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The Riddle Of Steel

Tyler Durden's Photo
by Tyler Durden
Wednesday, May 10, 2023 - 02:45 PM

By Michael Every of Rabobank

The Riddle Of Steel

The secret of steel has always carried with it a mystery. You must learn its riddle, Conan. You must learn its discipline. For no one, no one in this world can you trust. Not men, not women, not beasts. [Points to sword] This you can trust.” - Conan's father

There has been so much so Cold War happening that I haven’t found space to make movie references for a while. Yet today I must: to ‘Conan the Barbarian’, a much underrated 1982 swords-and-sorcery epic with a stunning soundtrack and cinematography, and a script starting with Nietzsche: “That which does not kill us makes us stronger.” Its core isn’t gore but Conan’s struggle to solve The Riddle of Steel which his god Crom demands before he can enter Valhalla. The hard-sought, hard-fought answer is that will is stronger than flesh or steel. Very Nietzschean.

People are again saying steel is all in this world they can trust; not men, not women, not beasts - and not market forces. Economists failed to see this is where we would end up despite years of data showing China crushing others’ steel output, seeing all competition flee before it, and hearing the lamentations of other economies. Being kind to those who didn’t notice this trend because asset prices were doing well, as someone notes in Conan: “Success can test one's mettle as surely as the strongest adversary.” Yet post-Covid, China looks to follow with autos, while arming itself at a similar pace. As such, a hawkish US ‘guns, germs, and steel’ backlash is shifting supply chains, boosting fiscal spending and investment, and helping raise inflation long before it dampens it again. That holds the fattest of tail risks: barbarian violence. Moreover, the national political will to win this economic Cold War will be key ahead.

China is sending its unemployed youth to the fields and making a whole-economy civil-military shift to back key industries: Beijing is even redeploying 5% of its civil service to the task of fighting (and preparing for) decoupling.

Russia is drifting towards a war economy, as we heard from the May 9 Victory Parade. Talk is of fighting for years and/or drafting 25 million men if needed. If may just be talk: but what if it isn’t?

The US is proposing Kennan-esque industrial policy as a new consensus, sold as needing no economic sacrifices when it means a lot - as the debt ceiling looms like Arnie and JP Morgan now has assets over $4 trillion. On which, national security fellow @matthew_pines tweets: “Seems likely geopolitical fracture + energy transition + demographics is going to = National Security MMT. This is means ZIRP for USG & Defence Industrial Base and administered credit rationing for everyone else. This requires a more concentrated, controllable banking system.” That’s what I’ve been saying here for ages, and what I told the G20 last year when they asked for my thoughts.

The EU, despite Lagarde’s recent speech along similar lines, has no steel, flesh, nor much will, just won’ts. It actually lobbied against the US Investment Reduction Act’s provisions on unionised labour because EU auto makers are invested in in non-union US plants: we must save the planet now, but good green jobs must be in Europe!

Others are looking at who in this world they can trust:

  • Syria was just readmitted to the Arab League, and Iran says it will now arm it; as Israel killed 3 Iran-backed Islamic Jihad leaders in Gaza.

  • Indebted Chinese provinces are asking Middle Eastern sovereign wealth funds for help. Will a debt-for-equity swap see them dive deep into the Chinese real economy and CNY, displeasing the US to whose dollar their economies still peg their currencies?

  • Russia and China will link their food regulation agencies to speed up food imports.

  • President Jokowi stated ASEAN should avoid conflict and not be anyone’s proxy, but that Indonesia should not see AUKUS as competitors, but as partners.

  • Japan and South Korea are to share radar signals with the US, risking Chinese retaliation; and Japanese firms looking at US deals are warned their investments in China might see them fall foul of CFIUS, which now includes overall economic relationships as pressure points via the pointed question of how a firm might respond if the US and China came into conflict. Meanwhile, the BOJ’s Ueda says Yield Curve Control will stay until 2% CPI is sustainably hit: so JPY will weaken, arguably placing some downwards pressure on CNY too.

  • Brazil’s Suzano SA, the world’s biggest pulp wood producer, is considering selling in CNY.

Chinese international relations scholar Yan Xuetong recently delivered a speech ‘Warning Chinese Businesses That Deglobalisation is Here to Stay’ and that US-China relations are in a worse state today than they were in 1978 before diplomatic relations were established. Even The Guardian now notes ‘China’s war chest: how Beijing is using its currency to insulate against future sanctions’. Yes, global ambassadors are flying around to try to find a way to reduce global tensions. Yet those tensions will keep boiling up because our geopolitical Riddle of Steel is actually easy:

China won’t give up its current share of the world market of steel or its growing ones of others, and everybody else wants their shares back to past peaks, or higher new ones.

That geoeconomic battle will dominate 2023, 2033, and 2043, or until a new global order is settled. That’s enough stagflation to even show up in a 10- or 30-year yield forecast – which nobody is doing yet; and the radical fiscal-monetary policy mix logically required to compete also looks fantasy to those who believe everything is going to be magically resolved soon. However, while we live in an age of Nietzschean will to power and steely violence, there is no such thing as sorcery alongside swords. So, stagflation is looks to be, even if we get a brief deflationary dip first..

For those in markets prepared to join me in accepting this painful reality, let me echo King Osric from Conan: “What daring! What outrageousness! What insolence! What arrogance! I salute you.”

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