to extend its QE bond buying even further, maybe doubling it from AUD50bn to AUD100bn. So what’s the point in tracking data? Central banks don’t seem to care.
Arguably, the better guide is now structural - which one needs to ‘be political’ to understand. Who is able to stimulate? That’s political. Who is willing to stimulate? That’s political. Within each economy, where will stimulus flow? That’s very political. What will the reaction be? That’s political too. “We don’t do politics,” an economist once explained to me. So tell me how you forecast GDP then, when everything is political?
In Australia, the RBA is willing and able, but the government is able but no longer willing. Where stimulus then flows is the housing market (“because Australia”); and what happens next is probably “the same as in New Zealand”, where the central bank and government are getting serious about property prices – though it still seems downright un-Australian to consider the RBA being forced to change its mandate the way the RBNZ just has. If that is the case, it’s still a better guide to playing the AUD-NZD than data-watching.
On a larger scale, can the US pass more fiscal stimulus? Can Europe (as the German constitutional court blocks the Covid recovery fund)? If so, does it go into wages or, like Suez, is that channel blocked (as the FT says of Germany: “IG Metall pay talks tell us inflation won't spiral”)? If so, into whose pockets will the money go, and in which country? Who is the fairest of them all is all political.
If that weren’t head-scratching enough for economists/markets, politics has an international dimension of ever-greater importance. China has just sanctioned US, British, and Canadian academics, think-tanks, and politicians: one US individual is the newly-promoted wife of key ‘swing’ Democratic Senator Manchin, which surely helps guarantee a harder US line. There are also suggestions from Chinese media Beijing will sanction the Better Cotton Initiative (BCI) and, somehow, The Quad (US, Japan, India, and Australia). Businesses who ‘don’t do’ politics didn’t see how this could impact them: now US and EU clothing firms are boycotted and/or closed in China; and a Wall Street Journal editorial states businesses need to make a choice of where they operate – a tail risk I have been warning of since 2017.
As this is happening, China just signed a multi-year investment deal with Iran: that after friendly diplomatic activity with Russia and North Korea. (Yet recall China wants cheap oil and a larger Middle East presence; Russia likes expensive oil and its own large Middle Eat presence: it’s not just within the Western camp that division lies.)
Against that backdrop, the US has floated the idea of building a “democratic” rival to China’s Belt and Road Initiative; USTR Tai has stated US tariffs on China won’t be coming down as they are a point of “leverage”; and the US is talking about a massive infrastructure scheme funded by a suddenly-politicised central bank; and on-shoring supply chains; and keeping control of key technologies via a new R&D surge. Perhaps even politics-blind businesses and markets can see the rough outline of lines in the geographical sand?
Which block is then the fairest of them all to businesses? At the very least, for those who still refuse to answer, can they see there is serious policy mirroring going on? (Which was also a logical US policy stance projected here as far back as 2017.)
Meanwhile, for those thinking the only politics required to call markets right is the “Build Back Better” mantra, the White House has invited the leaders of 40 countries to a global climate conference on 22-23 April. That includes China’s Xi Jinping, publicly dubbed “an autocrat” by Biden, leading a state the US says it is in “extreme competition” with, and whose economy has an enormous focus on coal power; and Russia’s Vladimir Putin, just called “a killer” on TV by Biden, leading a country seen as a major threat to the US, and whose economy is entirely energy- and resource-dominated.
Recall what happened in Alaska recently, which in diplomatic terms was seen as a debacle. The normal procedure is to hold lots of lower-level ‘Sherpa’ meetings to establish points of agreement, before the heads of state then roll up to smile for the cameras and sign on the dotted line. No such work has been done, it seems, and straight into the deep end we go in just over three weeks.
While we are waiting, read this article in the Globe and Mail. The author underlines his own experience in trying to tackle the climate crisis within a corporate ESG framework, and (echoing Polanyi) argues:
No “free market” truly exists. A market economy is, at its core, a collection of rules. No rules mean no market. Nor is there one set of standard rules. Every rule, including corporate tax rates, patent protection and fines against pollution, is a deliberate decision that has an impact on the system. If a government changes the rules, we get different results – all of which can be defined as market outcomes. Changing rules is no more an “intervention on the free market” than creating them in the first place….Business leaders need to take a stand: If you believe in capitalism, then you know that market failures cannot be addressed with silly markets-self-correct theories. Claiming so in 2021, 13 years after the financial crisis and decades after we’ve been told that climate change is the great market failure in history, is an abdication of our responsibilities to the youngest and the poorest in society, who will bear most of the burden of continued inaction.
So take a look in the mirror, Mr. Market: it’s all going to get very political ahead whatever happens.