By Michael Every of Rabobank
Let’s start with the Fed, and some thoughts that will needle. Stocks slumped in Asia, Europe, and the US session Tuesday - then the US magically rallied again, but not into the green. “The first rule of Fed Club is you don’t talk about Fed Club”; but did someone forget to sell enough bullish puts? Some may not like the idea that central banks are playing with markets, but as Groucho Marx said, “These are my principles. If you don’t like them I have others.” For example, IF there is a Fed Club, why can’t they raise rates AND pump markets? If secretly selling puts holds up stocks, and you can do that AND raise Fed Funds to pretend you are serious about supply-side inflation you can’t control,…then why not?
Similarly, why can’t you raise rates AND do QE? Yes, ‘they run in opposite directions on yields’. But if you want to finance a huge budget deficit while cooling the heels of the rest of the economy, buy freshly issued government bonds, with higher coupons flowing back to the treasury to boot, and raise rates.
It’s what one sees in a war economy.
On which, we published a note called “The Ukraine Metacrisis” yesterday underlining that:
- Markets are significantly mispricing the odds of an impactful war happening over Ukraine, with major volatility implied for energy, grains, fertilizer, metals, rates, and FX.
- The market impact of US sanctions could be extraordinary; at worst, they could bifurcate the globe into complying and non-complying countries - yet a failure to use sanctions would show US powerlessness to prevent Russia moving on Ukraine; and
- This is a metacrisis that will see an acceleration towards a different globalization in which the US can still thrive, but with huge challenges for many others, including the EU.
Recent developments underline and amplify that message.
In terms of war: more troops and equipment are still arriving from all over east, and west; the US is flagging it may send more than 8,500 soldiers to the EU; more NATO/Quad countries are asking nationals in Ukraine to leave or making lists of them (as the US flags it won’t help you if anything happens); and China’s Global Times has an exclusive – “Dirty trick again! US plots to authorize departure of staff from embassies in China over epidemic ahead of Beijing Olympics”. Over Covid, eh?
In terms of economics and finance: President Biden has stated a Russian invasion would “change the world”; a Russian senator has warned that if Russia is cut off from SWIFT, Europe won’t receive Russian oil, gas, or metals – but that it can work around a SWIFT ban anyway, and expects other countries to join it in that effort; and the White House has stressed that it will redirect global gas supplies from elsewhere to Europe and use Huawei-style global export controls as a primary economic sanctions tool against Russia, cutting it off from US technology, computing, aviation, etc.
In short, the fattening tail risks are of a tipping point towards a bifurcated global economy – no matter how illogical some of the projected market pricing then is (i.e., supply gluts in some places, shortages in others). It still seems unlikely the present phase of this metacrisis will get us to that endpoint: but it is a large step in that direction, and if it extends to Asia the probabilities will shift.
The same bifurcation of economic ecosystems is already evident in musician Neil Young (who is old enough that Lynyrd Skynyrd asked him musical questions) has demanded his music is removed from Spotify because it also hosts Joe Rogan. As Rolling Stone magazine, which used to lionise 70’s ‘rawk’n’rewl’ excesses but is now deeply political and politically-correct, notes: “Young’s letter was addressed to his manager and a Warner executive. At press time, Spotify hadn’t responded to a request from Rolling Stone asking if they planned to remove Young’s music. It’s still available, but it might be smart to listen to Zuma and Rust Never Sleeps while you still can. They could disappear at any moment.“ And so could lots of other things – because once we start down the road of responding to feeling needled by imposing a “me or them” binary, damage is done. When do they come for Eric Clapton, one asks, as we “Keep on rockin’ in the ‘free’ world.”?
Meanwhile, the IMF (“Keep on rockin’ in the ‘free markets’ world”) just released its latest outlook, which stresses the world economy rests on one dyad: the Fed and Chinese housing. The former is looking tragicomically wrong unless they ‘raise and pump’, say markets; the latter sees Bloomberg report local government vehicles are buying land plots over the heads of struggling developers at above market valuation when that land is owned by the local government - borrowing money to buy assets from themselves to crack down on private developers and yet not the overall economy. Why are we so close to a global bifurcation when we actually have so much in common?!
Of course, this overlooks the inherent risks to markets of the Fed tightening and China loosening (wild swings); which would also run true for the Fed loosening and China tightening (wild swings); and for the Fed and China both tightening (wild crash); or, note well, of the Fed and China both loosening (wild inflation – and even Singapore’s MAS tightened unscheduled yesterday for only the third time in 20 years). Think about that and one starts to see the *logical* appeal of much deeper bifurcation: or of central global planning. But I have probably needled too much today already.
Except I also have to add that we will now get to see more details of the police interrogation of British PM BYO; a looming, critical report into his Conservative ‘Party’; and what will be No. 10 attempts to spin all this as ‘Fifty Shades of Gray’ rather than “I’ll get my coat”. Moreover, in Italy there is still no white smoke as they try to elect a new president, with potentially major implications for markets. Throw in a new, clashing German leadership and an election in France in months, along with deeply unpopular US leadership, and it’s hardly the perfect backdrop for the kind of ‘thread the needle’ geopolitical decisions that will have to be made to avoid causing too much damage.