Rabobank: "This Is The Real Minsky Issue That Should Be Making Us All Sweat"

Submitted by Michael Every of Rabobank

“No sweat”. Once again, this is the very public message markets are hearing and echoing. And, yes, stocks are very high, bond yields are well off their lows, and key crosses like USD/CNH are stable around lucky seven. Yet unlike an absence of sweat, it all somehow still smells very bad.

Let’s start with Prince Andrew. His TV interview over the weekend to try to extricate himself from the Epstein sex-scandal mess is being seen as an epic failure. Calls for royal to say sorry and talk to the FBI”, says The Guardian; “Prince Charles urged to exile brother when he is king after ‘misguided’ interview”, says The Telegraph; “Prince ‘I-didn’t-party-or-do-PDAs’ Andrew is pictured doing plenty of both at wild parties on the French Riviera in 2007 (and he looks a wee bit sweaty too)”, says The Mail. However, the fact a pathologist (and, less helpfully, Syria’s Assad) have stated Epstein was murdered doesn’t seem to need any coverage. No need to sweat over that story any more, please, thank-you very much.

Meanwhile, the financial press says nothing much is happening other than US and Chinese trade representatives still edging closer to the “phase one” deal, which is underpinning market sentiment. There is no mention of the weekend New York Times’ story about Xinjiang, even given claims it is a leak from Beijing aimed at preventing anyone “from escaping culpability.” Clearly, however, nothing is going to be allowed to get in front of a “phase one” trade deal politically - until it fails. Indeed, think back to Khashoggi, for example, and to the 20th century, and we understand that for all their social-justice focus at the domestic level, internationally businesses only see what they Wannsee. Notably, however, the NYT story was re-tweeted by both US China-hawk Rubio, who takes the hardest of lines, and, more surprisingly, by Democratic presidential nominee Warren. Does that mean President Trump is now the main China-trade dove? And shouldn’t that make us sweat? Like I said, USD/CNH certainly isn’t.

There is also little news about the Fed’s latest financial stability review, which argued that a low rates environment damages banks and leads to misallocation of capital and hence future problems/crises: right after the Fed cut rates three times, of course, and as other central banks keep easing.

Likewise, I see precious little coverage of the fact that the IIF report global debt just hit a new record high of USD250 trillion as of H1 2019, and there is no sign that this is going to slow. It increased USD7.5 trillion from January to June 2019, even as global growth showed a synchronised slowdown. Where did the money go? Into assets, of course, which is why they are frothy and all else is not. Then again, if debt accumulation does slow, the global economy and global markets are going to crash as a result. That’s the real Minsky issue that should be making us all sweat, even as we head towards one of several possible socio-economic cliff edges (deflationary slump/inflationary spiral/MMT) in air-conditioned central-bank comfort.

Over in the UK, Labour has thrown a cat among the Brexit pigeons by promising free broadband to everyone. There we were, all thinking this was going to be a political battle over concepts of sovereignty and immigration, and instead it might be about The Word of Warcraft – a global reality which Labour’s foreign policy certainly does not address, of course. That manifesto pledge also underlines what was mentioned last week: the Overton Window is now an Overton French Window looking out onto a patio with some crazy paving. And if the IIF are right, we ain’t seen nothing yet.

Of course, none of this matters either – until it does. So Happy Monday and don’t sweat it too much.