By Michael Every of Rabobank
“How do you defuse a time bomb? Help, I need answers really qui…”
Yesterday saw US tech stocks tumble. Some of the biggest names took a big dip, and Bitcoin, the apparent wave of the future, receded nearly 20% from its recent peak. One pities the blue-chip CFO having to think about marking that crypto asset to market on their balance sheet: no firm would ever do something so rash in such volatile times, would they?
Meanwhile, US 10-year yields surged again to 1.39%, retracing, and then deciding that, no, they had been right earlier, to stand at 1.37% at time of writing. It’s almost as if the prospect of higher borrowing costs is negatively correlated with the performance of firms who base both their businesses and CEOs on Hooli/Gavin Belson from TV’s ‘Silicon Valley’ (“What is Hooli? Excellent question. Hooli isn't just another high-tech company. Hooli isn't just about software. Hooli, Hooli is about people. Hooli is about innovative technology that, makes a difference. Transforming the world as we know it. Making the world, a better place, through minimal message oriented transport layers.”) It’s also almost as if Bitcoin might be correlated with one ‘Belson’, who had just put crypto on his CFO’s balance sheet, saying that the price of said asset “seems high”. Or perhaps, more likely but less-well reported, with the US Treasury Secretary repeating that most of the activity that takes place in it is “extremely inefficient” and “illicit”. Tech tock, tech tock, tech tock(?)
What’s interesting is that the USD also sold off. So, briefly, nobody seemed to want to hold anything: not stocks, not bonds, not Bitcoin, and not the dollar. They are instead moving into commodities as the safest place to be, which is about as low-tech --and dystopian-- a future as one can imagine. (I refer readers back to my previous Mad Max references of mohawked brokers in bondage masks and studded leather hotpants all screaming “Gasoline!” at each other.)
That means one wants to own AUD, for example. And Australians themselves still only want to own houses, of course. It’s boom-a-rama in that sector, with the ABC news last night underlining how even rural areas in Tasmania just saw sales prices rise 40% in 6 months. The RBA could arguably save themselves a lot of money by just publishing the daily paper property supplement ‘Domain’ instead of their reports focusing on the Aussie ‘macro economy’.
The problem --and it is a problem—remains that this is not the basis for a sustainable recovery, just a frenetic short-term scramble. Everyone, with Australia at the vanguard on housing, has painted themselves into a corner with this latest leg in a decades-long ‘boom’. What we have begotten is a series of global Hoolis, and housing now unaffordable everywhere to at least half the overall population, and the vast majority of the young, and to a mortgage debt-load so heavy that any rate increases --which Aussie markets are now actively pricing for!-- will bring the whole thing tumbling down.
Unless wages magically turn up to save the day. On which note, the ABC news last night, as just one example, was talking about how despite the unemployment rate in Australia nearly being back to the pre-Covid normal, vast numbers of people are still on the ‘JobKeeper’ scheme that ends on 28 March; and, separately, it explained how a government employer wage subsidy for younger workers was seeing a serious financial incentive put in place to fire full-time staff earning AUD75,000 (in their example) and replacing them with three youngsters all earning AUD25,000. Sticking with tech(ish) retorts: very wage pressure; so salaries; many money - you’d have to sew eight of them together into a human centi-aussie-pede to afford a single Aussie house at a level which would allow borrowing rates to rise again in the future.
Of course, this dilemma is true everywhere to varying degrees. As Bloomberg reports solemnly today: “US Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell appear wary of signs of froth in financial markets, even as they press ahead with economic stimulus measures that are elevating the euphoria.” Indeed, just a few weeks after two IMF officials warned of a “sense of complacency” permeating markets, Yellen told CNBC TV viewers yesterday that there “may be sectors where we should be very careful.” Was she referring to stocks, bonds, crypto, and the dollar?
Was ANY of what is now unfolding anything but entirely predictable? We are all very much Keynesians again now. Yet Keynes spoke of the need to “euthanize the rentier” via low interest rates: we have eulogised them that way!
Bloomberg then goes on to bewail that “the US has fewer regulatory tools to head off asset bubbles and excessive leverage than many other countries.” Back to tech analogies: do the regulatory tools to stop such rentier-eulogising appear from the sky, like the Black Slab in ‘2001’, for primitive markets to gather round and jabber at, before then ascending to a higher level of evolutionary development? Or are they ultra-complex manmade things that only a few Gavin Belsons of this world can understand?
It’s not rocket science. We all know what happens when you don’t juice the system; and we all know what happens when you juice the system the way we are. Logically, the only way to prevent what we see today would be de facto credit rationing – which used to be the norm in capitalist economies under Bretton Woods, until the neoliberal reforms that built our present, wobbly global structure. For example, you could slash rates to zero, but cap the overall level of borrowing in a given sector, like mortgages, which given supply and demand for funds would then mean households would pay a higher price for money. (China tries some similar things today in its own way.)
Would that create a whole new set of problems? Sure! First, the current bubble would burst. But that’s going to happen anyway – or society will, with a lag. Second, a lot of international capital flows wouldn’t be needed – so de facto deglobalisation. So one can see why this is therefore ignored. But fewer and fewer voters seem to like this globalisation – and what other *logical* answer is there?
Today we hear from the Fed’s Powell at his semi-annual testimony to Congress – and I am sure nothing at all that I have mentioned above will be spoken of. We can expect something more Belson-esque --“What those in dying business sectors call failure, we in tech know to be pre-greatness” -- or else that ‘teching’ sound in the background is going to be followed by a very, very loud bang even more quickly than would otherwise be the case.