Rabobank: What's The Point... Of No Return?

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by Tyler Durden
Friday, Apr 16, 2021 - 10:20 AM

By Michael Every of Rabobank

What's the point - of no return?

What’s the point? That’s a question I ask myself more and more frequently. Thursday’s session was a key case in point of that. We got a slew of key US data and it was, almost across the board, fantastically stronger than expected: the Empire PMI at 26.3 vs. 20; initial claims 576K vs. 700K; retail sales up 9.8% m/m(!) vs. 5.8%; Philly Fed at 50.2 vs. 41.5; and only industrial production of 1.4% m/m vs. 2.5% spoiling the party a little. In short, stimulus is stimulating to an incredible degree, and it’s only just started.

So what did the markets do? Well, US stocks hit a new record – but then again US stocks always hit a new record. Whatever headline you care to think up, new records it is. More importantly, US bond yields tumbled - TUMBLED. 10-years dropped 11bp intraday, for example, before bouncing back to 1.58%. Yes, one can argue that Treasury shorts were stopped out. But why would anyone not be selling, or going short, on that kind of data basis? One can also argue that Japan and China were snapping up Treasuries too: perhaps because they recognize that all the US stimulus spending means more imports, and so more sales to the US, and so more need to park the cash somewhere? But who knew the balance of payments operated in real time like that? I am sure people far smarter than me will be able to turn round and give an explanation of how this makes sense: and I hope they can also show a time-stamped receipt that they were long US Treasuries on the back of expectations for a well-above consensus set of US data releases – otherwise it’s just a post hoc ergo propter hock.

The only fundamental arguments for a sudden swing to buy Treasuries like that strategically, not tactically, or at least the ones which appeal to me, are: the fervent belief that the more sugar-rush one gets now, the harder the crash afterwards – but why only see this now?; or the belief that none of this matters anyway because the Fed is going to look the other way regardless – which may well be true, but should lead all of us to say ‘what’s the point?’ That latter argument was at least consistent with the dip in the USD on the day, which is now at a key technical threshold. However, critical thresholds are one other argument which would back a move into Treasuries (though I am not saying this drove any price action on the day).

First, US Democrats have floated legislation to increase the number of members of the Supreme Court from 9 to 13 in order to ensure a liberal 7-6 majority. This front-runs President Biden’s six-month commission looking into the issue, and seems unlikely to pass. Yet to say this is controversial in an already bitterly-polarized US society is an understatement. It does at least hold the hope for inflation – of the number of justices, because any future Republican Congress and White House would then pack the Court too to ensure a conservative majority – and so on with each new administration until everyone is a Supreme Court justice, if one takes it to the logical extreme. The last time anyone threatened to pack the Court was 1937, when FDR was trying to get New Deal legislation through only to find conservative justices blocking it – but it’s Congress, not courts that threaten Biden’s stimulus, so does history repeat here? (By the way, that all came four years after an attempted fascist putsch backed by parts of Wall Street, which the New York Times at the time dismissed as “a hoax”.)  

Second, President Biden, while calling for “de-escalation”, imposed new sanctions on Russia and declared a national security emergency over its actions. This includes a ban on US entities taking part in the primary market for bonds issued by Russian state and financial entities. Optimists will try to say this doesn’t preclude the secondary market: and pessimists will note this is only a small step further, and that this could be a template for actions against China one day. President Biden also said he is “prepared to take further actions to respond” if Russia continues to interfere with US democracy – let alone Ukrainian. That’s as the “Russian bounty” story from last year is exposed as very probably Fake News. Will President Putin really agree to a summit with the US under that cloud?

Meanwhile, Russia has closed the Straits of Kerch to foreign vessels, which could effectively cut off Ukrainian port access through to the Black Sea; has redirected more ships to the Black Sea; 330 warplanes are nearby; the number of soldiers on the border is apparently moving closer to 110,000 within days; and there are reports of unusual movements around Moldova, Transnistria, and Belarus.

In response, the US is now no longer sending two naval vessels to the Black Sea; unconfirmed Ukrainian media reports state Kiev’s municipal government has updated maps of what can be used as civilian bunkers in an emergency; and the Ukrainian defence complex has announced it is willing and able to double arms output. (The EU has double supplies of cheese ready to roll too if needed.) One other indication of the seriousness of the situation is that Ukraine is reportedly now open to selling a 50% stake in the key firm Motor Sich, one if its strategic industrial assets, which makes engines for missiles and military helicopters, and which stopped dealing with its largest client, Russia, back in 2014. In 2017, a Chinese firm agreed to purchase a 41% stake, but under US pressure a Ukrainian court then froze the holdings for national security reasons.

As all this is happening, the EU foreign policy establishment is still talking of sofas and musical chairs, and how they can make it look weak: and Germany is saying it will not accept the BNO passports the British are allowing millions of Hong Kongers to apply for, just as most of the Anglosphere rolls out the welcome mat for these new arrivals. What does this imply for which way the EU will shift if things get out of control to their immediate east? What would Nord Stream 2, and hence global gas prices, look like once the dust has settled if more than dust flies?

Adding to the not-unconnected news-flow, Turkey has just made the purchase of goods and services with cryptocurrency illegal, beating India to it. So you can hold crypto, and buy and sell it: you just can’t ever use it in the real economy,….as the Anglosphere moves closer to putting them on blue-chip balance sheets “because reasons”. Which perhaps speaks volumes about how connected current asset prices - and data - are to the real economy.

Elsewhere, US and Chinese scientists have shown they can work together,…to create embryos that are part human, part monkeys – “because reasons”, and never having seen any of the Planet of the Apes films.

Like I said, I keep asking myself ‘What’s the point?’ – and also ‘What’s the point of no return?’