Lessons From Davos: Everything Can Come Crashing Down... And A Total Rejection Of Any Policy Alternatives

Submitted by Michael Every of Rabobank

As Davos wraps up today, what have we got so far so far from the cockpit of globalisation? Warnings of rising nationalism. Fears of recession. Worries that everything could come tumbling down again. And a total rejection of any policy alternatives regardless. It’s as if the Captain of the Titanic admits to the passengers early into the journey that the ship is sinkable, and indeed they will all drown horribly when it goes down, but then reassures everybody he’s sticking to the same route towards the iceberg anyway. Before flying home in his private jet.

Exhibit A: SO ROSS. Billionaire US Commerce Secretary Ross coming across on TV as a “let them eat cake” kind of guy, when wondering why US government workers without pay don’t just go to a loan-shark to get them through the never-ending shut-down. It was a double-whammy from Ross: he also said the US and China are “miles and miles” away from an agreement on trade, meaning March madness looms, before being prodded to stay on message that it’s all good, even if the real issues over Chinese reforms are where this particular ship is likely to sink.

Exhibit B: SOROS. Emmanuel Goldstein George Soros boldly stating China’s Xi Jinping is: “the most dangerous opponent of those who believe in the concept of open society…Authoritarian regimes are proliferating all over the world and if they succeed, they will become totalitarian….I’ve been concentrating on China, but open societies have many more enemies, Putin’s Russia foremost among them….The first step is to recognize the danger…But now comes the difficult part...The reality is that we are in a Cold War that threatens to turn into a hot one. On the other hand, if Xi and Trump were no longer in power, an opportunity would present itself to develop greater cooperation between the two cyber-superpowers.” Soros openly talked about targeting China’s economy in order to bring down Xi, and that Trump is not going far enough in that regard! And Davos gave Xi a standing ovation two years ago.

It’s unclear how far Saudi Arabia’s “can-we-just-move-on-from-the-whole-hacking-a-man-to-death thing”? sales pitch is going so far at Davos, but China is lobbying intensely: it just announced ‘US banks can start operating there in six months’. I am sure useful-idiot headline-followers will say China is opening up. They probably won’t notice the PBOC also announced a Central Bank Bills Swap that will give primary dealers bills they can use as collateral in exchange for a flood of new perpetual bonds that Chinese banks are about to issue, following the lead of the Bank of China (which is offering CNy40bn at around 4.5% for people who never want to get their money back) In other words, Chinese banks, desperate for cash to keep the Ponzi scheme afloat, can issue perpetuals that nobody in their right mind would want to hold; and the PBOC will swap them for its bills. Add that to MLF operations already underway and chatter of outright QE and one finds it hard to see where the real business model for Wall Street is in China, or to argue the part of Soros’ speech where he underlines how fragile China really is (which is why it needs that Wall Street cash-flow).

On a related note, the Canadian ambassador to China, who just helpfully provided the Chinese with a list of legal arguments against the extradition to the US of the Huawei CFO --nothing at all to do with him having received USD73,000 of travel gifts from Chinese lobbying groups when he was a back-bench MP!-- has now regretted that he “mis-spoke” his carefully prepared media statement. Let’s see if that has any impact ahead on the key Huawei tug-of-war.

Exhibit C: SO RASH. Davos being brightened by the cadaverous smile of multi-millionaire Tony Blair against a backdrop of mountains that matched his dazzling enamel, who brushed aside all suggestions the 2003 Iraq War, the GFC, and the response to the GFC might have led us to the edge of a populist backlash. And US billionaires publicly laughing out loud at the idea floated by US political shooting star Alexandra Ocasio-Cortez that the US should raise marginal tax rates for those earning more than USD10 million to 70%. (And we should laugh: everyone knows you need to tax capital, not income to soak the rich! How ‘gauche’ to think they pay income tax!) Oh, and BOE Governor Carney saying that threats of jail for bankers are “a total bluff” and the real weapon to hit where it hurts is “deferred compensation and the ability for it to be clawed back.” That’s exactly what the Occupy Wall Street gang wrote on their signs, of course.

Ironically, given how poorly the British ship of state is being piloted, it fell to UK Chancellor Hammond to try to tell UK firms that they had to accept that free movement was coming to an end and hence rethink business models based on cheap, low-skilled labour (and low productivity and wages). Likewise, Italian Prime Minister Conte appeared to sell his administration’s populist vision: “We are radical, but we are radical because we want to bring power back to where it was supposed to be, according to our Constitution, its people,” he said. In short, even in avoiding one iceberg we just hit another.

Meanwhile, rashness in large-iceberg goes on elsewhere. Yesterday we noted a worst-case scenario for Venezuela would be the US backing the ‘new president’ and Russia and China backing the ‘old president’ (A “Gentlemen Prefer Bombs” Monroe Doctrine): well, guess what is happening? And the local military is also siding with the ancient regime for now too.

Rather forlorn in this global picture, the ECB met, did nothing, and tried to show it sees things are getting worse while still believing that actually everything is doing just fine: all very ‘Davos’. Risks to the growth outlook were assessed as being tilted to the downside – mostly because of persisting uncertainties, which may ultimately weigh on confidence; but despite this downgrade of the balance of risks, no policy response was considered. Indeed, Mr. Draghi appeared reluctant to steer towards new policy measures, Draghi-ing his feet, one might say, even as the Council may need to act if the economic weakness persists. And if that does happen, we expect TLTROs, now raised by “several” members, may be the preferred first policy response if data remains weak. For more on that, please see here from Messers de Groot and van Geffen.