By Michael Every of Rabobank
He Believes Anything
Friday’s US payrolls report surprised to the upside, with 916K job gains vs. 660K expected, suggesting hopes for a Great Reflation. This was before new stimulus had passed, or even newer stimulus had been floated, which is likely to see some worry about inflation overshooting. More so given supply-china squeezes, Miley Cyrus giving away $1m in stonks to encourage stonk-trading, and someone paying $660,000 for an unopened 1996 copy of Super Mario Brothers. Yet --whisper it!-- not everyone can spend the same on an unplayable video game as they do on an apartment. The payrolls data reflect re-opening in several large US states that the White House has been decrying as risky; and Covid hysteresis plus hysteria remains a background threat which still has the whiff of deflation.
On which note, Bloomberg, reporting on the IMF’s latest outlook update, are inadvertently hilarious today when stating: “unlike in the aftermath of the 2008 financial crisis, the recovery looks lopsided…among the laggards are most emerging markets and the euro area.” Yes, the post-2008 recovery was *geographically* even, but it was *socially* lopsided, with almost all the gains going to the rich. That’s happening again, give or take help for those at the bottom already being rolled back outside the US. It’s just that this time even for the rich it’s a zero-sum game. In particular, the IIF continue to warn of the risk of an EM Taper Tantrum 2.0, while the IMF head states: "While the outlook has improved overall, prospects are diverging dangerously."
Special emphasis on the “dangerous”, says I, when one considering the broader backdrop.
More important than it seems, The Economist had an article Friday about growing (quasi-)religion in US political debate. Allow me to quote G. K. Chesterton's maxim: 'When a man stops believing in God he doesn't then believe in nothing, he believes anything.” Perhaps some will soon see that “anything” ironically includes the neoclassical economic policy peddled by The Economist et al., when it is that deregulation, globalization, and financialization which led to the backdrop of so many people so obviously desperate for some alternative belief, no matter how atavistic and/or utopian.
Regardless, the facts are that:
observers outside economics spotted this emergent socio-psychological trend years ago;
yes, it means policy debate then becomes faith, not evidenced based;
which means even deeper political polarization; and
that translates into more surprises for markets.
For the latest example, see Georgia’s passing of a new voting act; major firms calling for a boycott of the state because of it; and Georgia Republicans and former President Trump threatening to remove tax breaks from and calling for a public boycott of said firms. From ‘Play ball!’ to curve ball in no time at all: and expect a lot more of this to come all over.
But the danger is larger than that. The same Economist policy cocktail has arguably led to the present geopolitical backdrop, where the US and China are in a new form of Cold War and others are caught in the middle (and as The Economist says blasé-ly and more-than-five-years too-late-ly that: “China is betting that the West is in irreversible decline”).
This matters hugely for global firms too: for example, H&M, who face consumer sanction in China for their stance over Xinjiang cotton, have tried to rebuild bridges by including China’s “9-dash line” on maps printed on some their clothes.....and so now face a consumer boycott in Vietnam as a result. Weren’t global CEOs promised by The Economist that they were always the top dogs? And now they aren’t, which tail are they ultimately going to choose to be wagged by?
Meanwhile, as headlines continue to be written about Taiwan and worrying timetables, the large-scale, largely-unreported military build-up on the border between Ukraine and Russia still continues apace. Is this just very expensive military posturing? Is it a test of the resolve of the new White House? Or is it a harbinger of something far more serious that markets will soon need to worry about in a way they aren’t at present?
Don’t ask an economist for the answer! All I can add is that Russian military analyst Pavel Felgenhauer --who may just have a slightly better grasp of the inside story and logistics than a Wall Street FX trader-- is quoted as saying that “the Western powers have no idea what to do in this situation”; that the clock is ticking; and that “at the beginning of May, everything will be ready” for a Russian military advance – if they want to make one. The analogy of ‘Wag the Dog’ can now be thrown in for those who wish to do so – or G K Chesterton and believing anything.
Talking of thrown in, however, EU High Representative Josep Borrell, who was recently humiliated in Moscow, just tweeted: “Talked to Ukraine Foreign Minister…Following with severe concern the Russian military activity surrounding Ukraine. Unwavering EU support for Ukraine sovereignty & territorial integrity.” But what kind of support? The ECB’s firepower wouldn’t help at all if *actual firepower* is being used. If one were only focusing on the virus situation, it would already be a very worrying backdrop for the EU, which is suffering from a third wave and not enough vaccine, underlining its key structural weaknesses; but throw in the risk of a war nearby to deal with, and things look far worse.
But this won’t happen, right? Hopefully not. Yet even The Economist (again) has another article about how the French army is “planning for high-intensity war”. Working groups have been set up to examine things like munition shortages and the resilience of society, including whether French citizens are “ready to accept the level of casualties we have never seen since WW2”. They presume they have a decade to prepare for it…but perhaps they don’t looking at the timetables above. At least they are doing something: most of the EU still seems to think the bloc is protected by some kind of “Imaginot Line”.
So what should one believe in? G K Chesterton, at least.