Submitted by Michael Every of Rabobank
“Tonight the super trouper lights are gonna find me
Shining like the sun (sup-p-per troup-p-per)
Smiling, having fun (sup-p-per troup-p-per)
Feeling like a number one…”
So sang markets yesterday in excitement as we enter what I am dubbing “Super Trouper Tuesday”. Indeed, the Dow Jones went up a whole baseball cap-and-a-bit to close at 26,703 even as the 10-year US remain at an unprecedented 1.12%. Not because the Fed mumbled something on Friday, but didn’t act, and not because the BOJ pumped all of USD4.6bn into markets yesterday, and not because the RBA cut rates 25bp to a new low of 0.50% earlier today, meaning that they now have one more cut left to go before it’s “Oz-QE, Oz-QE, Oz-QE” (Oi!Oi!Oi!) time. (Good timing not only due to Covid-19, as building approvals tumbled -15.3% m/m in January anyway.)
It’s also not due to more signs the virus spread is in “uncharted territory” according to the WHO (which means “pandemic” but is contractually obliged not to ever say it, it seems), with more deaths, and as UK police and army draw up lockdown plans and supermarkets plot their own contingency plans, for just one real-life example.
Rather it’s a reflection of the fact that the not-so-magnificent G-7, and G-7 central banks, have pledged that they will meet today to act jointly on the virus, and the IMF and World Bank are also prepared to help if needed; Covid-19, it seems, is a threat that requires immediate action in a way that the potential risk of the end of life on earth (if you are Green), or increasingly Victorian/Gilded Age levels of wealth inequality (if you are Piketty) are not. Then again we have to recall that stocks had just fallen by over 10% in a week, and that house prices risk following: Come on you cynical people, priorities, please!
So here we are at Super Trouper Tuesday. I am sure that a global virus-crisis meeting led by none other than world-famous virus expert US Treasury Secretary Steven Mnuchin will provide us all with the kind of comfort that deserves a whole baseball-cap in Dow movement. I am just not sure which direction.
Answer this first, key question: what level of interest rates is required to incentivize you to risk the death of yourself and your family? I am sure that there are policy wonks out there who believe they can correctly capture that precise equilibrium level on monetary policy. The point is that lower rates don’t help in this situation at all. If demand is destroyed by people bunkering down at home for weeks, and supply chains being disrupted, all lower borrowing costs can do is help tide businesses over if banks agree to extend loans and credit cards, etc. (as China is already now doing) – and all that does paint us further into the corner we are already in, because those rates won’t be able to rise again.
Nonetheless, those rates cuts are coming – because they push up equities very near-term. Indeed, our Fed watcher Philip Marey, who had already been calling Fed cuts this year, has now revised his 2020 rates call. He now expects the Fed to start cutting rates in March instead of April, with a 50bp reduction this month, again in June, and in September. In other words, it is back to the zero-bound by autumn (ahead of his original call, which was December).
Arguably even more interesting are the other rumours that are flying about over the G-7 meeting. Crucially, will this be the start of an open coordination between the government and central banks? Will central banks say that states can spend whatever they want to get us through Covid-19, and they will cover the required deficits? In other words, MMT? I would like to remind regular readers that such ‘unthinkable’ policy options are something we have openly flagged as a logical inevitability, even in developed markets: we just felt that the Green New Deal, or a war somewhere, would be the better ‘sell’ to the public. There are also enormous downside risks to any such strategy, which we have covered before in detail. Not everyone can “get away with it”, meaning a huge shift in relative power. Moreover, once you have shown that you CAN get free money like this, how is that genie put back in the bottle politically? This is actually an anti-Piketty argument: his view that we are doomed to see inequality rise is based on the concept that capital is the result of accrued savings rather than being created de novo as needed by (central) banks.
Of course, if we don’t see any major fiscal stimulus then it’s hard to imagine how one can remain too optimistic either. Notably, Mnuchin is keen on a tax cut rather than any higher state spending, and if that is any indication of what the G-7 will agree on, then we are in real trouble. All that returned cash is going to sit there on hold until the virus has been and gone, however long that is; and then the recovery will be too aggressive the other direction. The change in baseball caps that will be required up and down and up again could be extremely challenging, especially now Chinese supply chains to the US for things like baseball caps are damaged.
At the same time, it’s also Super Trouper Tuesday in US politics, where Joe “White Walker” Biden has been levelled up to become the Night King; that after Pete Buttigieg came, was from Indiana and spoke Norwegian, and went, and Amy Klobuchar, came, was from Minnesota, and went, both dropped out and backed Biden. Ahead of the slew of states voting in primaries today that means it is Game of Thrones vs. Curb Your Enthusiasm. Oh, and Mike Bloomberg is still in the race too, and very generously doing what Piketty et al., have long argued billionaires should be doing: redistributing lots of their own wealth to no particular end.
“But it’s gonna be alright; (You’ll soon be changing everything)
Everything will be so different; When I’m on the stage tonight
Tonight the super trouper lights are gonna find me
Shining like the sun (sup-p-per troup-p-per)
And I’ll go long too (sup-p-per troup-p-per)
‘Cos juicing stocks is what they do”