By Michael Every of Rabobank
A Talebian Treatise
One of the (few) joys of social media, at least for a (very) narrow subset of users, is the ability to watch intellectuals thrash out great ideas, or each other, in real time. It’s like being in a 17th century London coffee house, but with less syphilis and scrofula. In the highest pantheon of such is flaneur Nassim Taleb, who has something provocative, profound, and logically consistent to say about a staggering array of topics. And it is a particularly Talebian news-day today.
On Twitter, Taleb notes of the White House’s proposed wealth tax on billionaires: “Consider that if we established a capital gain tax on *large* unrealized earnings (as a “draw” against future realization) we could pretty much close the deficit. At 45% Fed+State, just half the owners of Tesla would owe half a trillion! Unless, of course, it collapses the market.” Which it almost certainly would. And on US tax, the latest proposal is a 15% minimum rate for all firms earning over $1bn for three consecutive years. So, watch them all suddenly earn $999,999,999 in year three.
China says Evergrande’s billionaire owner should pay some of the firm’s massive debts with his own wealth: what is that if not Taleb’s ‘skin in the game’? Presumably, as regulators tell other struggling Chinese developers to make clear just how much foreign debt they actually hold, and to “optimize their foreign debt structure”, this suggestion will also be made to other CEOs. Again, China seems to understand the essence of how capitalism really should work better than how Western capitalism really does work.
Taleb also has a great line on inflation, defined as: “when what you own goes down and what you don’t own goes up,” which applies to the asset-rich-income-poor framework central banks are still relying on, except in China. After all, US house prices yesterday jumped 1.2% m/m and 20% y/y, with a surge in new home sales to investors. Who needs a property-owning middle class? It’s only the long-recognized central pillar of a stable liberal democracy.
Taleb’s comment also segues to supply chains, if you rely on imports, i.e., goods that you don’t own; and to another key idea of his, antifragility - that some things get stronger when tested, in a Nietzschean sense. On that note, an article from March 2020 asked, ‘Why Didn’t We Test Our Trade’s ‘Antifragility’ Before COVID-19?’, noting Netflix uses software to regularly and randomly bring down its servers, allowing its system to adapt rapidly. They extend this metaphor that: “To be resilient, a social entity, whether a nation, region, city, or family, will have a diverse mix of internal and external resources it can draw upon for sustenance.” To do so, the authors suggest: 1) practice disconnecting, and; 2) do it randomly.
“…simply declare, ‘Let’s pretend all of the grocery stores are empty, and try getting by only on what we can produce in the yard or have stockpiled in our house!’ On another occasion, perhaps, see if you can keep your house warm for a few days without input from utility companies.” Now we don’t have to pretend.
“…simply say, ‘We are awfully dependent on supplier X: this week, we are not going to order from them, and let’s see what we can do instead!’” Again, we are now seeing this for real.
banning imports means trade war, but “a possible solution…is that a national government could periodically, at random times, buy all of the imports of some good from some other country, and stockpile them. Then the foreign supplier would have no cause for complaint: its goods are still being purchased! But domestic manufacturers would have to learn to adjust to a disappearance of the supply of palm oil from Indonesia, or tin from China, or oil from Norway.” We see stockpiling today, and swings in purchases of key goods. But don’t be fooled: they aren’t random. As the authors recognise, “Critics will complain that such government management of trade flows, even with the noble aim of rendering an economy antifragile, will inevitably be turned to less pure purposes, like protecting politically powerful industrialists. But so what? It is not as though the pursuit of free trade hasn’t itself yielded perverse outcomes.” They make a good point.
So what does this imply?
For individuals and businesses, shortages can pop up anywhere. US inventories of both coal and gas (export-demand adjusted) are worryingly low if we see a cold winter, and Blackstone’s Schwarzman and BlackRock’s Fink have both just admitted green policies are also going to push up energy and food prices - “And when that happens you’re going to get very unhappy people around the world, in the emerging markets in particular.”
On trade, resilience *is* geopolitically zero-sum, sadly. Russia has just told Moldova it can get a better gas deal this winter…if it weakens its free-trade ties with the EU: “Autonomie strategică,” as they say in Moldovan. What now, Brussels? China’s de facto ban on exports of fertilizer and magnesium could potentially also have huge knock-on effects for agricultural producers and EU auto makers, who are 95% reliant on the latter. More generally, China has stated, rationally, that it intends to remain at the center of global supply chains, except where it on-shores production itself. If others want to become more resilient on trade, it is hardly likely to lower the transition costs of doing so: quite the opposite, in fact. No country and no firm in similar circumstances would act any differently: watch the EU-UK dynamic over time. China has meanwhile also just told France it supports its aim of strategic autonomy – but that means an EU moving away from the US, not an EU getting magnesium, and other goods, from sources other than China.
In short, there is a lot more real-world volatility to come ahead from this backdrop, even if those with no skin in the game, and who adore fragile systems, cannot see it coming.
In a country that now knows all about eggs-in-one-basket trade resiliency --and whose lobster exports are a national security issue for others-- Australia’s headline CPI came in 0.8% q/q as expected, and 3.0% y/y, a tick lower than the market expectation. However, trimmed mean CPI was 0.7% q/q vs. 0.5%, and 2.1% y/y vs. 1.8% consensus, and the weighted median was also 0.7% q/q vs. 0.5%, and 2.1% vs. 1.9% consensus. Forget about house prices soaring to the point where they will get to Jeff Bezos’s orbital business park before he does, we suddenly have a slightly above-target core CPI print!
The Aussie yield curve is reacting like yields also want to go into space: 10 year yields are up around 10bp, and 3-year yields up around 23bp at time of writing. Is the RBA really going to look at this and suddenly change its mind about not raising rates until 2024 – even after the US has seen core CPI far higher for months, and is still on go-slow? First, let’s see if the RBA steps in to defend its imaginary line of yield curve control: but it would be wryly amusing if the Reserve Bank were to suddenly pivot just because one core CPI print came in 0.2 percentage points above a market consensus set by people with as poor a track record of forecasting as the Bank itself.
What a sensible system we have built: now back to the usual Twitter trivia and vitriol.