By Michael Every of Rabobank
The central-banking conference at Jackson Hole this year was virtual: how appropriate for these Covid times - and for central banks thinking there is anything that they can actually do about them. The highlight was Fed Chair Powell’s speech, which comfortably met somnorific market expectations in being full of the aren’t-we-doing-well-but-steady-now! rhetoric that is the life-blood of modern central banking. As our Fed-watcher Philip Marey puts it here, there was a lot of conditionality in terms of the path towards QE tapering (which is not the same as hiking rates). Powell of course expected inflation to prove transitory (but steady now!) and supply chain issues to resolve themselves soon – as queues at LA port remain near records, a category 5 hurricane bears down on Louisiana and the Mississippi transport delta, and growing media recognition that supply chains will still be snarled in 2022 at the least.
Bloomberg’s reading of the Powell speech is that it was dovish. While it wasn’t hawkish, I failed to see anything to coo over, just ‘if the data are strong, tapering happens: if they aren’t, it doesn’t’. The fact that obvious message saw US equities push to a new record high and Treasury yields lower (10s by 3bp from 1.34% to 1.31%) suggests the market thinks the data are too weak for tapering to happen – or it’s a mistake that will be reversed if it does. Indeed, if we don’t get a taper tantrum like in 2013, it’s surely because there is little underlying belief in a strong recovery to justify one. With the Atlanta Fed GDPNow tracking forecast sitting at 5.1% for Q3, down from 5.7% on 25 August, and with 3.5 percentage points of that 5.1 total due to a supply-chain panic inventory build, where is the momentum that says ‘taper now’?
Moreover, in what was supposed to be an honest appraisal of the US economy, where was the message that if over $4 trillion of fiscal stimulus passes against a supply-constrained backdrop, QE tapering may not be needed per se, but might be necessary to mop up Treasury supply in a market that will be worried about headline inflation again? Or that if fiscal stimulus cannot pass following a collapse in President Biden’s political capital to match that of Kabul, the Atlanta Fed trend suggests there will be a need for more QE ahead? In short, one can argue that while in Jackson Hole, the Fed in no way indicated that they are really about to stop digging.
That ‘hole’ metaphor applies to much else around us too. A recent piece from monopoly/oligopoly guru Matt Stoller addresses both the ongoing calamity in Afghanistan and the broader failings of the US economy. Stoller recommends watching the Netflix black comedy ‘War Machine’ to grasp what went wrong, noting: “the war in Afghanistan is like seeing management consultants come to your badly managed software company where everyone knows the problem is the boss’s indecisiveness and cowardice, except it’s violent and people die… None of these tens of thousands of Ivy League encrusted PR savvy highly credentialed prestigious people actually know how to do anything useful. They can write books on leadership, or do powerpoints, or leak stories, but the hard logistics of actually using resources to achieve something important are foreign to them, masked by unlimited budgets and public relations.” (Ironically, I didn’t watch War Machine because I usually suspect Netflix original productions of the same management sins.)
Stoller concludes that the post-WW2 US was a true logistical powerhouse: but today, Wall Street listens to crypto burblers and Fed Chairs who have never been to a port telling them supply chain issues will soon be resolved, as generals and the intelligence community tells us wars are being won as profiteers laugh all the way to the bank.
As a result, one can hardly avoid the “Is this ‘Suez’ for the US?” thought-pieces flooding our screens – which will really matters for markets if they are right. On which note, here are a smattering of geopolitical developments to note reflecting the deep hole the US has dug for itself with a Grand Strategy thought out via PowerPoint and buzzword bingo from the Hamptons by K-Street and Wall Street:
The Washington Post reports the US *chose* to hand over Kabul to the Taliban, creating recent terrible scenes at the airport, when the latter had offered to let the US keep control of it. The US now states that it believes it has “substantial leverage” to ensure the thousands of US (and Western) passport and visa holders left behind are free to leave as they wish;
The US is back to drone strikes in Afghanistan that apparently kill innocent children rather than guilty (unnamed) terrorists. Of course, the US can also collapse the Afghan economy by freezing its FX reserves – which will necessitate the country turning to another currency entirely;
The UK Telegraph says President Biden “holds grudges” and will punish Britain for its Afghanistan criticism and “comments about his mental acuity”. In which case, he should read the French press too;
President Macron of France says his troops will be staying on in Iraq regardless of what the US now does, which is an echo of older, more expensive and expansive French foreign policy;
The EU has been prompted into the painful realisation that it needs its own defence, seeing Biden perhaps achieve what Trump could not – though it does not yet grasp that the true sum required is in the trillions if it wants to do the job properly;
The Aussie financial press --and others in Asia-- are openly discussing what national long-run defence and foreign policy orientation should now be, echoing the huge post-WW2 pivot from the British to the US umbrella. Again, this sound uncomfortable and expensive;
Japan is openly talking defence with Taiwan, which China warns “may backfire”;
China has declared all vessels entering its claimed nine-dash line territorial waters must declare themselves to its Maritime Administration starting September 1 or they will be “dealt with”
North Korea appears to be restarting its nuclear reactor / weapons production site;
Iran-backed Houthis killed 30 Yemeni soldiers in an attack right after President Biden declared to the Prime Minister of Israel that Tehran will never be allowed to get nukes, and as the US is allegedly now believes Iran may not return to the 2015 JCPOA deal;
The Russian press reports President Erdogan of NATO member Turkey stating: “We have no hesitations about the purchase of a second batch of S-400s from Russia. Turkey and Russia are taking a lot of steps, whether it be with S-400s or other areas in the defense industry”; and
Algeria is moving towards a $7bn arms deal with Russia, not the US, as Nigeria agrees to defence cooperation and a “landmark development in bilateral relations” with Moscow.
For those who don’t like to draw the political into the economic or markets even after Afghanistan being the front page in the financial press for days, we could discuss the latest socio-economic developments in Asia instead. How about the introduction of ‘Xi Jinping Thought’ to the curriculum at all schools throughout China, and the potential long-run economic ramifications therein? Or that, as Bloomberg puts it, “China to Cleanse Online Content that ‘Bad Mouths’ its Economy”?
We are collectively in a deep hole. The key issue now is who has the flexibility to be able to stop digging - or at least to be able to ‘Dig for Victory’.