By Michael Every of Rabobank
The Woozle Effect & Heffalumps in the room
“I shall have to wait until I catch up with it,” said Winnie-the-Pooh. “Now, look there.” He pointed to the ground in front of him. “What do you see there?”
“Tracks,” said Piglet. “Paw-marks.” He gave a little squeak of excitement. “Oh, Pooh! Do you think it's a—a—a Woozle?”
The Woozle Effect, also known as evidence by citation, occurs when frequent citation of previous publications that lack evidence misleads individuals, groups, and the public into thinking or believing there is evidence, and nonfacts become urban myths and factoids. Using that definition, contemporary neoclassical economics is a complete Woozles. Name the economic theory and it will have been proved wrong - yet that lack of substance doesn’t stop it being taught or given as policy advice to politicians. I have made similar points on economics before, but it really does matter if the assumptions we base our market thoughts on are Woozles, and so we find ourselves, like Pooh and Piglet, walking round and round a larch tree in the snow, following our own footprints, and thinking a sustainable recovery is always just ahead.
It’s good news US jobless claims are below 1m again – but they are still nearly 1m, not the usual 250K. President Trump can proclaim he will cut the capital gains tax to 15% if re-elected, and that this will jumpstart investment and jobs, and he will find economic backers among those with capital, and maybe some voters, but he won’t find any scientific evidence.
Turkish President Erdogan argues higher interest rates cause higher inflation and lower interest rates, lower: with TRY at 7.35, French forces in the Eastern Med, and an emergency EU Foreign Relations Council meeting today to address Turkish behavior, it is an interesting time to be talking about cutting rates again.
Chinese data disappointed overnight, with industrial production at 4.8% y/y (vs. 5.2% expected), retail sales -1.1% (vs 0.1%) and fixed assets at -1.6% y/y YTD (in line), all as property investment leaped 3.4% (vs. 2.5%) as new home prices shot up 0.5% m/m. So production up and spending down. Not so much “dual circulation” evident there yet – unless it means another housing frenzy to try to mop up excess supply and exporting the rest as per usual.
Which brings me to the Heffalump in the room. ONE thing IS clear, yet the markets refuse to act on it: the deterioration in US-China relations. Yesterday saw Reuters report: “In China, fears of financial Iron Curtain as US tensions rise - a sharp escalation in tensions with the United States has stoked fears in China of a deepening financial war that could result in it being shut out of the global dollar system - a devastating prospect once considered far-fetched but now not impossible.”
‘Yawn,’ says the market, circling round the larch tree.
”A broad financial war has already started ... the most lethal tactics have yet to be used,” an economist who previously advised the PBOC, says, adding China should make preparations, echoing the former director of the international payments department of SAFE says “We have to mentally prepare that the US could expel China from the dollar settlement system,” and arguing China should use its CIPS system and a digital yuan to circumvent SWIFT and the USD. Except this will mean others being paid in a non-fungible digital currency that can only be recirculated back to China for its goods. See the Heffalump in that particular room?
‘Stomp, stomp, stomp,’ goes the market round the same old tree.
The two Wall Street journalists who wrote endless pieces about how a US-China trade deal was always imminent now publish a book saying there is actually a deep Cold War (no!!!) and a rising risk of hot war; that as the editor of China’s Global Times tweets: “The PLA has conducted military exercises in the Taiwan Straits and at its northern and southern ends, showing PLA is capable of launching a full scale attack and capturing the island within hours, leaving US military no time to react. It’s a clear warning to Taiwan independence.” - and the US sends stealth bombers nearby.
‘Tiddley pom,’ hums the market round the larch tree.
Geostrategic shifts of historic dimensions are occurring, as Israel and the UAE strike a normalisation of relations, seen as likely to be followed by the rest of the Gulf Co-operation Council in time, a foreign policy victory for Trump’s controversial Middle East policies, and a finger in the eye to Russia, Iran,…and China. The US has also just designated Chinese Confucius Institutes as official foreign missions for propaganda, not educational/cultural centres: they can stay for now, but will be watched closely.
‘Sing Ho! for the life of a Bear!’ says the market round the larch tree.
Don’t forget that the US-China phase one trade deal is up for assessment this weekend. The very-best-case scenario is more larch tree-circling, and indeed Trump alluded to that overnight in saying that China is now placing record orders of US agri products. China will play along given it doesn’t know who will win the US election yet either (which now has the same odds as in 2016 from Nate Silver). Yet we remain of the view that this deal will still collapse at some point – and probably when most politically expedient to Trump. Which would push stocks down…and perhaps so focus the minds of Congress on the need to agree on a new stimulus package when they return in September. So all is well then!
Indeed, why should a clash/decoupling between the world’s two largest Heffalumps matter when there’s so much central-bank hunny to get gorged on…. though the awful 30-year US Treasury auction yesterday suggested the risk of rapid onset diabetes. Some voices are even arguing that in a decoupling world, it makes sense to put money into the US and China. That presumes that one understands that, unlike in Woozle theory, money is not always fully fungible, and is likely to get less and less so ahead as other Soviet-style central-bank jiggery-pokery is introduced.
On which note, the RBA’s Lowe didn’t *entirely* rule out negative rates today while making clear he really doesn’t like them; and it seems the BOJ, who has negative rates already, is trying to work round them by paying people to lend more. Just wait until we all get new Woozly digital currencies, eh?
“I see now,” said Winnie-the-Pooh. “I have been Foolish and Deluded,” said he, “and I am a Bear of no Brain at All.”