By Michael Every of Rabobank
We're in a Charlton Heston movie: which one?
A reference to Charlton Heston means I lose readers who, despite having the sum of human knowledge at their fingertips, don’t know much recent history. Yet we are all in a Heston movie regardless – we just don’t know which one yet. That’s because markets, who also have the sum of human knowledge at their fingertips, don’t know much recent history either. I will run through the news Heston-ally, and suggest what that means for the movie we are all in.
Let’s start with the good news on Covid. Bad as it gets, we are not in 1971’s ‘The Omega Man’, about the last-survivor of a Sino-Soviet biological war.
However, the Fed flagged QE tapering. Philip Marey expects a formal announcement in November, with the actual start in December. FOMC Chair Powell expects tapering to end around mid-2022, implying a $20bn reduction in QE per meeting. The Fed’s dot plot shifted upward and moved closer to a first rate hike in 2022, with the participants evenly split between zero and 1-2 hikes; after 2022, it’s a steady pace of 3 hikes per year. The economic projections suggest the FOMC is still confident inflation spikes will be over by Q4 2022 – despite a record 73 ships waiting at LA/LB ports. (For the full report, please see here.) The market reaction, after initial confusion, was short US yields up,…and longer yields down and USD up. Recall how Minsky debt dynamics work - the change in the change is what matters; recall how pyramid schemes work; and recall how each previous attempt to normalize away from QE in an economy stronger than it is now has worked out. Taper tantrum fears? Not in DM, because there is no sign of any strength – thus the flattening curve. But for EM, inflation, stagflation, and policy-error deflation all now stalk the land. (Brazil just hiked rates to 6.25%, as expected: see here for more). See the key scene of 1968’s ‘The Planet of the Apes’ – with a lag.
In October we could also see both a US government shutdown and a debt default if the spending and debt bill approved by the House of Representatives yesterday does not pass the Senate. As Philip also notes, this is a game of chicken in which the Democrats try to force the Republicans to share the blame for suspending the debt limit in light of the midterm elections in 2022. He adds that this stand-off is completely unnecessary, and if the Republicans don’t blink, the Democrats can still raise the debt limit and adopt a spending patch through budget reconciliation. However, this will raise the internal pressure in the Democratic Party regarding Biden’s legislative agenda by adding another time constraint (see here). See the chariot race in 1959’s ‘Ben Hur’- but which charioteer is President Biden?
“China’s Evergrande to be saved!” says Bloomberg, quoting someone else. “Saved” means being split into three firms and nationalized, with no indication of which investors get how much money back. Given today the struggling firm has to repay $83.5m to USD debt holders, who won’t want cement, unfinished flats, or a nudge-nudge-wink-wink, we shall soon find out. Few observers saw a direct risk of a Lehman moment, despite the dynamic referred to above at play, because there are no truly free actors in Chinese markets. However, this ‘salvation’ is in line with a “Marxification” of the economy. The implications for China and the world are something markets refuse to consider because it would give them indigestion. See the end of 1973’s ‘Soylent Green’ - when markets prefer to see the ‘soy’ and the ‘green’.
Energy prices continue to soar, despite official assurances the authorities saw this coming, aren’t surprised, and have clear plans for what to do about it. UK energy firms are toppling, and European economies that were preaching the need for immediate shifts in climate policy are suddenly subsidizing fossil fuels again to prevent a looming 1970’s recessionary-style energy-price shock. Which means other people have to pay more instead. Russia is meanwhile laughing all the way to the bank. See 1976’s ‘The Two-Minute Warning’ - and if you are conversant in Cockney, see 1953’s ‘The Pony Express’.
The Biden administration is reportedly to nominate Saule Omarova to run the Office of the Comptroller of the Currency, the bureau within the Treasury that charters, regulates, and supervises all national banks and thrift institutions and the federally licensed branches and agencies of foreign banks in the US. Omarova is a law professor who has criticized crypto, and advocates for the government to have a much larger role in banking. That comes after the SEC’s Gensler’s comments this week on stablecoins. See 1974’s ‘Earthquake’ or 1975’s imaginatively titled ‘Airport 1975’.
US President Biden and French President Macron are attempting to build bridges burned over AUKUS. The French ambassador is now to return to DC, and Biden to come to Europe for talks next month. However, word on the street is that France, and French agriculture, now have the excuse to kick the planned Australia – EU FTA into the long grass even if the rest of the EU is in favour. The UK has also been sent scuttling from any thoughts of joining the USMCA. However, geopolitics leads and trade usually follows in today’s atmosphere. Japan’s outgoing PM Suga has also been exceptionally forthright, stating China’s rapidly growing military influence and unilateral changing of the status quo could present a risk to Japan. That’s ahead of a first in-person Quad meeting to be held on Friday at the White House. See 1976’s ‘The Last Hard Men’ (and for those who prefer fantasy to Western, see ‘“Orcs”, Elves/Hobbits, and Dragons’).
In short, the overall market backdrop is perfect for Heston. Yes, the world has changed dramatically from the epoch where a card-carrying member of the NRA and the Republican Party could be a major Hollywood celebrity. But today is again epic; and gritty; and dystopian; with disease; and economic crises; energy crises; political crises; geopolitical crises; ideological crises; inflation; stagflation; and the backdrop of a shift in the global financial architecture. Not that this doesn’t mean most markets, and modern movies, don’t want to ignore it all and keep partying on as in 1992’s “Wayne’s World”, in which Heston also made a guest-appearance. Try doing that with less QE, less gas, less crypto, and more Marxism and geopolitical risks though.
“It's been quite a ride. I loved every minute of it.” Charlton Heston (1923 - 2008)