Who Turns Downs Millions? People Who Believe We Are Heading For "F**k It" Phase

By Michael Every of Rabobank

A 5% World and the 1% World

We are seeing market concerns about a “5% World” where US Treasury yields reach and stay at that level; that as Nick ‘Fed-Whisperer’ Timiraos just laid out ‘Why the Era of Historically Low Interest Rates Could be Over’; and as opinion piece from a former White House economic advisor, backed by Paul Krugman, argues ‘The Fed Should Carefully Aim for a Higher Inflation Target.’ The author suggests the Fed should be tough now, but that a CPI target of 3% would be more appropriate if it were being set today, and that by 2025 the Fed should be considering it. That kind of chatter all implies a lot for both the level of bond yields and the curve shape! This morning in Asia the 2-year US yield was +6bps on the day to 5.01% for the first since 2007, i.e., before the Global Financial Crisis, and a time when George W. Bush was preznit. The US 10-year yield was +9bps to 4.36%, narrowing the 2s-10s inversion.

As such, the market is apparently telling us the ‘New Normal’ is over - but that doesn’t mean economic ‘healing’ has occurred: we are in a far deeper socio-economic and geopolitical hole now.

However, that doesn’t mean inflation and/or yields cannot go up and stay up. Look at the UK, where stagflation is now widely accepted. Regular readers will also know that “Higher for longer (plus acronyms)” has been a matching global strategic meme as we’ve moved from a demand-deficient ‘Marx’ world of excess labour supply to a ‘Lenin’ one of full employment, shrinking labor forces, strikes, war, and deglobalization, exacerbated by changes in the physical environment impacting on supply chains. Indeed, ‘You Don’t Know Ship’ from our killer, jewel of an energy expert Joe DeLaura, besides having flagged the recent Ukrainian attack on the Russian port of Novorossiysk in advance, states: “Economic projections based on past low, stable energy prices are a house of cards on a flimsy old folding table.”

Regardless, in large parts of markets there is deeply ingrained intellectual resistance to seeing the geopolitical, political-economy Maslow pyramid behind CPI. Partly that’s because most people talking CPI don’t study these topics; and that’s because if you do, you ask questions about why economic power is distributed the way it is. For example, look at the US share of total net worth held by the top 1% of society. It was 23.5% in 1990, and 32% in 2022 – as society unravelled.

Yet history also shows the top 1% wealth share can collapse: in 2000, it dropped from 28.5% to 25%, and in 2008, from 29.5% to 27%. In short, a “5% World” means deep asset-price pain for the top 1%. This is not acceptable either them or their ‘Butler’ class in the 9% below them, (i.e. vanilla market funds, ra-ra financial media, bubblicious fin-tech, corporate lawyers, management consultants, property developers, etc.), who are looking down at the social maelstrom below them, worrying about paying their kids’ private school/university fees, and thinking, “There but for the grace of the Greenspan Put go I”. One can see the ‘logical’ argument why ‘rates must come down soon’ from those who need them to.

Yes, if we cut rates it will mean a larger bounce in assets than already seen as ‘pivots’ are front-run by markets trying to force central banks to act by acting as if they already have. Regrettably, absent structural change, it would also see commodity prices surge, risking a replay of the 1970s. However, let’s assume, as the top 10% do, that low/deflation looms, so rates are slashed, bonds rally, stocks too ‘because bonds’, while unemployment rises. Even here the 1% should worry.

A recent Wealthion interview discusses how a worsening wealth gap could trigger a class war, suggesting the length of time a society is under stress matters as much as its depth. After 15 years post-GFC, the societal ‘Fs’ that can be collectively expected are: Fight; Flight; Freeze (which we see in the 10%’s current thinking); Follow (a charismatic leader); and, finally, “F**k It.” Look at the success of the US country song ‘Rich Men North of Richmond’; and the musician who sang it just turned down $8m from a record company. Who turns downs millions? People heading for the final of the five ‘Fs’, that’s who.

Indeed, if you think a return to New Normal high unemployment and low rates, with even higher house prices and rents, will let the 1% thrive as next-9% fund managers disingenuously say to the majority of the public owning no or few shares that, “We are here to help teachers and fire fighters”, think again. Things can get very ugly, very fast.

After all, the last of the five Fs is already evident in geopolitics: Russia no longer accepts anything Washington or Brussels has to offer, as they both offer Ukraine F-16s; Argentina’s leading presidential candidate, who used to work as an economist for HSBC, wants to dollarize --with no dollars-- and  “burn down” the central bank; second-placed US Republican presidential primary candidate Vivek Ramaswamy wants to fire 90% of the Federal Reserve staff and change its remit to solely protecting the value of the dollar. Do you spot a pattern of frustration? Do you think rate cuts and higher house prices are going to help?

In China, where the 1% keep hoping we will see stimulus, we instead see a shrinking fiscal deficit, irrelevant responses like longer market trading hours (in which people are selling), and constant FX intervention to try to cap CNY at 7.30, which only helps push Treasury yields higher, boosting the dollar more. That’s as:

• Bloomberg notes, ‘Run It Cold: Why Xi Jinping Is Letting China's Economy Flail’.
• A Xi speech published in the CCP’s top atheist, historical-materialist, Marxist-Leninist theoretical journal critiques Western countries who “cannot curb the greedy nature of capital and cannot solve chronic diseases such as materialism and spiritual poverty.”
• The Asia-Nikkei saying ‘Xi's apparatchiks will struggle to revive economy: China watcher’, where Willy Lam adds the slowdown will likely be exacerbated by prioritizing geopolitics and national security over economics.
• The WSJ’s ‘China’s 40-year Boom is Over: What Comes Next?’ quotes “those with knowledge of Beijing decision-making” saying the leadership believe China’s focus should be on “bolstering its industrial capabilities and girding for potential conflict with the West” rather than “wasteful” consumer spending, which it remains suspicious of because “empowering individuals to make more decisions over how they spend their money could undermine state authority.”

The above *is* New Normal - just not in any world the 1% thought they knew. It’s one where we have to understand ‘apparatchik’ again; and ‘commissar’; and ‘refusenik’ - and I’m not just talking about China or Russia by any means. If you think the Western policy response to all this is going to be deflationary New Normal rather than inflationary protectionism, national security, and de-risking, on-shoring, and friend-shoring, etc., then you must work in the top 10%.

So we wait with bated breath until later this week when --as the BRICS meet to maybe form a G7 rival-- the ECB’s Lagarde and the Fed’s Powell talk at Jackson Hole under the theme of ‘Structural Shifts in the Global Economy’. Will Lagarde offer more of her fiscal-and-monetary-fusion / higher-for-longer-plus-acronyms / fight-trade-invoicing-shifts policy revolution, or just drip-feed into the September meeting? Will Powell follow her lead, or provide more evidence for a “5% World”, or open the door a crack to a “1% World”, as some in markets hope?

Even if it’s the latter, remember it is no longer a world *for* the 1%.