Rabobank: "Markets Are, Across The Board, Totally Divorced From Reality. Facts No Longer Matter"

Submitted by Michael Every of Rabobank

Make It So!

Back in the 1980s there was a lot of discussion at my college about “post-modernism”. At that point it was in a strictly cultural sphere. It meant different things to different people, but I personally found enlightenment in the example of Jean-Luc Picard, captain of the starship Enterprise. To be “post-modern”, I was told, was to be a cultural creation from beyond the modern era. The original Star Trek TV series had been modern (indeed, ultra-modern for the time), but it had clearly been based on pre-modern concepts, such as novels like Horatio Hornblower and Westerns. On the other hand, Star Trek: The Next Generation was based on Star Trek, and hence was “post-modern”.

Post-modernism today seems to be next generation too. The encyclopaedia of Britannica definition is: “…in Western philosophy, a late 20th-century movement characterized by broad scepticism, subjectivism, or relativism; a general suspicion of reason; and an acute sensitivity to the role of ideology in asserting and maintaining political and economic power.”

As the critics of post-modernism point out, it believes that it is not opinions that are multifaceted, but facts: there are no facts, and those that assert there are do so from a position of power. Yesterday, for example, social-media lit up after a Tweet from a US teacher claiming that “2+2=4” was an example of Western imperialism and that there are other valid ways of looking at it. This was not a high-level maths reference to Gödel's incompleteness theorems.

Obviously, the numerals expressing 2+2 =4 are Arabic, and the concept itself emerged simultaneously in ancient China, Persia, and India. We should all also know the chilling Orwellian reference to that equation from ‘1984’: and that when Winston Smith is tortured by the Party, and head swimming so he can no longer see properly is asked how many fingers are being held up (four), and Smith says he no longer knows, is told that this is a “good start”.  

So where do we get to post-modern markets? Well, as repeatedly stressed of late, markets are, almost across the board, totally divorced from reality. Facts no longer matter to them, almost as if they were not facts.

We have become used to equities ignoring that Covid-19 is still spreading wildly. Now they have to ignore that the WTO is being forced by scientists to admit the virus may be airborne and carried for tens of meters, meaning that any indoor venue or non-filtered office air-conditioning system is the perfect transmission vector for it. No 1- or 2-meter rule makes any sense if that is proved to be true. How will recently re-opened summer venues cope when we are all huddled indoors in perfect virus-spreading conditions? Yes, equities were down overnight, but not by enough to reflect that emerging fact.

Bloomberg today reports some members of the Trump White House have been pushing for the US to break Hong Kong’s USD currency peg by not letting HK banks used the USD, as punishment for Beijing’s imposition of the draconian new national security law. Yes, this is only some members, and neither Pompeo nor President Trump have apparently yet been given the option to approve. However, this is a nuclear bomb being assembled on the table in front of us pointed directly at Hong Kong and US-China relations…and the reaction in the Hang Seng today was to rise 0.3% at time of writing.

How can this be the case? Because we have post-modern markets. Don’t like facts? Ignore them; and do so knowing that central banks are using their enormous powers to over-rule them. The virus is airborne? So we will buy more assets! The HKD peg is under real threat, politically? So we will buy more assets! Truly, nothing means anything except what that power dictates.

As central banks and Jean-Luc Picard both like to say, “Make it so!

Except, of course, both are mere mortals. Picard just came back as a feeble old man in a very post-modern Star Trek series where he is treated by most of the cast as if he is an elderly parent trying to learn to use Skype for the first time during lockdown. Moreover, as central banks divorce asset prices further and further from reality, so they help drive the political populism on the right and left that believes facts don’t exist and that all that matters is power. This was alluded to in a recent Martin Wolf op-ed in the Financial Times pleading with someone, anyone to fix capitalism before liberal democracy falls apart – without providing not a single concrete suggestion of how this can be done without neoliberalism doing so.

Meanwhile, if the core argument that the unthinkable on Hong Kong can’t happen as that would mean US stocks would go down (heaven forfend!), be aware that right up until the post-modernists run central banks, the central banks will be the full post-modern anyway. The Fed is not going to set US foreign policy, but it would have to react to it – so why not buy stocks if needed in a geopolitical crisis? Clarida yesterday said there are no limits to how much the Fed can buy, after all, even if he did not say stocks. But stocks, corporate bonds, junk bonds, mortgage bonds, government bonds – these are all just words, aren’t they? Rightly, and in more ways than one, think about the power.