Rabobank: Exposing The Fed's Hypocrite-ic Oath

Authored by Michael Every via Rabobank,

The traditional form of the Hippocratic Oath that doctors of Western medicine swear starts with “First, do no harm”, or “Primum Non Nocere” as it used to be before little things like 2,500+ years of tradition went out of fashion because they were hard. It’s not bad advice: before trying to do anything to make things better, make sure you aren’t making things worse.

Yet it’s very hard advice to follow if you are looking after not just a human body, but a larger economic body. After all, who can say what the negative side-effects of any given policy will be?

For example, surely lower interest rates are good for us? They boost capital investment. They encourage spending. They ‘juice’ the economy! Well, yes. But in the same way, a shot of adrenalin can get you moving around quickly in an emergency situation - yet a long-run use of steroids is a great way to destroy one’s health. Outside you look amazing, but inside you can be in terrible condition.

Indeed, you can look at this “Disruption! Skyscrapers! 5G! Dow 2x,xxx!” global economy and see the sleek and well-oiled and muscular and bronzed parts if you want. Or you can think about the dangerous mood swings in financial markets, inequality, falling productivity, major organ damage to socio-economic stability, lethal debt levels, mostly in unproductive areas of borrowing, and the uncontrollable populist rage that flows from this all. If you opt to see the latter you would call in the doctor for your body-building friend and beg them to recall their Hippocratic Oath.

However, Fed Chair Powell spoke yesterday and suggested the Fed--like the ECB, and the RBA (etc., etc.,)--will soon be increasing the dosage of monetary-policy steroids even further. Not so much Pumping Iron as Pumping Stocks. Yet even then markets were unhappy as there was no syringe placed on the table, just a medical tool kit that might only have tiger balm for all their performance-enhancing-stimulant-addled minds know.

Ironically, in the background we also have news that the market should want to hear: the US is allegedly preparing to can-kick at the G-20. Bloomberg reports that a friend of a friend of this girl who knows a guy whose cousin works in the White House at some level has told them that the US is prepared to hold off on raising tariffs on another USD300bn of Chinese goods to 25% after this weekend’s summit. They will also agree to reopen trade talks again. However, they won’t remove any existing tariffs or commit to any other action. For its part, China has already stated it wants all tariffs removed as a precondition for restarting talks, which puts them in an interesting position of having to lose face a little. Yet that is probably achievable. So in short, we might end up with the status quo ante after the G-20. On which, several thoughts flow.

First, if I were Trump that would suit me ‘hugely’. He still has 25% tariffs on many products. He still sees Chinese supply chains shifting offshore. He still carries the threat of going ‘all in’. But he doesn’t have to actually pull that trigger ahead of the election – just the threat is enough. Please recall, as I have already written several times, that my first guess at what the US ‘should have done’ was to say “40% tariffs in 12 months from now”, forcing supply chains to move before prices were impacted.

Second, this suits Xi. China has a whole heap of problems. The demonstrations that will be held in Hong Kong during the G-20 to try to embarrass him is merely one of them. SHIBOR sub 1% and bank failures is another. So, yes, please, let’s kick that can!

Third, this is not even a Donaldtov-Xibbentrop Pact. It’s just a pause for breath as both sides focus on domestic problems for a little while.

Fourth, for global businesses it won’t mean they stop moving supply chains. Or it shouldn’t if they have any common sense. Like with Hard Brexit: do you wait for it to happen and then plan? Even Huawei is apparently trying to hive off its US business as a separate entity called ‘Futurewei’(!) I would suggest ‘Nowei’ would have been more apt unless all employees wear comedy Groucho moustache and glasses at all times so nobody notices what they are actually doing.

Fifth, for the steroid-selling Fed, what does that G-20 development mean? “Trade war”, the convenient get-out-of-jail card for everyone who didn’t see that our current economic paradigm was always going to end up in another slump and crisis, is going to be less of a threat. So how do you justify even more steroids when you don’t have the excuse of an obscenely-muscular body-building boogieman in budgie-smugglers to challenge you?

But don’t worry: at the end of the day it doesn’t matter.

The Fed are just going to let rip anyway in order to get us more ‘ripped’. Rates will be cut. QE will flow, etc. None of what the Fed, the ECB, and the RBA (etc., et.) say has to make any sense, and doesn’t...

...except to those who look at Austrian, Marxist, or other heterodox schools of economics who can interpret that central-bank speech will always translate into “lower for longer/do whatever it takes” eventually regardless.

It’s all a big Hypocrite-ic Oath.

So rip away. Until something tears.