By Michael Every of Rabobank
“I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the fear has gone there will be nothing. Only I will remain.”
Markets appear to have taken this philosophy from Frank Herbet’s Dune to heart again to some extent, but clearly the risk of risk-off returning ahead remains. Indeed, US Election Madness is about to hit fever pitch as the country has to choose between two deeply unlikely Kwisatz Haderachs.
It’s not like we are short of gom jabbars on other fronts too. There are a panoply of pain-inducing stories to choose from all over the world. In more ordinary times, any one of these events would be the main news focus. Somehow, however, all of them now just blend into the melange we call “2020”. The shocking murders in France obviously; record virus cases; and journalist Glenn Greenwald quitting the online newspaper he founded specifically to avoid censorship because of its self-imposed censorship.
For those who look within to dive into the deep, dark depths of social media to follow these stories further….well, that melange becomes more like the Frank Herbert version: “The spice expands consciousness.” Of course, that same spice is also highly addictive, and ends up horribly distorting you if you aren’t careful. Yet “the Spice must flow!” or otherwise there’s less GDP, say social media giants, and we can’t have that.
Indeed, let’s focus on that Great Worm of GDP, which most in the markets watch in awe, silently muttering “Oh mighty Shai-hulud; Keeper of balance; Bless the Maker and His water; Bless the coming and going of Him; May His passage cleanse the world.”
US GDP certainly rebounded strongly in Q3 with a 33.1% leap, which captured some pre-election headlines – although at least one US media source decided to use just the q/q number and not the q/q annualised one because it was smaller. Yes, that is where we are now - but not that these numbers are not always spun one way or the other by many parties for many reasons. Naturally, the Q3 rebound was flagged the other way by pro-Republican media – who failed to point out that in y/y terms --the best measure-- GDP is still down, and with momentum fading in Q4, the growth outlook is still questionable. (Bond markets don’t seem to get that of late, as they start to project mystical visions of greening deserts, a la the Atreides.)
This is something almost every Guild Navigator, I mean central bank, including the Fed, is pointing out over and over again. The ECB yesterday, as our team had expected, did nothing, but let us know that next month they will do something. Which is better than nothing at least.
Meanwhile, China released elements of its new Five-Year Plan. These are being pored over by the same Western financial media who seem to be equally (and ironically) fixated on both nanosecond trading and quarterly earnings reports, as if all sit happily together.
The take-away so far is that China is aiming for a technology Great Leap Forward to 5G, artificial intelligence, quantum technology and the like, and will be looking inwards for its own core technology development. (“We just folded space from Ix. Many machines on Ix.”)
How this will all play out vis-à-vis other countries desires to develop or keep these technologies for themselves, given China’s scale, and especially regarding the US high ground in these fields, and in semi-conductors, remains to be seen. (“He who controls the spice controls the universe!”)
Even today’s Bloomberg op-ed, usually an endless iteration of “The spice must flow!” says: “The result will be a more insular approach to industry and trade as Beijing strengthens a robust domestic market for those up-and-coming heroes to ply their wares. Foreign companies –notably in semiconductors, software or materials- that still believe China is a viable long-term business are kidding themselves. Only those supplying crucial products and services not available locally will have any shot at sustained market access, and even then only until a domestic alternative comes along. ”
China is also pledging “quality growth, reform, opening up, and innovation.” Which, like Duncan Idaho’s endless gholas in the endless series of Dune sequels, are memes that keep being repeated in this literature: and in both senses we are looking at what could be declining marginal returns rather than new ideas. Let’s see what is delivered this time.
A digital CNY is allegedly close to being approved (says the South China Morning Post), and this certainly opens up some new avenues. However, it does not solve underlying problems like the closed capital account, or the reliance on the SWIFT network. (On which, another Dune acronym, CHOAM, comes to mind.)
Anyway, let’s get back to trying to trying to follow all of this as best we can:
“It is by will alone I set my mind in motion. It is by the juice of Sapho that thoughts acquire speed, the lips acquire stains, stains become a warning. It is by will alone I set my mind in motion.”