Rabobank: "We Live In A Pretty Crazy World Right Now"

Submitted by Michael Every of Rabobank

Crazy World

I think we can all agree that we live in a pretty crazy world right now: and that’s an appropriate title for the Daily today too, for reasons that will be explained shortly.

It’s a world where we are seeing staggering increases in public-sector deficits. We have already seen WW2 level spending in the UK, for just one example: and yet the British Chancellor is now planning to introduce 10 deregulated “free ports” across the country where UK taxes and tariffs will not apply at all. It’s obviously the inverse tactic of spending more money on left-behind places. Yet will somewhere like Luton hypothetically become the next mini-Hong Kong just because there are no regulations and no taxes to be paid there? We shall see: and those deficits will swell even further. Laffer would approve of course: and using the logic his fans always push for, by cutting taxation to zero, presumably tax revenue will now be infinity.

Equally, it’s a world where despite one in three Americans worrying about making rent, there appears reticence from the White House to push for a new major fiscal package. Is this all political timing, and huge stimulus looms in weeks? Or do the it-will-all-be-fine arguments from economic advisors like Stephen Moore and Larry Kudlow reflect the official line?

It’s a world where despite all this state largesse, or absence of state largesse, bond yields continue to move lower anyway: the US 5-year touching 0.25% last week (though at the giddy heights of 0.29% at time of writing) as it does not throw in the kitchen sink; the UK 5-year gilt is at -0.07% even though they ARE throwing in that ‘no-taxes-here’ sink.

It’s a world where global stocks continue to be the inverse of movement in bond yields, and one where Barstool Dave uses Scrabble letters to outperform hedge funds: that trick still wins until he, or someone else, starts doing the same with a tin of Alphabetti Spaghetti.

Politics is naturally in its own special little crazy world on so many fronts one hardly knows where to begin: it’s all as up is down and down is up as market; the latest being that Joe Biden is successfully managing to present himself as an angrier economic outsider than Donald Trump.

Meanwhile in Poland, which has benefitted from EU membership more than most, the presidency is down to the wire but it seems incumbent anti-EU candidate populist Duda has narrowly beaten his pro-EU rival. As Piotr Matys reports, Duda’s victory (if confirmed) should not have a major impact on the PLN and local assets over the next 12 months; indeed, his re-election to some extent is positive as the economy is in a recession and it is crucial that the government and the president work together. However, from the longer-term perspective, Duda’s second term will allow the ruling PiS to tighten its grip on power further. For the EU that threatens another problem to try and ignore, armed as they are primarily with lofty rhetoric.

Of course, all this up-is-down-and-down-is-up was fine in the past when it was flowing in the direction markets enjoyed. We had former UK Trotskyites evolve into market-loving New Labour; and the Italian Democratic Party, happy to support a ‘sensible’ neoliberal Eurozone consensus in power today, was originally the Italian Communist Party. This was not seen as crazy. It was just zeitgeist.

On which note, the title of today’s Global Daily is a tribute to the 1990 album by German metalmeisters The Scorpions, which contained the power ballad ‘Winds of Change’. You know the one…”I follow the Moskva; Down to Gorky Park; Listening to the Winds of Change”. There are now allegations this massive hit was actually a CIA psy-op meant to sell the former Soviet bloc on the necessity for peaceful change. This is denied by the band: it’s not good for rocker rep to work for the CIA. What will be next? That Ozzy Osbourne worked for MI6?

Yet it is a doubly crazy world that this story is getting ‘summer season’ attention while real Cold War incidents, not conspiracies, are playing out all round us – and to a series of polite shrugs from markets, who would rather listen to Winds of Change than face up to the deeply unpleasant geopolitical headwinds blowing in their face.

Exhibit ‘A’ for today is a Bloomberg story today --“China Presses Global Yuan Role as US Tensions Explode Into FX”-- underlining that China is determined to internationalize CNY to strengthen its hand and neuter the ‘USD weapon’. The article gives a long list of Chinese experts supporting the necessity of that move: and then it correctly argues that to do so either China has to open up its capital account, which it can’t do without a crash, or import far more to run a current account deficit, which it won’t do either because that means being more vulnerable too. So China must do something China can’t do. Fortunately, the conclusion is still that the US won’t use the USD weapon anyway ‘because this would be bad’.

How about if Trump needs to change the narrative pre-debate against ‘Beijing Biden’? How about if having lost the November election Trump uses his lame-duck period in office to trigger exactly that USD weapon? Apparently such risks are still ‘crazy’ – even in today’s world. Are they?

Rock You Like a Hurricane,” as The Scorpions also sing.