By Michael Every of Rabobank
Buy-all-the-stocks and Boom?
Readers will know my view that we are living in a black comedy. There is plenty of evidence of this, but US President Biden saying it is the Taliban who are in the midst of “an existential crisis” takes the biscuit today given the US is charging $2,000 for its citizens to be evacuated from Kabul while refugees go free, and the Wall Street Journal both reports the White House *was* told Afghanistan would likely collapse back in July, and op-eds “How Biden Broke NATO”.
Black comedy dates back to antiquity, but was defined academically by Sigmund Freud’s 1925 essay ‘Humour’ as when: “The ego refuses to be distressed by the provocations of reality, to let itself be compelled to suffer. It insists that it cannot be affected by the traumas of the external world; it shows, in fact, that such traumas are no more than occasions for it to gain pleasure."
Which brings me to markets. There is always slapstick comedy on Wall Street: e.g., banks opening wealth management shops in China just as China launches a “wealth redistribution” campaign (and shares of European luxury brands slump, showing it is real), or buying shares in Chinese firms that are IOUs in the Caymans. There is surreal comedy: e.g., NFTs --literally infinite digital flatulence-- becoming an ‘asset class’ as a hedge against fiat inflation. There are (illegal!) inside jokes: e.g., when certain names tell us to buy something they actually want to get out of. And there are bad jokes: e.g., central-bank inflation and growth forecasts. Yet right now, the most important dynamic is black comedy, in that traumas are no more than occasions to gain pleasure.
One of the grand-daddies of US black comedy is 1967’s ‘The Producers’ by Mel Brooks. In it, failed Broadway producer Max Bialystock and nervous accountant Leo Bloom embark on a scheme to create the most offensive musical ever – “Springtime for Hitler”. They have sold tens of thousands of percent of the profits to elderly investors, and have only put a small portion into the production, so if the show bombs, they make a fortune, but if it’s a hit, they go to jail.
By parallel, are the Fed really unable to see that the US and Chinese economies are slowing; that US fiscal stimulus soon becomes a fiscal cliff; that food prices are up 31% y/y with more to come; retail energy prices will be high into autumn/winter; and that, as Treasury Secretary Yellen points out, Delta is a concern? If they taper into this then it will be slapstick comedy for markets, the kind where you get punched in the face: Commodities are slumping, iron ore -26% this month; 10-year US Treasury yields have gone from a low of 1.14% to a high of 1.37% and back to 1.24%; and AUD shows how much underlying optimism there is at 0.7150 when it was as high as 0.7423 weeks ago.
If you think central-bank-ily, would you not want to be leaning towards MORE not LESS QE now? All you can ever do is throw excess liquidity at problems (regardless of the fact that while some gain pleasure from it, many problems are actually caused by it). If so, how could you find the excuse to do more QE?
How about the stock-market bombing? That might even help the White House scare enough senators to push through fiscal stimulus. (Which QE will then ‘pay for’.) As Bloom discovers in 1967: “Amazing. It's absolutely amazing. Under the right circumstances, a producer could make more money with a flop than he could with a hit. Hmm...Yes, it's quite possible. If he were certain that the show would fail, a man could make a fortune!”
So how to best produce a market flop? How about talking up the monetary policy equivalent of “Springtime for Hitler” - tapering QE into a synchronised deflationary slowdown!
However, just as Bialystock and Bloom run into unexpected problems with too-competent incompetents, the Fed is being hamstrung by the stubborn US equity market trend of Buy-all-the-stocks and Boom. US equities just keep shrugging off the gloomy background and Fed tapering rhetoric, effectively saying “We’ve heard that one before!” (Or, “The other shows on Broadway are even worse”.)
Yet the more stocks refuse to go down, the more the Fed might actually have to proceed with a QE tapering it may not want to actually commit to given it will likely end so badly for its beloved equities – and already-wobbling EM FX. Or it will have to try to find some other way to stop the show from being a hit. In ‘The Producers’, B&B try to physically blow up the theatre their show is playing at - what is the potential equivalent for the Fed, one wonders?
There is another potential punchline though. The Fed tapers QE, markets tank as they see they weren’t in on the joke, and then it has to quickly reverse policy “because markets”. But then everyone, including the increasingly-angry general public, gets to see that central banking --like the Pentagon-- is now seemingly just a clown show. They would see that extraordinary monetary stimulus and society-destabilizing asset inflation is all the Fed ever has in the locker, and that Build Back Better is just a squirty-water flower. That isn’t funny at all; it’s tragicomic for all of us.
And, unlike in ‘The Producers’, don’t expect anyone to end up in Sing singing ‘Prisoners of Love’. But on the upside, there will be even more money floating into flatulent NFTs, which is amusing in a fin-de-regime kind of way.
Of course, if you strongly disagree with all of the above hypothesis, just take is as a joke.