Authored by Michael Every of Rabobank
“Over by Christmas.” So says PM Boris Johnson, bumbling on happily about how Coronavirus is under control in the UK, and so how employers should strongly reconsider sending everyone back to work in offices as normal from 1 August – and against the backdrop of such opening ups failing in Hong Kong, Israel, and Australia and against the warnings of his scientific advisors. Whatever happened to “guided by the science”? It would appear to now be “guided by the dismal science” – let’s pretend the economy is going to Boris back. ‘Pretend’ being the operative word.
The last time that the UK said something this serious would be over by Christmas it was WW1, where the patriotic, aristocratic BoJo/Rees-Moggs of the country leap-frogged their way to sign up to fight under a leadership by the same class best satirised by Blackadder’s General Melchett proclaiming that to repeatedly attack where the enemy was strongest, not weakest, would ensure Britain would: “win the greatest victory since the Winchester flower-arranging team beat Harrow by twelve sore bottoms to one!” Of course, there was also a killer virus then too.
“Over by Christmas” might well have also applied where British leap-frogging in 1914 led, as the key Euro-summit that has been dragging on since Friday dragged on until the early hours of Monday morning; you know, the urgent summit to try to shape the apparently-Rubicon-crossing fiscal package that will help Europe recover from the same virus the UK thinks will be over by 25 December anyway. (Which, I should also further add, is peak flu season anyway.) At this stage Europe appear to be stuck on the final EUR50bn difference between either EUR350bn or EUR400bn in grants in a EUR700bn supplement to the 10-year budget – or the EU might have just found common ground at a figure of EUR390bn in grants. Indeed, the Frugal Five are perhaps now only the Frugal Four as Denmark has apparently defected (which anyone might want to do after being stuck in a room talking about an EU budget for three whole days.) What is notable --besides the EU again showing that when the chips are down it still behaves like the People’s Front of Judea, NOT the Judean People’s Front, in ‘The Life of Brian’ (“Right! This calls for immediate discussion!”)-- is that even EUR390bn is out of scale with what is being spent elsewhere, and with this much effort to get that far, surely hopes for more are ‘Boris-like’?
Meanwhile, not getting the attention it deserves given the gravity of the statement is that on Friday Republican US Congressman Yoho announced he will propose legislation this week that would force the US to declare war on China should Beijing attempt to occupy Taiwan. Yes, this is not law yet – but against the current political backdrop in DC such a bill is likely to sail through Congress. If so, it would no doubt be taken as a staggering affront by Beijing. Historians will note it is precisely the kind of red-line mutual defence commitments that we saw pre-1914 and 1939, and which either de-escalate geopolitical tensions, or take us towards people saying “It will be over by Christmas.”
Meanwhile, Kanye West held his first campaign address in his run for president (which, contrary to some stories over the weekend, has not been halted) under the banner of The Birthday Party. The highlights of the event included #Ye stating that he wishes to “save the country” – which is something most voters can get behind; that “shooting guns is fun” and without that right the US could be “enslaved” by China or other countries – so clearly pro-Second Amendment; a move away from industrialisation back to agriculture as the industrial revolution is over – which seems timely as people flee big cities; that marijuana should not just be legal, but free; a precautionary note that he isn’t prepared to go against Big Pharma because “they would kill” him – so cynics might say he has a better grasp of US realpolitik than his critics claim; and the proposal that US new-borns should be given USD1m as, after all, “The money’s not even real, and didn’t we just stop all the jobs for six months?”. Kanye added the US and other wealthy countries should pay to implement the same scheme worldwide. I think we can conclude that is an argument for MMT(?) – and certainly a version that is going to see a whole lot more consumer spending ahead than if it funds corporate tax cuts and/or bailouts. Let’s see how goodwill, good for guns, going rural, free ganja and free government hand-outs with “not even real” money do in the presidential polls. Surprisingly well, I suspect.
As with the Winchester flower-arranging team, the line between parody and reality is wafer-thin at present, if it exists at all. So where does that leave “markets” this morning?
US 10-year yields are still around 0.62%, Germany’s at -0.45%, and the UK at 0.16%. No reflation really being priced in on a major scale where it’s being tried outside Europe on a larger scale than proposed within it.
Chinese stocks are up 2.5% at time of writing “because” even though the PBOC’s key one-year loan prime rate was left on hold at 3.85% today, as expected. Indeed, Bloomberg promises now that the wild state-led swing up and panic sate-led sell-off is out of the way, a smooth private-led bull-market is assured. Well, that’s a view, I suppose. Equities are, after all, apparently all about Keeping Calm and Going Up Regardless.
I would, however, point readers to the recent coverage on the Chinese housing market in the Wall Street Journal showing more is being invested in houses in China right now in both USD terms and as a % of GDP than was the case in the US before its housing bubble burst in 2008: and the largest increase in mortgage loans is to households holding more than two properties already, the majority of which sit empty and so generate a negative return. Kind of like some key bond yields, but with the additional problem of physical depreciation to match the current nominal price appreciation, and a shrinking Chinese demographic meaning that in the future there will be far fewer hoarders to sell the empty properties to. Who doesn’t want to get on an equity market based on an economy built on that kind of solid foundation?
In FX, the USD remains on the back foot. EUR in particular is at 1.1440 and rising due to the perceived success of the mega-summit. However, AUD is still hovering around the 0.70 level and GBP at 1.25, neither really breaking new ground. CNY is comfortably under 7 for now – but then again that’s a political signalling device and not a market as such. I suspect that USD is still likely to see another lurch higher at some point as risk swings back to off. And I don’t think we will have to wait until Christmas to see it.