Submitted by Michael Every of Rabobank
Happy Halloween! On what was supposed to be Brexit day we instead need to find other things to be scared of. Fortunately, there are plenty out there. Indeed, Halloween seemed an appropriate time for me to finally watch ‘Joker’ - and if there was ever a film oozing angry ‘Age of Rage’ populism this is it. It literally shouts “Kill the rich!” in places. Ironically, trying to watch Joker while several rows in of seats in front of me were illuminated by mobile phones held aloft like lighters during an 80’s hair-metal power ballad by a generation too young to even know what the 1980’s were almost produced the same violent reaction in me as one scissors-related scene: amazingly, even said scene did not prompt the guy in front of me to look up from his device. “Is it getting crazier out there, or is it just me?”
Meanwhile, a Joker-style uprising in Chile has seen the country forced to cancel hosting the 2020 APEC summit. That’s the kind of barbarians-getting-through-the-gates development that markets really don’t like; and unless a Trump resort is available(?) perhaps there will be no APEC at this year. In which case, where are Trump and Xi going to sit down and sign this ‘phase one’ trade deal? (The one that we think is an empty box rather than anything substantive.)
Anyway, checking after viewing I see that Joker currently has a 69% critics rating on the review-aggregator website Rotten Tomatoes vs. an 89% audience score. That’s an arbitrage opportunity--buy or sell it, depending on which score you trust--but not as large as for a new D.C.-Universe neighbour, the Batwoman TV show, which has a 71% critics rating but just a 12% audience score. Is it angry US culture wars or are Russians involved somewhere again?
The question is being asked in the real D.C. universe in the presidential impeachment process. With no irony, the latest bomb dropped is that John “Bomb ‘em” Bolton is to testify; a man alleged to be akin to a previous Joker iteration in that he “just wants to see the world burn” is now being looked at as a voice of reason by those same critics. Of course, as every step is taken members of the D.C. team will be checking audience vs. critics scores to see if impeachment really is a good idea or not politically – and that arbitrage is again important for markets.
In the expanded D.C. universe yesterday we also had the outcome of the Fed meeting. Against the backdrop of GDP healthily beating expectations at 1.9% q/q annualized, driven by both household and state spending (a figure helpfully mocked by the editor of The Global Times for being far less than China’s “6% growth”), the Fed decided to cut rates 25bp for a third time this year to 1.75%. More importantly, the Fed made clear that this is it: the mid-cycle adjustment that it had absolutely no idea would be necessary back in January this year is now complete and they are on hold. Chairman (Ker)-Powell also added that it would require a major shift upwards in inflation to get them to raise rates again, or for geopolitics to go wrong for them to be forced to cut: otherwise they are done.
As our own D.C. hero Philip Marey makes clear here, we strongly disagree. Our view is that the economic data released in recent weeks have been outright alarming. They point to a sustained and significant contraction in manufacturing, a slowdown in the services sector and a slowdown in employment growth. There was even an unexpected decline in retail sales. As a result, we expect a recession in the second half of 2020 that will force the Fed to cut rates all the way back to zero. Oh, and we does not think the Repo issue is under control either. More to come there too.
Anyway, back to critics/audience arbitrage. In Joker the eponymous madman launches into an angry tirade at the world: “All of you, the system that knows so much, you decide what’s right or wrong. The same way that you decide what’s funny or not.” Given central-bank and central-government shepherding of asset prices, can we really say the same isn’t true if we substitute the word “funny” for “value”?
Where is the value of a bond or a stock if there were no central-bank backstop? Are we about to find out if the Fed are going to sit on their hands, as we don’t think they will? And isn’t it ironic that supervillains and banks end up together in my mind even when there is no bank-robbing going on in a Joker movie that was far more Taxi Driver than Batmobile?
Is that scary enough for you? No? Well how about Treasury Secretary Mnuchin proposing the removal of some of the post-crisis reporting requirements for RMBS to help the markets along? That should raise as many hairs on the back of the neck as it does champagne glasses near term. And want another Halloween scare? On the Brexit front it appears that the Lib Dems have struck an electoral Remain pact with the Green Party and Welsh nationalists and former Tory Dominic “General Grievous” Grieve….and the latest news on the other side is that the Brexit Party is prepared to stand down in Tory marginal seats and only attack key Leave-voting Labour constituencies. If true, that makes Remain the popular equivalent of the D.C. Universe before Wonder Woman vs. Leave’s Marvel Comics Universe ensemble – even if the latter is ironically led by BoJo(ker). Early days, but it looks like a potential power shift towards a strong Leave victory.
Yet Halloween has candy too. As Joker says, “All I have are negative thoughts.” Fortunately not all we have are negative yields – indeed there are a few trillion less today than a few months ago. And we can try to accentuate the positive further: sometimes real value slips through ‘the system’ anyway. As someone quipped regarding Greece issuing debt at negative yields, at least now we openly see those buying Greek bonds won’t be getting all their money back!
This morning also saw an enormous and unexpected surge in Aussie building approvals (up 7.6% m/m vs. flat consensus) as the market once again moves from outright gloom back to bubble territory, at least in Sydney and Melbourne. It’s a choppy series but this underlines: 1) RBA cuts are less likely near term; and 2) Australia has become like the Chinese economy on which it relies. There are fewer and fewer productive business opportunities to invest in, so one either goes all-in on property (when the RBA, APRA, and government give the thumbs up) or one goes all out (when the RBA, APRA, and government give the thumbs down). There is no moderate house-price inflation scenario: it’s dangerous bubble or dangerous bust. Which one do you think the Jokers at the RBA will want to lean towards, via Aussie QE if needed?
We also had China’s manufacturing PMI far weaker than expected at 49.3 and non-manufacturing PMI at 52.8, meaning a composite of 52.0, down from 53.1. So on top of all the other screams today, we can add a slowing Chinese economy.