Submitted by Michael Every of Rabobank
What a Friday that was. German manufacturing slumped badly; global manufacturing followed; yields tumbled; 10-year Bunds went below zero again for the first time since 2016; the US yield curve inverted 3M-10Y and 1Y-5Y, which has a pretty flawless record of calling US recessions (our call for 2020 already, of course); and the Turkish Lira collapsed again. So join the dots. The global economy is in real trouble long before central banks have come up with a cure for the new normal. Bonds have been right all along and equities have been wrong (as is always the case in my experience). And the knee-jerk ‘sell USD trade’ after a dovish shift by the Fed looks as silly as it always was - because if the US is in trouble, then everyone else is in far deeper doo-doo. Think second-order and third-order effects, people, not first-order.
Then we got the news that the Mueller Report has been handed over to the US Attorney General...and that was that. No more indictments. No impeachment of Trump. No proof of collusion. No Reds under every bed. No Putin on the Ritz. Unless something else appears related to it, the whole Mueller affair was, in short, the nothing-burger I have kept calling it in the Daily since it first started - and hence it has no market impact. Yet it isn’t a nothing-burger. As Rolling Stone’s acerbic Matt Taibbi --no Trump fan he!!-- notes, this utter mis-selling of events by channels like CNN and MSNBC, as well as newspapers like The Guardian, means “Russiagate is this generation’s WMD times a million”, a reference to the scare-stories on Saddam Hussein’s “nukes” that led us to the 2003 Iraq War, and then to Iranian regional dominance and to ISIS, etc. In this case, the lasting damage is that after having screamed “Fake News!” and “Witch Hunt!” for nearly two years, President Trump can now Tweet “No Collusion. No Obstruction. Complete and Total EXONERATION. KEEP AMERICA GREAT!” and be legally correct. Which does nothing for the reputation of the media at a time when populism is not just knocking on the door, but is inviting itself in for tea and biscuits. On which front…
Moore is less
Far more significant, and of course overlooked by the same media rabidly obsessed with Russia and impeachment, was Trump announcing he will nominate Stephen Moore to join the Federal Reserve. This is an intellectual appointment on par with Larry Kudlow, not Janet Yellen. As one journalist reports it, the sequence of events ran allegedly like this: “Scoop on how this went down: At lunch last week, Kudlow showed Trump Stephen Moore’s op-ed in WSJ. Trump said: Why didn’t we make him Fed chair. Kudlow said you could name him to one of open seats. Trump said call him.”
Those who have seen my recent ‘The Age of Rage’ presentation, or suffered through the 17,500-word special report (which at a push can be folded into a panic room or bunker by those who know origami), will know that I raised the question of how markets would react if we got truly politicised central banks ahead under populism- for example, if Trump appointed son-in-law Kushner to the FOMC rather than making Middle-East peace. Just that scenario, but with Moore not Kushner, is now playing out. If Trump wins in 2020 —and with Mueller toothless why not?— then the next Fed is going to look a lot less “sound money” and a lot more “Mad money”. Except, of course, the irony is that the existing Fed has hardly covered itself in glory. It’s mountain of PhDs and experts failed to see the dot com bubble; blew a housing bubble; failed to see he GFC; failed to see QE would distort everything that matters; failed to see wages wouldn’t rise; failed to see they were raising rates when they didn’t need to; and are now finally right in moving towards cutting rates by accident not design. As such, would a Trumpy Fed actually do any worse? Clearly Moore is a further sign that monetary policy as we’ve known it is over and fiscal and monetary policy combined are going to be the way forward (as I argued back in 2017’s Heaven or Hell-icopters). In other words, shades of MMT - the modern monetary theory traditional economists like Paul “the Internet isn’t important/China isn’t important for world trade/I don’t know what endogenous money is” Krugman are scrambling to now pooh-pooh.
Is that threat negative for the USD? Yes. But it’s even worse for everyone else for many reasons - just ask Turkey. If things are so bad that we need to get that radical, the US will still be the place to be: and if everyone is heading for MMT then only a few currencies are going to be in international demand, topped by USD, as the unwritten rule of MMT is that it needs to sit alongside mercantilism and/or capital controls to work properly...and on that basis it’s not too many USD you need to worry about offshore, but too few. Potentially, Moore really is less.
Today is yet another day where even with this kind of backdrop we focus on Brexit yet again, as PM May fights off what the media is suggesting will be a palace coup to topple her, given that while she stays on and robotically refuses to budge on her Red Lines, Hard Brexit looms. Parliament can do what it wants, but it needs to find a compromise it can live with this week, and have May then agree to listen to it, or off the White Cliffs of Dover the UK goes. Yes, a million people (and not Jeremy Corbyn) just marched through London to say “not in my name”, but that will have as much effect as the same number of marchers did in 2003 over the Iraq War unless May goes: but will she? The latest news is her ministers are actually rallying round her. How very “Russian”.