By Michael Every of Rabobank
That 'there are none so blind as those that will not see' is an English idiom inspired by the Bible --Matthew 13:13 (“Therefore I speak to them in parables: because they seeing see not…”). or Jeremiah 5:21 (“Hear now this, O foolish people, and without understanding; which have eyes, and see not…”)-- but is not actually seen in it word for word. Like all old wisdom, it rings true.
We just had a former Fed president say what he was not allowed to when in office -- which itself would be worthy of comment if our financial commentators were worth their salt -- that the Fed needs to push down stocks to get inflation under control. We then had a current Fed member say he wants the Fed Funds rate at 3.50% by the end of this year. Yet US stocks decided to stage a late rally yesterday, closing up on the session.
Bloomberg, typically myopic, puts it thus: ‘Steadying: Markets Stabilise as Traders Mull Fed Comments’. No, markets are blindly refusing to see what they are being told by the people they spend all their time apparently deferring to. They are being told clearly they can no longer have their cake, and everyone else’s cake, and eat it and fit in their jeans. And they are ignoring it.
This isn’t to say the US can push rates to 3.50% this year and not see USD/JPY well over 130, EUR/USD at parity, and USD/CNY back towards 7, etc.; or a deeply inverted US yield curve following a bear steepening; or a US recession. In all likelihood that would all hypothetically happen if the Fed tried. Yet that is what was just flagged. And markets are apparently ‘mulling’.
To be fair, within an hour Bloomberg had someone with better vision rewrite the headline to ‘Time Correction: Investors Face ‘Maximum’ Angst as Markets Stay Flat’. Then, shortly afterwards, it was rewritten again to ‘Aggressive Move: Fed’s Bullard Favours Raising Interest Rates Sharply’. Yet that just shows you there are none so blind as those that will not see anything other than Bloomberg headlines. Do your own thinking and reading!
That ‘aggressive’ proposed Fed tightening is what sacrosanct former Fed Chair Volcker did to stabilize markets and inflation in his day: stocks still guzzle at the trough he, globalized supply chains, and Greenspan’s permanent liquidity bailouts built. Of course, 2022 is not 1982, and today it may prove a policy error.
Yet are stocks at least echoing St Augustine in imploring, “Lord, make me chaste – but not yet!”? No: they are arguably acting like the short-tempered, incredibly spoiled child one dreads being trapped in any room or vehicle with as its pathetic parents feebly try to discipline it with a series of constant bribes. From the eschatological to the scatological, we are dealing not with high priests of finance, but a singular multi-trillion Eric Cartman from South Park.
Of course, the Fed are blind too – but that should not reassure any blasé markets. US trucking statistics are suddenly looking grim – just as the Fed’s Bostic says it will take far longer to resolve US supply-chain issues than he had expected. He clearly didn’t read ‘In Deep Ship’ and felt everything would mean revert with a lag or bounce back to a 50- or 200-day moving average, like lines on screens. That is not and will not be the case. Logjams will be cured by recession, driven by either inflation or rate hikes, or both, or by a Grand Strategy encompassing fiscal and monetary policy and new geopolitical supply chains, or not at all.
China’s ports are choking with vessels as it refuses to back away from Zero Covid despite the economic cost of trying to contain a staggeringly transmissible virus: workers are de facto locked into offices or factories, and people into their homes even in ‘liberal’ Shanghai. Yes, that means US port backlogs will ease ahead – and it also means far fewer people will be getting their orders from China at all. And this disruption might be structural if it is going to be China’s policy response to a virus that now appears endemic and increasing in transmissibility with each new mutation. Moreover, the EU just passed a ban on Russian coal, and is closer to a ban on Russian ships and lorries; and the US Congress just voted to revoke Russia's "most favored nation" trade status, allowing steeper tariffs for any Russian goods still coming in.
If you think this is going to end soon, “because markets”, read Russian Orthodox Patriarch Kirill’s sermon to his deeply-religious country from the Cathedral of the Armed Forces. He addressed the leaders of Russian forces and troops: stated Russia was fighting fascism, as in WW2; that its soldiers are “laying down their lives for a friend.”; blamed “various forces” (i.e. the West) that emerged in the Middle Ages for a false division between Russia and Ukraine; and didn’t acknowledge Ukrainians as existing, referring to them as “Holy Russians.” In short, the speech endorsed religiously sanctioned militaristic imperialism and cultural genocide. But Kirill is not on Bloomberg, and their latest survey shows a majority think Russian bonds are cheap. As are US bonds, apparently, just as the Fed talks about 325bp of rate hikes. There are none so blind as those that will not see.
Not unrelated, Finland may be close to NATO membership, prompting Russian lawmaker Vladimir Dzhabarov to state: ”If the leadership of Finland goes for it, it will be a strategic mistake. Finland, which has been successfully developing all these years thanks to close trade and economic ties with Russia, would become a target. I think it [would be] a terrible tragedy for the entire Finnish people.” More threats – as seen from both sides.
Meanwhile, the UN General Assembly suspended Russia from the UN Human Rights Council, with an interesting selection of countries voting for, against, or abstaining. China was against, and Brazil, India, and Mexico all abstained. Finland and France stay on the UNHRC… as do China, Eritrea, Sudan, and Somalia: sleep soundly knowing human rights are guarded by angels. The UN vote split may get people shouting about ‘Bretton Woods III’ despite there being no clear indication of what that catchy title actually means. Then again ‘BRICs’ meant nothing either, and only one brick is not now facing structural problems clouding its growth path, yet it was career-defining. A revelation to new believers, however, is how badly other FX will fare if the ‘So Bretton Woods II’ US dollar sees Fed Funds hiked to 3.50%.
Relatedly, and with a hint of Martin Luther’s 95 Theses, billionaire Peter Theil lashed out at billionaire Warren Buffet and billionaire Larry Fink as being ‘Finance Gerontocracy’ for opposing Bitcoin. The billions aren’t the problem, the way they make them is: make way for the new plutocrats! And the revolution rolls on, and over us, all over:
Canada, following the freezing of bank accounts without a court order and the closing off residential housing sales to foreigners, announced a 1.5% tax hike for banks and insurers on profits over C$100m and a one-time 15% tax on taxable income over $1bn for the last tax year the government is calling a Canada Recovery Dividend.
In Australia, the market is pricing in a massive series of rate hikes - 8 this year and more in 2023. Imagine what that will do to a political economy where rising property prices are the established religion. The RBA’s Financial Stability Review today helpfully managed to avoid doing any serious reviewing of financial stability, instead telling banks to maintain lending standards --after APRA walked away from the previous attempts to enforce them when the housing market wobbled-- and underlining that it is worried about high household debt levels – which it encouraged with its low, low rates. All very St. Augustine, as the RBA no longer gets inflation cover from the globalisation it was not responsible for in any way but took to be written in stone.
Indeed, an ex-BOJ official is suggesting Japan will have to abandon its policy of yield curve control and let them rip, in which case perhaps it is yields higher that will move and not JPY lower: but something is going to move a lot.
I won’t claim to be able to see all that is coming: but I am not wilfully blind to the fact that a large part of it is going to be very uncomfortable for many markets.