By Michael Every of Rabobank
A step forward - and more backwards
In the real, not the financial economy, we have just seen one key step forward - and more back.
In particular, the crisis at the port of LA/Long Beach, on the verge of truly metastasizing, has finally seen shipping containers allowed to be stacked higher than usual to provide more storage in the limited areas available. Will this help? Yes! Is it enough? No! LA/LB still has a record backlog, with more containers arriving every day; every US logistics node from there on is also logjammed; alternative smaller ports are constrained by a lack of workers and trucks; and global carriers are opting to skip larger ports, such as Boston (perhaps for good reasons, but it certainly ensures shipping rates stay sky high).
China also reports Covid is spreading again in 11 provinces, despite being largely closed off to the outside world, and is imposing limits to intra-province travel. This will not only hit an already-slowing economy, but global supply chains too. Yes, that might ease congestion in US ports again temporarily, as did recent Chinese power-cuts. However, it will only do so because goods aren’t flowing, not because they are. It’s not just a US issue either. Recall the warning here about China’s cessation of exports of magnesium, and the likely knock-on effects on European industry? Politico is now flagging EU leaders signal alarm over Chinese magnesium crunch. Add other goods, and industries, to that list, perhaps.
On the virus front, despite official pre-Budget denials, there are also health-expert warnings and cynical chatter about the UK needing another Covid lockdown – although naturally not until 30,000 people have mingled at the COP26 in Glasgow next month. Parts of the EU are also seeing soaring Covid case numbers.
Europe can also worry about the La Nina pattern emerging in the Pacific, presaging what could be a colder than normal winter for the Northern Hemisphere, which already-tight energy markets did not want to see. As Politico also notes: ‘The EU’s impotent rage at Putin’s gas games: Access to Russian gas is splitting the European Union.’ But it’s not just gas doing so. The UK still rejects the European Court of Justice (ECJ) having a role in Northern Ireland, and the Polish government is also brawling over the ECJ vs. sovereignty: the Polish PM says the EU is making demands “with a gun to our head,” and risks starting a “third world war” if EU funds are withheld. In support, Hungary’s Justice Minister has tweeted: “We remember the Hungarian freedom fighters who faced Soviet tanks on the streets of Budapest. We said no to the Soviet Empire & we say no to the #imperial ambitions of #Brussels.” Recall EU countries are talking about a joint foreign policy and army: if things get worse, intra-EU enmity will start to look as bitter as that between California and Texas!
Is it a surprise Treasury Secretary Yellen now says inflation will stay high until H2 2022? But why is she talking about inflation again? The person who should be doing that, for now, Fed Chair Powell, just stated despite all of the inflation risks, it would still be “premature” to raise rates. As an aside, following the Fed’s recent decision to ban market trading by senior officials, it turns out the ECB's own disclosures for last year show 13 of the 25 members of the Governing Council picked their own funds, stocks and bonds - in some cases including government bonds the ECB is buying under its stimulus programmes, or shares in companies whose debt it buys. Again, how very American of Europe.
So the inflation outlook is now clear: high, for around a year – and then we will see, depending on supply chains. Yet the growth outlook is far from positive. Bloomberg had a long read called ‘Chinese Economy Risks Deeper Slowdown Than Markets Realise.’ (Well, some of us did.) Beijing has also announced, contrary to the Wall Street Journal, that it *will* proceed with pilot property tax schemes over the next five years. The Global Times explains: “…there is no turning back…It will not begin with tigerish energy and peter out towards the end, or leave the matter unsettled…it is best to treat the prospect of property tax with a calm mind [because] people with more houses have enjoyed more public services provided by the country and society, so they should contribute more tax…there is no need to wait until house prices fall off a cliff due to the levying of property tax. I can say with certainty that such a scenario will never happen. Our country will not allow such a situation to occur, and will not introduce radical tax reforms that could lead to the "collapse" of the housing market.”
So the tax rate will be very, very low: in which case, it won’t provide much revenue for cash-strapped government. And in the background, Evergrande is putting out pictures of the projects it is still finishing, just as another developer looks like it is to default on a 12.85% US dollar note due today. Consider the profit margins the firm must have been expecting to have borrowed at that rate; imagine the margins Beijing would prefer under ‘common prosperity’ to allow for more affordable housing.
Staying with tax, and after having almost all other avenues closed off by intra-party fighting, the US Build Back Better Act --the White House fiscal plan to stave off a growth slump, even if it also pushes inflation higher-- will apparently be funded by “not a wealth tax, but a tax on unrealized capital gains of exceptionally wealthy individuals,” according to Yellen. Which means their assets, i.e., their wealth. So, in the US it is time for curbs on ‘excessive’ income and for the wealthy to give back more to society. Oh, sorry: that’s common prosperity in China. More policy mirroring, as both sides of a growing geoeconomic divide try to deal with the inequality and polarisation that Chimerica globalisation built.
In geopolitics we see mirroring too. On Friday, US President Biden stated on live TV the US would defend Taiwan if it were attacked, a major step away from the US policy of “strategic ambiguity” over this hyper-sensitive topic. The admission, not actually Biden’s first on the topic, was immediately walked back by the White House press office, but it remains to be seen if this was the president ‘mis-speaking’, or if it was deliberate messaging. Either way, Beijing’s response has been furious, with the Global Times calling the present US administration the "most incapable and degenerate in the country's history." With the US also pressing ahead with plans to try to allow for Taiwan’s “meaningful” involvement at the UN, tensions over this issue look set to escalate further. Indeed, with all the EU drama over “WW3” and Poland, it’s the Indo-Pacific that is still the epicentre of geopolitical fat tail risks.
So that’s the real economy. The financial economy will just do its own sweet thing today, as usual.