The Sound Of Balloons Bursting

Tyler Durden's Photo
by Tyler Durden
Monday, Feb 06, 2023 - 02:51 PM

By Michael Every of Rabobank

The sound of balloons bursting

POP! Go hopes for a US labour-market slowdown allowing a Fed pivot. Instead, Friday’s payrolls data made a stronger case for the risks of a Fed shift towards halting at 6%, not 5%. They were white hot at +517K, with large upwards revisions to back data, an increase in hours worked, and in the participation rate, and yet with a fall in unemployment rate to the lowest since the 1960s. If you think payrolls data are hot air, weekly initial jobless claims and JOLTS data say the same; and if you think labour markets lag, the US services ISM at 55.2, not 50.5 as expected, was hot too. POP! If the job and GDP data are real, then productivity is slumping, which is again inflationary; and if you thought supply chain issues were behind us, logistics experts warn ‘Shortages 2023: 4 goods facing tight supplies this year - before anything ‘exogenous’ happens. POP! Matt Stoller also tweets: “In December of 2021, I did a ballpark estimate that corporate profits drove 60% of inflation. Most elites dismissed that idea. This month the Kansas City Fed wrote "markups could account for more than half of 2021 inflation."” We need more than rate hikes if so.

POP! As the US shoots down a Chinese spy balloon floating over it - to monitor sensitive sites, says the DoD. The US is furious. Yet China’s Foreign Ministry is outraged too and “strongly disapproves of and protests against the US attack on a civilian unmanned airship by force… The US use of force is a clear overreaction and a serious violation of international practice. China will resolutely safeguard the legitimate rights and interests of the company concerned, and reserves the right to make further responses if necessary.” Secretary of State Blinken’s visit to Beijing to meet Xi is now postponed, and with the March National People’s Congress, then a trip to Taiwan by House Speaker McCarthy, it may not happen. POP! Is also the sound of those blaming US ‘Sputnik’ Cold Warmongering failing to differentiate between spy-planes in international airspace and balloon entry into national airspace; and the White House knowing about the balloon and covering it up so Blinken could go to Beijing - until a journalist posted a picture of it over Montana.

POP! Go hopes for détente on the headline ‘China Helping Russia’s War With Ukraine With Military Aid—Violating Sanctions—Reports Show’, the Wall Street Journal saying: “China’s state-owned defence companies have shipped navigation equipment and parts to fighter jets and other military technology equipment to Russian defence companies, according to Russian customs data.” That’s after China’s Vice Foreign Minister reaffirmed strengthened “mutual political trust” with Russia, and pledged to “reliably defend the sovereignty, security, and development interests of the two countries, and to build together a more just and democratic multipolar world order”. The Journal also says Iran is to build a drone factory in Russia, after they link their banking systems. Markets opinion writer Noah Smith echoes my late-2017 call that ‘You are now living through Cold War 2: A late push for re-engagement is not going to work’. Can you see the sides if so?

POP! Goes the view China isn’t decoupling. ‘Xi Jinping says China must quicken pace of tech self-reliance to prevent being ‘strangled by foreign countries’ is one headline; and ’Sinification  interviews Beijing Professor Lu Feng, who backs: further weaponizing Chinese demand; developing an “independent industrial base” for semiconductors; pursuing “fully independent manufacturing” by de-Americanising its chip supply chain and replacing almost all foreign made equipment and materials with domestic ones; focusing less on advanced chips and more on being the world #1 in mature chips – and using that as a weapon; imposing sanctions on any company that complies with US export controls, e.g., ASML; and, most of all, never backing down.

POP! Goes the belief a US general warning about war over Taiwan was a one-off: now the CIA Chief is quoted saying Xi has told China to prepare for war with Taiwan by 2027; as the US agrees new military bases in the Philippines; and Japan reports US requests to base medium-range missiles on its territory. Coincidence, or Cold Warmongering? POP! Goes the thinking the US will stay 100% committed to Ukraine as pressures mount elsewhere(?) @ElbridgeColby sees trial balloons going up in White House-adjacent media suggesting a negotiated end to the war is now needed, and argues President Biden may be escalating to deescalate. Except Russia will escalate too; which will require far more US production.

POP! Goes the view the US is incapable of real Cold Warmongering. Even the China-friendly Brookings Institute’s Robert Kagan op-eds in the Journal (again!) in ‘Challenging the US Is a Historic Mistake’ that China risks repeating the errors of Germany in 1914 and Japan in 1941. He says the US could again reindustrialise, rearm, and run 9% of GDP fiscal deficits, in concord with the UK, Japan, South Korea, Japan, and Australia. POP! Kagan’s critics burst his balloon by noting Germany and Japan knew they were going to be eclipsed by the US, and acted out of desperation to try to make the costs of US victory so high it would not want to pay it; and the US had to transform its political economy to do so, while today it’s China’s which pumps out navy vessels.

POP! Goes the neoliberal political-economy model of assets over production even before we think like Kagan. Martin Wolf op-eds in the Financial Times that ‘The case for a land value tax is overwhelming’, arguing a political-economy that heeds George, not mistranslations of Smith and Ricardo that lump land --and the asset-based economic rent-seeking we call financial capitalism-- in with physical value-added capital is the only way to extricate ourselves from our mess. He admits powerful lobby groups stop that happening: his solution is to get Georgist for land valuations above today’s, sealing in gains, but killing off the ‘buy land, get rich’ model. POP! In Australia if so, which has ‘emere terram et bene cito’ as their Latin motto. Indeed, the local press applauds hordes of Sydneysiders flocking to an auction Saturday to ensure the median price of a home there gets back above A$1m as soon as possible. The market was already coming round to the view that the RBA can’t just stop hiking at 3.35% this week.

POP! Goes an economic balloon we shoot down in a new report - ‘Balance of Payments -and Power- Crises’. It argues DSGE economic models don’t capture the real economy specifically in that they don’t understand realpolitik. Against headlines of the UK getting ready to roll back energy-price caps in April, seeing household bills soar 40%, and the EU agreeing on a $100 price cap for Russian diesel, we adapt a DSGE model for the UK and Eurozone to assume a geopolitical world of: no guarantee of input supply; or exported output; or quick labour rebalancing; or past monetary and fiscal policy laxity. In that case, the two economies are a shocking 7.2% and 7.4% smaller by 2027 than in our base case, with higher inflation, lower productivity, and Sterling well below parity and the Euro around 0.90 to the Dollar.

Listen carefully and hear the sound of all those balloons bursting.