Submitted by Michael Every of Rabobank
Nothing matters. We (mostly) all know that. Events come and events go, but markets go up regardless. Yet suddenly, lots of things might just matter all at once. And markets actually went down!!
US presidential candidate Biden, who is way ahead in the polls, has outflanked President Trump in the populist stakes with a Build Back Better plan and a USD700bn “Buy American” pledge to create 5m new manufacturing jobs; that while Peter Navarro’s proposal for the same gathers dust on the White House desk. Biden also says he backs unionization and collective bargaining.
Unless Trump comes up with a sweeping new plan he will lose #MAGA ground to a man who spent his career building the neoliberal consensus Trump won by running against. I said Trump would win in 2016 because he said the economy stank: now the economy more than stinks --jobless claims were still around 1.3m yesterday-- his message is that everything is Great Again. As such, polls and news show he seems to be shedding both billionaire and working-class supporters simultaneously, which is quite the trick.
Biden also decried that “throughout this crisis, Donald Trump has been almost singularly focused on the stock market, the Dow, the NASDAQ – not you, not your families.” How very dare you, Sir! More audaciously, Biden proposed to raise the corporate tax rate and that for the wealthiest Americans. How very, very dare you, Sir! Forget about toppling George Washington: this is a genuine revolution for markets to contemplate. No more tax cuts to pump into the stock market? Who would that leave to drive markets higher? How else can an economy work? Of course, to underline again, this is a man who spent his career building the neoliberal consensus. One wonders how Biden envisions the Fed operating under his administration: will he allow them to continue to be almost singularly focused on the Dow and NASDAQ, or will he want their support on the fiscal front for actual investment? It’s unclear.
Back to things that suddenly matter. The White House imposed sanctions on four Chinese individuals over human rights abuses of Uighurs, including the head of Xinjiang province, who is a member of the 25-person national Politburo. This is more of a shot across the bows for now given primarily the sanction means they and their families cannot enter the US. However, it shows that sanctions can happen.
Indeed, on that front --and of huge potential significance-- Reuters reports that Chinese banks in Hong Kong are “preparing to lose USD access” if the US imposes its toughest sanctions on them and cuts off USD access. What was being blithely dismissed as a nuclear option nobody would ever use is now seeing the same people rush to construct bomb shelters. Several large foreign banks are also so deeply enmeshed in the special autonomous region that they are sweating. FT also reports foreign banks are scouring their client lists to see if they will be impacted should such measures hit. Indeed, all banks are torn between US sanctions law, which demand global compliance, and the new Hong Kong national security law, which demands the same - yet in the opposite directions.
Certainly, the atmosphere is one of schism. Australia just offered asylum to 10,000 Hong Kongers in the country and followed Canada to rip up its extradition treaty, the Aussie PM even saying he would facilitate firms wishing to relocate operations and their staff Down Under. At the same time, Italy has followed France to walk away from Huawei for 5G – leaving just mercantilist Germany, sweating profusely. Even Bloomberg says “A New World Order for the Coronavirus Ear is Emerging”, talking about Potsdam and Yalta and the geopolitical map of the world being redrawn.
Linking these threads is key news, still as far abstract to most people as US sanctions were a year ago, that Iran has signed a 25-year co-operation deal with China encompassing trade, infrastructure, energy, and defence coordination. It means China will be buying huge volumes of Iranian oil – in which currency given Iran can’t use USD? And, if the UN arms embargo collapses, China will be selling Iran huge volumes of weapons – in which currency? (Russia will too of course.) The suggestion last year was even that Chinese troops could be stationed in Iran.
Is the US going to watch its encirclement of Iran (and Russia,…and China) collapse? Or is it going to push back? I don’t have that answer, and Trump or Biden probably don’t either: but it’s going to really matter for markets, as it will risk dragging everyone in. And it’s a decision that’s going to have to be made fairly soon.
Meanwhile, there are also more mundane stories that matter too, and yet which are also linked to this big picture. China may be waiting for the US to light the touch paper on Hong Kong, and the US might be waiting for China to light the touch paper over Iran, but China appears to want to stop the equity fireworks display already. Monday saw stocks soar nearly 6% as the authorities gave their blessing to the latest bubble iteration. Five days and USD1 trillion in capitalisation and “I can’t lose” investor headlines later, Chinese media are telling people to calm down and state pension funds are taking profits. So is that it? Is the bubble over even before the grannies jumped in to help the millennial day-traders? Or is this a pause to refresh? Let’s ask perennial China-bull Shuli Ren of Bloomberg, who argues ”Whereas the 2015 rally was engineered by the central bank which started its rate cut cycle the previous November, this round of trading frenzy is a play on Beijing’s ambitious $1.4 trillion tech infrastructure build-out.”
Basically she argues this time round it is not PBOC easing driving the market, but fiscal easing….into another Chinese mega-project that means an inevitable clash with the US….and where the fiscal spending is backed by the PBOC anyway. In other words, it’s not a rate-cut artificial bull market; it’s not a QE artificial bull-market; it’s an MMT artificial bull-market, predicated on the latest Beijing “build it and they will come” mantra. Joe Biden might approve if it were his plan; it’s odd Trump doesn’t seem to.
So nothing matters again – phew!(?) MMT to the rescue? Hardly.
Don’t forget the geopolitical see-saw of intersecting US vs. Chinese MMT ambitions - and all those caught in the middle.