By Michael Every of Rabobank
Salo News Day
Regular readers will know I am a cynic. Try writing a Daily for over two decades and not be – and events over the last 24 hours underline that fact. Indeed, you could call it a “Salo News Day” in reference to the controversial Italian film “Salò, or the 120 Days of Sodom”, a loose adaptation of the 1785 novel by the Marquis de Sade. As Wikipedia puts it: “The film explores themes of political corruption, consumerism, authoritarianism, nihilism, morality, capitalism, totalitarianism, sadism, sexuality, and fascism.” In other words, a typical day at work in the markets of 2021.
After all, the Wall Street Journal reports “World Bank Cancels Flagship ‘Doing Business’ Report After Investigation”, frustrating to economists who rely on it. The rub is: “Chinese officials in 2018 were eager to see their ranking improve, and so Mr. Kim and Ms. Georgieva and their staff held a series of meetings to discuss ways that the report’s methodology could be altered to improve China’s rankings.” So untrustworthy World Bank data – and no consequences; a World Bank boss with a stained reputation – and no consequences; and an IMF boss with a stained reputation – and no consequences. That makes it two in a row for the IMF, with the previous one now running the ECB.
At the Fed, “Powell orders ethics review after Fed presidents disclosed multimillion-dollar investments”. Somehow this ethical violation on the part of the people running the global financial system passed them by until now. Yet is this really rare? How about if a rate-setter at a central bank told you over lunch about the land their company was snapping up for development? That happens - just not at the Fed. (As far as I know.)
One can openly trade stocks based on legislation one writes if a member of Congress: House speaker Pelosi is just one example of many. How about the swirls of corruption around the Trump administration, or Hunter Biden’s “Mr 10%” emails subject to an FBI investigation? A grand jury just indicted Michael Sussmann, the lawyer accused of making false statements during the 2016 presidential campaign to slander then-candidate Trump; and as Glenn Greenwald notes, this key story was then sugar-coated at the New York Times by the journalist whose ‘Russiagate’ book Sussmann helped to sell. Moreover, this is hardly just an American problem. What about the scandals around the revolving door, and wallpaper, of the British BoJo administration, former French president Sarkozy, or former German chancellors working for Russia? And have you ever been to an emerging market?
Even in terms of the most existential issues, the same selfishness prevails. We are seeing a flood of money into ESG funds, but Morningstar data published in February shows 256 funds repurposed or rebranded as sustainable in 2020, up from 179 the year before. In Q1 2021, it was 127. Morningstar states: “Transforming existing funds into sustainable strategies is a way for asset managers to leverage existing assets to build their sustainable-funds business, thereby avoiding having to create funds from scratch.” Repurposed funds typically just add terms such as ‘sustainable’, ‘ESG’, ‘green’, or ‘SRI’ to their names. Yet 40-years of the same neoliberalism, then a burst of idealism and Covid-19, have also seen energy prices exploding towards recessionary levels, matched by worries over food prices. The energy spike is likely to force the dirtiest of fuels to be used again, and the economic domino effects are just starting to be felt in an already-unhappy populace as we move towards winter (and more lockdowns?). Keep your fingers crossed for mild weather and Russian generosity on EU gas supply. Maybe Mr Schroeder can put in a good word?
Overall, we may need to coin a new markets term. “Immoral hazard”. Indeed, if 40 years of neoliberalism has rotted everything away, how exactly is liberal democracy not to fail, as some fear? The ancient Greeks, no longer taught in the West, argued government moves in cycles: aristocracy > timocracy > oligarchy > democracy > tyranny (Plato); monarchy > anarchy (Aristotle); democracy > aristocracy > monarchy, and their degenerate forms of ochlocracy > oligarchy > tyranny (Polybius), which seems to fit better.
Of course, that’s why we now have ‘Build Back Better’. However, it needs to get a move on - winter is coming. Years ago, I posited it would be far easier to sell ‘Build Bombs Better’ (i.e., national-security mercantilism) than social welfare. That fits the bill given AUKUS and military-industrial policy is now in play. Which has upsides and downsides. More jobs: but China now says Australia will be targeted in a nuclear war even if it does not have nukes. This morning, both the US and Australia underlined their commitment to strengthen ties with Taiwan, raising tensions further.
AUKUS also eclipsed yesterday’s launch of the EU’s Indo-Pacific strategy, which appears to revolve around trade deals as if we are back in 1995 or 2005. Relatedly, I pronounce AUKUS as “Orcs”, as in Lord of the Rings. Some might see this as a contrast to the perceived ‘Elves’ in Europe. Unfortunately, it is more a case of ‘Hobbits’, the French Bagginses aside. Notably, if not by German leadership, the EU parliament yesterday adopted by a 570-61 vote a new position paper on China, concluding: “We must not be naive when dealing with China. Whilst China is an important trading partner, it is also a systemic rival that poses a challenge to our way of life and the liberal world order. Economic gains should not make us blind to the Chinese Communist Party's ambitious political agenda…”
China also reacted to the ‘Orcs’ by officially applying to join CPTPP, the trade pact Australia is in: on the same day their press talked about nuking it. There are various takes on this latest move in our Great Game, but here is one more to note. The NAFTA 2.0 deal the US struck with Canada and Mexico gives the US veto rights over either country’s entry into a trade deal with a non-market economy: guess what China is in US eyes? Guess which trade pact Canada and Mexico are members of? And guess who therefore gets veto on Chinese entry into it?
Meanwhile, China, which still teaches the ancient Greeks in ancient Greek, and is very aware of the cycles of government, faces up to, as Bloomberg puts it, the “Nightmare Scenario” of an “Uncontrolled Crash” at Evergrande. The property behemoth is now to hold an auction 30 September to raise funds for investors who bought its wealth management products (paying 13%!), effectively offering cheap apartments in lieu of cash. Yet this is exactly the kind of forced margin-sales that can drag down prices in the whole property market. Things clearly can’t carry on like this; and a crash surely cannot be allowed to happen; and yet a Western-style ‘rich-first’ bailout looks incompatible with Common Prosperity. Build Back, yes - but how, exactly?
In more traditional market terms we also have the traditional looming US debt-ceiling Kabuki; triple-witching of US equity options today; and a backdrop of slightly higher US Treasury yields and a stronger USD due to a US retail sales beat helped by a downwards revision to the previous month’s data.
Now go enjoy another Salo news day. Happy Friday.