By Michael Every of Rabobank
You came in like a wrecking ball
“There was nothing that I or anyone else saw that indicated a collapse in 11 days.”
At some point ahead, if the Fed announces QE tapering at the September FOMC meeting --despite an evident economic slowdown, no fiscal stimulus, and slowdown and ‘reforms’ in China-- then the above words may come from the lips of Fed Chair Powell. At least we can assume that would be the case based on the market reaction to that implied policy path in the Fed minutes, as covered by Philip Marey here. It wasn’t epic selling all over: but any equity selling is a defeat for Fed, and overall it was the equivalent of a small Afghan provincial capital flipping to the Taliban without a shot being fired by the well-stocked local ‘army’. Both nothingburger and harbinger.
Does the Fed have the intelligence to prevent such a collapse from happening? When one sees in the minutes that “some participants raised the possibility of imbalances arising from a protracted period of low interest rates and widely increased asset prices” one thinks perhaps not. Do those in DC really not know what they have wrought? Do those on the ground really not transmit the actual landscape upwards to the Beltway?
While the Fed were writing this, food prices were rising sharply. Property prices were rising sharply. And in ‘crypto province’, NFTs of a penguin were being bought on a Monday for $4K and sold on a Tuesday for $7K; “cute, sassy” Ethereum Kitty images were being bid at up to $4K each; and Christies was auctioning NFTs, as Old Money finds it can’t resist so much very new. In short, an entire multi-trillion --dollar-- industry and social movement is creating massive, instant, vapid ’wealth’ via e-printing (for peanuts) and e-trading (for huge profit, lottery style) the equivalent of Panini stickers: except there are Anini, Banini, Canini, Danini, etc., all the way to infinity. In fact, I may go and make a quick set of them myself now and retire before lunch. And ironically, all of this is being done while decrying the imperial US Dollar for being watered down by Fed money-printing. It’s a monetary insurgency - and it is winning on the ground. Fed tapering --or regulation-- will see a big hit to ‘wealth’ there; but also to don’t-touch-this property; and to sacrosanct equities; and to most EM FX. Do they really not know this going on higher up?
But while we wait to see what the Fed says first next week (Jackson Hole) and next month, we get to hear “There was nothing that I or anyone else saw that indicated a collapse in 11 days” from the lips of Miley, General not Cyrus, who told the press the Taliban who came in like a wrecking ball were a big, fat whocouldanooed. Likewise, the Secretary of State and National Security Advisor are saying the US had planned for all scenarios. Really? So nobody had ‘Taliban wins’ pencilled in as a tail risk scenario when they gave away Bagram airbase? All that DC air-conditioned war-gaming never planned for the presently unfolding catastrophe, despite lower-level voices on the ground flagging it as ultimately inevitable for years?
Besides the genuine human tragedy, massive geopolitical implications, and sheer sense of shock, I draw the comparison between the Pentagon and the Eccles Building because both are exhibiting the same Beltway intellectual/industry capture and reality-denying careerism – at least based on the statement that there is a “possibility” of “imbalances” from current monetary policy. Everyone knows that QE has been running since 2008, and that if the Fed is really going to end it --in a slowing economy where Covid is still a serious concern to many, and with either no, or too much fiscal stimulus-- then the wrecking ball will be a bigger hit than Miley’s song was back in 2013.
At least there seems the possibility of new leadership at the Fed, if not a new policy direction (dove Powell vs. ultra-dove Brainard is the final selection, it seems). Politico is not saying we will see new faces at the DoD, NSA, or as Secretary of State regardless of them having just performed the foreign policy equivalent of QE tapering and a 150bp rate hike overnight – while telling people to keep buying houses and stocks.
Meanwhile, back to China as backdrop for the Fed. Bloomberg mentions the dreaded (to them) words “wealth redistribution” in relation to the target of “common prosperity” and the specific targets of the rich and private businesses who need to “give back more to society” flagged on Tuesday. So the Wall Street geniuses pushing for day-trading of NFTs to be part of your pension pot have opened up wealth management businesses in China just as the state does its own “wealth management” thing. What is about US elites and being able to foresee risk scenarios? Of course, the real effort will now be put into spin rather than any strategy reassessment. I have already seen many market iterations of “There was nothing that I or anyone else saw that indicated a collapse in 11 days” in regards to recent Chinese actions
So what does the latest news mean? Well, imagine this as “ESG with Chinese characteristics”, which is easy to sell. But understand that in the US, it might perhaps translate to “Oi – Microsoft, sort out homelessness in Seattle!” Moreover, there are also suggestions of a proper property tax being introduced, which would a real wrecking ball if so given 70%+ of household wealth is tied up in multiple empty properties, and up to 30% of GDP growth in building these concrete equivalent of NFTs. That’s why the property tax has never been brought in nationwide, or at a significant level, before now.
Bloomberg also reports that China is not taking its burgeoning, lethargic “Lying Flat” generation lying down. The emerging picture seems to be of encouraging young people not to just drop out, and to drop their hopes of draining white-collar hi-tech and finance jobs to move back to work in manufacturing again, perhaps driven by the moral mission of helping China. Social engineering towards engineering has not worked in most other economies who have tried to encourage it, even with serious pay incentives: what will Beijing have to do to achieve it?
Of course, wealth redistribution *is* logically part of solving Chinese, US, and global imbalances, and even the Fed are tiptoeing in that direction in their rhetoric even if most of their actions are de facto still delivering *upwards* redistribution. But if you want to deliver a true wrecking ball to neoliberal global markets, that is what it looks like. Who will be capable of seeing it coming?
Perhaps the RBNZ got just a whiff yesterday when they surprised markets (but not yours truly) by not hiking as expected, while reiterating that they will soon, honest. The same dynamic that stopped them acting yesterday will still be there waiting: and if one Covid-19 case saw rates on hold, we now have 11 cases, and 2 in hospital. Is that a rate cut in the current market currency?
The Aussie jobs number, following dismal real-terms wage data yesterday, was even sillier than usual: rather than -43K, jobs rose 2.2K, and unemployment collapsed to 4.6% while most of the country is under a draconian lockdown. (Yes, the data are for July, but the point stands.)
Yet let’s finish in Afghanistan, where despite a looming financial crisis as the US and IMF turn off the FX taps, the Taliban are not only trolling President Biden on Twitter and having a pop at Facebook for its censorship, but are going door to door and telling people to go back to work at gunpoint. In our global “-ism” debate, do they offer a role model for Western politicians who dislike US imperialism, and for US imperialists who dislike “wealth redistribution”?
Frankly, if one does not laugh at the black comedy of the moment, one cries.