By Michael Every of Rabobank
Feddling While Rome Burns?
As expected, the Fed didn’t do anything yesterday. Our Fed-watcher Philip Marey underlines here that the FOMC said: amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened; that the sectors most adversely affected by the pandemic remain weak, but have shown improvement; and inflation has risen, largely reflecting transitory factors. And that was it. During his press conference Powell repeated that the US is only going to see transitory inflation, and does not want to start talking about tapering - they are not close to the substantial further progress the FOMC wants to see before starting this discussion. Perhaps the most surprising thing was Powell daring to use the word “froth” to describe the stock market he himself is boiling.
Bloomberg chimes in that “The Fed’s New Reaction Function is Winning”, and that the market now understands what the Fed is doing. Yes, many of us do. It couldn’t really be any more obvious. But is the Fed really in control via this process of actively doing nothing?
If one believes yes, then all is well: assets will levitate; the USD to soften; rates and yields to stay low; and it’s boom-time.
By contrast, if one believes no, and that the Fed is blind to how bad the current supply-chain snarl is, and how high prices are likely going to rise as a result, and to risks of a further USD4.1 trillion in stimulus spending (over a decade) being thrown in on top, then Powell is Feddling while Rome burns: markets are on fire; and soon prices will be too; and then what?
For those who don’t know, the source of this phrase is the popular belief that Emperor Nero played the fiddle while Rome burned during the great fire of 64AD. It’s a useful idiom to describe doing something useless while important events are transpiring. The only problems with it are that: 1) fiddles didn’t exist when Nero was alive; and 2) we have no idea if Nero actually did such a thing, because historical records are written by the winners. One historian says Nero did; others disagree. Today we have The New York Times and Glenn Greenwald/Matt Taibbi. Plus ça change.
Indeed, as I type, US President has just started his first annual message, traditionally in a Roman-style Capitol building to a Congress including a Roman-named Senate. Some traditions have deep roots, as both proponents and opponents point out at the moment.
Media reports suggest there will be a further push for the USD2.3 trillion American Jobs Plan, which will be partially spent on physical infrastructure, and involve higher taxation; and on the USD1.8 trillion American Families Plan, which will be spent on more European-style social care, and again involve higher taxation. The appeal will be to the American people - and to one Democratic Senator in particular, Joe Manchin, who is again making press statements showing his unhappiness with what is being floated so far.
There will no doubt be mention of foreign policy, with reports the White House is intent on removing all sanctions on Iran, including over terrorism and its ballistic missile program, in order to re-enter the 2015 JCPOA nuclear deal. In effect, the US will accede to every Iranian demand. The ripple effects of this are already being seen in the region. Alongside tit-for-tat attacks on shipping and ports, there are rumours Riyadh is talking to Tehran, and that Saudi Aramco may sell a 1% stake to China, giving Beijing a foothold in what was always considered a critical US interest. It’s unclear if this US U-turn will mean lower energy prices due to new Iranian supply, or higher, due to greater geopolitical instability as the regional power-balance shifts. Markets will also be listening carefully to what President Biden has to say about India and vaccine help (as Prime Minister Modi calls President Putin “my friend” on Twitter and thanks him for his cooperation on multiple fronts); and about Russia; and about China, of course.
Meanwhile, thinking of the classical architecture of Washington DC --and without making any partisan political statement-- while brushing up on my Nero, I was surprised to see how much history can echo down to the present:
- Nero negotiated peace with the Parthian Empire (today’s Iran); crushed a major revolt in Britain, led by the Iceni Queen Boudica (what will the US say about Scottish independence prospects?); got deeply involved in the Bosporan Kingdom (today’s Crimea); and also ended up at war with a rebellious Kingdom of Israel that didn’t see eye-to-eye with the Empire;
- Nero focused much of his attention on diplomacy and trade, as well as theatres and athletic games;
- Nero also introduced what his critics dubbed as extravagant, empire-wide programs of public and private works, funded by a rise in taxes that was much resented by the Roman upper classes who paid them - yet this economic populism sold well among the Roman lower classes until his death, and even beyond. Which might explain why the story was then spread that he fiddled while Rome burned: perhaps it was all just “Fake News”?
Of course, inflation isn’t fake news, and supply chains aren’t fake news, and geopolitics aren’t fake news. They are just uncomfortable truths that we can temporarily choose to ignore. Thinking of the Fed more than the White House, historians will also point out that well after Nero’s populism, Emperor Diocletian was forced to introduce his ‘Edict on Maximum Prices’ to try to order inflation caused by constant monetary debasement to disappear. That policy certainly went up in flames.
Of related interest, yesterday saw China slash import tariffs on steel and impose export tariffs of up to 25%, effectively making it very expensive to sell steel abroad and even cheaper to bring it in. Is this about capping soaring local prices? Probably partly, yes. Is it about lowering carbon emissions? Maybe, if it is also about reducing local steel output, which has been often promised and never delivered. Is this about China trying to import more and export less to rebalance global trade? Hardly, if you have paid attention to their stated policy goals. Yet what could it mean for the rest of the world if China stopped exporting steel and started buying it the way it has been doing agri-commodities? How much global Building Back Better is going to be affordable then?
Maybe it’s time for Bread and Circuses instead…