This Is Neither The Empire Strikes Back, Nor The Crying Game, Or The Red Wedding

Submitted by Michael Every of Rabobank

I hate watching a movie unfold towards a ‘big reveal’ when it is so painfully obvious that there is no way to actually feel surprised when it happens. The kind of “Whoa!” moments you got in The Empire Strikes Back, The Crying Game, or The Red Wedding are now few and far between due to shoddy script-writing and on-line spoilers: for every Keyzer Söze there are dozens and dozens of Keyzer So-sos.

As they say, life imitates art.

For example, is anyone really surprised that the Bundesbank is now flagging a German recession this year? Just look at car production data worse now than during the global financial crisis--even before Brexit, or US tariffs, or Italy, etc.--and it is not autobahn but auto ban that comes to mind. Yet talking of shoddy scripts, it is actually news that Germany is considering fiscal stimulus if it slips into recession. That is the equivalent of a sick patient saying they may consider anaesthetic before major surgery. Is it any wonder that German Bund yields are as negative as they are and that much of Europe is following?

Likewise, is anyone surprised US President Trump is now arguing for a rate cut of a specific size…and QE? “The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!” Once again, Trump seems to be in tune with the markets – but not the Germans.

You want a real surprise though? USD continues to gain and is close to a 2019 high. That didn’t blindside us, but is certainly both a “Whoa!” and an “Aaaah!” moment for many. The US Treasury is apparently more and more interested in joining Trump in backing a weaker USD, but to achieve that in a global trading system where everyone needs dollars, and all the more so as risk-off sentiment rises, will require a plot twist far larger than Luke Skywalker throwing his lightsabre away.

On which note, another ‘surprise’: the White House has dismissed the idea of payroll tax cuts as a form of stimulus, if needed. Of course, that would push the fiscal deficit to new levels if it happened: but more importantly, the prevailing economic orthodoxy is that such tax cuts are always better directed to the wealthy and/or corporations…which has worked out so very well for us so far.

And another ‘surprise’: Huawei was given another 90-day reprieve by the US, prompting cries that Trump is flip-flopping from some, and sighs of relief from others, both ignoring that at the same time Commerce Secretary Ross noted: “We are giving them [meaning US firms] a little more time to wean themselves off.” Just look at the script’s progress so far: does it look like a genuine trade deal is suddenly going to leap out in the final act?

And another: China has announced that local government borrowing is likely to increase yet again from the already pre-announced CNY2.15 trillion (USD305bn) level of special bond issuance that has already been approved. Let’s recall that officially local governments are not allowed to run deficits; have nonetheless run up vast debts; we were told they were deleveraging; they have already had one de facto PBOC bail out; and they are now essentially becoming a normal arm of fiscal policy…except that most won’t be able to raise the revenue to ever repay this new (or old) borrowing given their tax-raising ability is mainly via rising land prices. If anything happens to property prices, it’s game over – and yet prices are already so high they are causing social problems and distorting the rest of the economy. Now where have we seen that script before?

Not to worry though as fiscal policy everywhere--except Europe?--is shortly going to mean fiscal and monetary policy in an attempt to jump-start the economy, so nobody ever has to pay anything back, we will just deflate it all away (if it doesn’t end up like Japan, or Zimbabwe, or 1930’s mercantilist all-vs-all trade wars). Who knew that at some point the script would have someone saying “I see dead independent central banks”? Sorry – have I given away the surprise ending?

If you already saw that one coming too then kick back and relax with this short article suggesting that Denmark buy the US: ‘If Denmark’s bid for the United States is accepted, the Scandinavian nation has ambitious plans for its new acquisition. “We believe that, by giving the U.S. an educational system and national health care, it could be transformed from a vast land mass into a great nation,” the spokesperson said.’