Rabo: If Powell Does Nothing, We Will See Godzilla-Sized Shockwaves Across Markets Everywhere
By Michael Every of Rabobank
“Quadzilla is approaching Tokyo!”
[Cue epic music] “Up from the depths; 30 trillion high; Breathing fire; Its name in the sky — Quadzilla! Quadzilla! Quadzilla!” [Sudden switch to comedy music] “…and Godz-EU-ki.”
For those who grew up with 80’s cartoons, that intro may be familiar: for those who didn’t, here’s a link. It’s also timely today as US Secretary of State Blinken and Defence Secretary Austin approach Tokyo to discuss how the combined USD30 trillion economic behemoth of the US, Japan, India, and Australia can work together. The leaders of the four countries just held a virtual summit and even have a joint editorial in the Washington Post calling for an “open, secure, and prosperous” Indo-Pacific “free from coercion”.
They’ve already agreed to a joint Covid vaccine plan, where US vaccines will be produced in India, and Japan and Australia will help with the finances and logistics to distribute this throughout Asia. That’s powerful PR and diplomacy (even if India was already doing most of this alone, overlooked by Western media). Moreover, the Quad countries have pledged to ensure emissions reductions based on the Paris climate accord, as well as to cooperate on technology supply chains, 5G networks, and biotechnology. There are also defence agreements between most of them. It doesn’t take Austin going along for the ride to realize this is all about countering that other economic giant, China – which is as big and powerful as King Kong. So Quadzilla vs. Xi-ng Kong? That’s a movie already supposed to be released this year, coincidentally.
As US diplomacy moves into high gear, Pentagon war-gaming has repeatedly shown China would win any conflict with it over Taiwan, changing the entire face of Asia and the global economy. That news comes as Blinken, perhaps misspeaking, referred to Taiwan as “a country” – crashing across a key Chinese red line; the Australian newspaper carried an ominous warning: (“China arms for war, as Quad fights back: The reality of conflict in the Pacific is moving ever closer. Those are not hysterical words. They are the implicit message in the words of Chinese President Xi Jinping this week.”); and Bloomberg today has an op-ed quoting a Council for Foreign Relations report that “urges the imminence of the risk of conflict between China and the US over Taiwan”, concluding “the US needs urgently to dust off its options to meet a looming threat.” As they say in Latin: Si Vis Pacem, Para Bellum….so we see the Quad. It’s not NATO; and it’s not a free trade area; but it is likely to embrace elements of both moving forwards. Geopolitics will demand it even when local politics doesn’t.
The post-Brexit UK has indicated it might want in too. Relatedly, there looks to be a Tory party rebellion if the government tries to kill off an amendment banning trade deals with countries committing genocide; and the UK has declared China in breach of the Sino-British Joint Declaration over its treatment of Hong Kong – which has seen a strong Chinese response unlikely to lead to a new “Golden Age” of Sino-British economic relations.
Meanwhile, the post-Brexit Godz-EU-ki is also searching for a (non-comic relief) role:
The EU’s Indo-pacific strategy was supposed to be out in March but this has slipped to April;
The French want the EU to drop English and revive Latin. Could there be a better symbol of a bloc turning inwards, and away from soft power, than to revive a dead language most non-Europeans, who have already opted for English, will find impenetrable? Why not Esperanto? (And did you know William Shatner starred in the 1962 Esperanto movie “Incubus”?);
The details of the China-EU CAI investment deal, now revealed, show many of the Chinese sectors to be ‘opened up’ have huge strings attached, e.g., the EU remains open for Chinese FDI into its media, but China remains firmly closed. Indeed, there are specific bans on foreign programs being shown on TV in prime time without special permission;
Internally, Wolfgang Munchau reports Germany is to spend EU virus relief funds on pre-existing plans rather than introducing the reforms such spending was supposed to be predicated on. He strongly implies this will do wonders for internal unity when Berlin then expects others to act on said reforms; and
The EU is about to start a 15-month roadshow, The Conference on the Future of Europe, where townhall meetings will help decide what the bloc should be/do. As Politico notes: “Macron’s grand idea for a Europe-wide discussion, the sort of thing that EU leaders often resist as a navel-gazing exercise, instead turned into a navel-gazing exercise about a navel-gazing exercise.”
Meanwhile, it’s going to be a ‘monster’ week for central banks. Indeed, with the Fed, BOJ, and RBA all looking like the BOJ alone used to, the key focus is what Fed Chair Powell will say about the rise in long bond yields. Over the weekend, Treasury Secretary Yellen said that she wasn’t worried about inflation risks, which are “small”, and “manageable”: she again forgot she’s now in the wrong role in this particular movie. Treasury Secretaries are generally seen as small and manageable compared to central bank chiefs by global markets.
If Powell does nothing, we could perhaps be on the verge of a 2013-style Taper Tantrum. That would send Godzilla-sized shockwaves through markets everywhere, including Tokyo. (And I now think of 1970/80’s British TV ads where a Mock-zilla would eat famous global landmarks before deciding he preferred a certain candy “even chewier than a Barrow-in-Furness bus depot.”)
Against that background, if the ECB switched to Esperanto to cry “Ne paniku! Ni havas ĉion sub kontrolo!”, it likely wouldn’t help that much. The same is true for the BOE in the Queen’s English, also meeting this week; and for the RBA; and of course emerging markets would be right at the front of the queue for impact. Even China would not be able to stand isolated from this development either, as we have seen before. So if when we stick to markets, sometimes it still comes back to Godzilla vs. King Kong…
…although it’s unclear if this is the US vs. China or the Fed vs. the markets. Which is the real King of the Monsters?
Of course, Powell could say something or do something: Operation Twist and Shout; or YCC. First of all, this would then show that there is a disconnect between the Treasury and the Fed, which is hardly ideal. Moreover, such steps would prompt a major market flattening, but of two different kinds (short end up and long end down; or just long end down). As I keep repeating here, YCC would also open the door for some seriously new epic adventures, like opening the mysterious giant gate behind which King Kong is found on his remote island.
It would also be a prerequisite for a true Quadzilla strategy of course.
[Cue epic music and flaming background]: “QUADZILLA!”
Mon, 03/15/2021 – 09:30