By Michael Every of Rabobank
Policy Error(s) and Zeitgeist
Last week, or at least post the Fed-meeting, was wild. 2-year US Treasury yields spiked as 10 and 30-years tumbled (the latter to below 2%), dramatically flattening the curve; the dollar leaped; commodities and gold slumped; and equities just about held on. Even given the possibility the US long-end reflects the Fed buying more Treasuries than the Treasury is (currently) issuing, the overall impression is still of the market screaming “POLICY ERROR!” at the Fed. And why not? Doing nothing for 2.5 years as asset bubbles roar, and *then* hiking rates into what would logically be far closer to the end than the beginning of a recovery cycle is the embodiment of monetary policy error.
Will the Fed respond? Perhaps not short term – so more of this market action could yet be seen. Indeed, it will likely take equities tumbling to get the Fed’s full attention. But even so, last week’s volatility could *potentially* be a sign that US policy tightening is over even before it began - unless we get a shift of fiscal policy and supply chains.
Equally wild in its own way, US academic Bret Weinstein is facing a YouTube ban for daring to host experts discussing Ivermectin and mRNA vaccine safety: obviously YouTube knows more about the science of mRNA than the man who actually invented it - how reassuring to free speech and free thought! Weinstein is again at the heart/ahead of the zeitgeist: I recall watching his experience at Evergreen College in 2017, and saying to anyone who would listen that this issue would go national if no action was taken: it wasn’t; it did; and almost everything, including central banking, has changed. Moreover, last year Weinstein was the only academic voice saying evidence for a Covid ‘lab leak’ theory could not be ignored - and look where the US discussion is now.
Indeed, National Security Advisor Sullivan stated on TV on Sunday:
Would China ever accede to this demand? Consider a tweet from journalist @zhengwei75 from the South China Morning Post China desk: I find more Chinese officials are no longer keen to talk. One told me there is no use explaining as the world is forever biased.
“Those hate us will never change. Why waste time? We just shut up and do our work. Days for our revenge will come.”
Also unlikely to help US-China relations symbolically is news that the Hong Kong media group AppleDaily owned by jailed tycoon Jimmy Lai is reported as likely to go under within days.
Meanwhile, National Review just published an op-ed from the dean of the College of International and Security Studies which argues the US needs to adopt Great Power geostrategic thinking and needs “to abandon the globalist mantra, break out of a trading system that is increasingly stacked against us, and cut off Chinese access to our R&D base, educational system, and industry. We need to reshore our key industry, bring our critical strategic supply chains home, and remember the old Cold War mantra that we cooperate and share with our allies and partners, but not with our adversaries and enemies, especially in the area of technology…it is time for some straight talk: If “victory” in the current round of great-power competition means preserving the status quo customarily referred to as the liberal international order (LIO), i.e., insisting that “globalization” as construed over the past three decades should be preserved, then the US --and with it the world’s democracies-- will lose its global leadership position to communist China.”
For those who recall, that was a key argument we made in the ‘World in 2030’ project last year: that the US would ultimately have to move to realpolitik to retain hegemony even if it means bifurcating the LIO/LWO. Of course, it’s just an op-ed - but from an important source, and in an important publication. Whether it represents a policy error, or is Weinsteinian in its zeitgeist capture, remains to be seen – but the potential market disruption is ignored at your peril. Indeed, this is exactly the geopolitical process that would force the Fed to act on rates given the inflation impact implied – unless we enter an even wilder world of MMT and YCC, etc.
Staying geopolitical and Great Power, Friday’s Iranian presidential election, within a partial theocracy, saw low turnout, 10% of ballots spoiled, and victory for ultra-hardliner Raisi, who is under US sanctions, and has overseen the execution of thousands of (political) prisoners. As a result, the US push to get the nuclear deal over the line is accelerating: the line of thinking is that there is still a narrow window before Raisi takes office on 3 August. The problem --besides an Iranian president who opposes a deal rammed through in a lame-duck session-- is that Tehran wants guarantees no future US administration will U-turn (again): and that is impossible to deliver. There is no Congressional majority for a deal now, or after the 2022 mid-terms; and who knows after 2024? Meanwhile, some US states may impose their own sanctions.
It’s obvious the White House wants this deal done, in order to shift its focus to China and Russia (even as Russia and China enter the strategic Middle East as the US leaves). The election result and even embarrassing mainstream press reports that Iran is sanctions-busting by selling oil to China are not going to stop that. Indeed, the Pentagon is pulling military equipment out of the Middle East rapidly, which is as clear a sign as one can get of what is going to happen. It’s just not yet clear if the nuclear deal *can* be done, meaningfully: and that is supporting oil prices for now, which is going to keep parts of the inflation story on the market’s radar (even as radars are removed from the region).
There are many, many-layered policy errors for us to contemplate today – and many more to come.