Submitted by Michael Every of Rabobank
This is going to be another shocking US payrolls day. How does one even begin to describe the most important data series in the world for markets recording a drop of 7.5m in May according to consensus expectations, on the back of 20.5m job losses for April? Even if 80% of these jobs bounce back quickly as the economy reopens --and lockdown now appears to be totally over in people’s minds in the US-- we still face an appalling labor-market future. Wage growth? Please! Wage cuts will loom as an atomised, desperate labor force takes what it can get. Given that underlying socio-economic conditions were hardly healthy to begin with for those not riding the asset gravy-train, things look grim. One could even imagine large-scale street protests and/or rioting breaking out….but what am I talking about: we are already there.
Of course, with the rare exception of a dip in stocks yesterday, which was far higher up the list of today’s Bloomberg headlines than another looming payrolls disaster, none of this matters. Not only are stocks way, way up, but key FX says “risk on!” and bond yields are rising sharply too. US 10s, for example, are up from 0.54% on 9 March to 0.82% at time of writing. Yes, that’s a small move in the bigger picture; yes, the economy is new ‘reopening’ in order to protest; and yes, it’s still a level that one would never have expected to see outside the readership of this Daily or of our equally-gloomy Rates Strategy Team. Yet a new OPEC+ oil deal today aside, where is the reason for optimism that any reflation is coming in a post-virus US economy where the perennial labour vs. capital struggle is now an arm-wrestle between Sheldon in the Big Bang Theory and Dwayne ‘The Rock’ Johnson?
One would think such simple truths would be covered in the financial market press. They aren’t, for the most part: as I was told by a journalist talking to me on a separate but key global issue yesterday, no matter how interesting the facts I had presented were, the editorial line of what the story was going to be (the opposite conclusion) had been set in stone from the start. They were powerless to change the narrative.
No matter. One would think such simple truths would still be covered by financial market analysts. They aren’t, for the most part: how many have read any Marx or his intellectual protégés, from Kalecki to Minsky to Piketty, who have pointed out negative rates, financial collapse, and that inequality does not just go away by itself?
No matter. One would think such simple truths would nonetheless be reflected in financial markets themselves. OF COURSE THEY AREN'T given what central banks are doing! Yesterday the ECB offered up another EUR600bn in bond purchases that will stretch out until summer 2021. How can markets reflect fundamentals when there are no fundamentals that matter for markets above that liquidity? How can financial analysts reflect anything but that simple liquidity dynamic too? The shallower, the less-well-versed in theory, history, and reality their call is, the better it proves. Just look where central bank billions and trillions are flowing, and follow that trail: nothing else matters. This is not financial repression. It is reality repression.
It seems appropriate on another earth-shatteringly bad US payrolls day that is nonetheless likely to see further risk-on moves across ‘markets’ to recall the old adage about the Soviet economic system: “We pretend to work and they pretend to pay us”. For me there were always worrying parallels between that statement and the low pay, low productivity ‘quandary’ that OECD economies have slumped into ever since they adopted neoliberal ‘efficiency’. Yet things are now even worse. In ‘financial markets’ we can add: “We pretend to trade and they pretend to regulate.” There is no regulation: there is asset-price targeting. And there is no ‘trading’: just a reflection of the orders of the monetary Commissars ‘looking out for the good of society’.
Of course, this won’t end well. It is already ending badly. When even Elon Musk is on Twitter arguing that monopolies like Amazon are bad and need to be broken up, one might want to pay attention. It is just that ‘markets’ are no longer the signal we can look to as any kind of indicator any more than Goskomstat was a guide to what Soviet life was actually like.
Speaking of Goskomstat, the Global Times has recently blared out it is “just a matter of time” before China overtakes the US. Technically this will come in Q2 2020 given the Atlanta Now projection of a near 50% drop in US GDP - but of course this is only temporary. Most ‘market’ analysts find it hard to grasp that deeply-troubled as the US is, China’s prospects are not much brighter if an alliance of other major economies rally against it on trade, technology, capital flows, and security issues. In that kind of scenario one can realistically project Chinese GDP growth to grind down to around 2% to match that of the US, meaning that after another few years of gap-closing China levels off at around 75% of the size of the US economy - and never overtakes it before relative demographic differences then put things into reverse. How many business models and management-consultant straight-line growth projections and financial market forecasts go out of the window if that happens?
In which case, note that yesterday India and Australia signed a mutual co-operation pact to use each other’s military bases and to develop common standards on communication technology (i.e., 5G). The Global Times response to India’s invite to the upcoming, expanded G7 was already that “if India hastily joins a small circle that perceives China as an imaginary enemy, China-India relations will deteriorate.” Expect angrier retorts ahead - which have already been seen vs. Australia. Also note that today has seen the launch of #IPAC, the Inter-Parliamentary Alliance on China, “an international cross-party group of legislators to reform the approach of democratic countries to China.” This is not anything to do with the Belt and Road Initiative. It’s more the Belt and Roadblock Initiative.
Of course, it’s better for your near-term financial safety to ignore today’s Global Samizdat and keep following the official line from ‘Pravda’ or ‘Trud’. Yet please note that two days before the fall of the Berlin Wall in 1989 the UK communist newspaper The Morning Star proclaimed: “What we are seeing now is not the crisis of Socialism, but the crisis of the outdated model of Socialism….Those who are ready to bury Socialism, because of the difficulties we are going through will be disappointed. The cause of the Great October Revolution is immortal.” On the evening of the day the Berlin Wall began to collapse its headline was “GDR UNVEILS REFORMS PACKAGE”
Happy and productive Friday, Comrades!
Today will see German factory orders (expected -19.9%) and Canadian employment (seen -500K) ahead of that key payrolls release, where -7,500K is the consensus, taking the unemployment rate up to 19.1% and the underemployment rate to over 22%. Average hourly earnings are expected up 1.0% m/m and 8.5% y/y due to data distortions around federal handouts – but don’t expect that to last.