Rabo: The Slow And The Furious (Democrats)
By Michael Every of Rabobank
The Fed’s Beige Book yesterday mentioned “shortages” just slightly less than in the prior month, while making clear that most firms were experiencing exactly that in goods and labor, along with expectations of further increases in prices, or at least an extended period of currently-elevated prices. I guess that qualifies as ‘business as usual’ today, which underlines how the human mind, and the market’s ADHD, adapt faster than the physical economy.
On which, the will-they/won’t-they/how-much-if-so US fiscal package, to unlock the $1.2 trillion infrastructure deal, sees reports that Senator Manchin is sticking to a figure of just $1.5 trillion; Senator Sinema won’t allow any increase in top tax rates, again meaning $1.5 trillion; the White House says there are lots of options for other things to tax, but it looks like free community college is no longer on the table anyway; and, potentially log-jamming everything, there are even suggestions Senator Manchin may leave the Democratic Party and caucus as an independent with the Republicans, which would flip the Senate. That leaves slow progress towards whatever remnant of the originally $3.5 trillion package remains – and furious Democrats.
Meanwhile, 160 Republicans have written a letter to President Biden proposing he focus on supply chains and infrastructure, and lift Covid restrictions accordingly; the White House is weighing the use of the National Guard to replace missing truck drivers – which will not replace missing truck chassis slowing things down; and a California Governor Newsom executive order to find new land to put shipping containers and lift the weight allowance trucks can carry won’t solve the same chassis argument applies, or that weightier trucks take more time to load, and surely the rest of the US will have to agree the same weight-limit, or else a new bottleneck occurs at the California state border(?) In short, things are going to stay slow and furious on this front too.
From a different perspective, the Dean of the College of International and Security Studies at the Marshall Centre has tweeted, cc-ing The Heritage Foundation Vice-President and the former commanding general of the US Army in Europe: “We have shortages in the US & there are ships waiting to be unloaded unable to enter our ports. This is what “globalization” has wrought. We need to de-couple from China and re-shore our critical supply chains ASAP.” This is political/strategic logic we predicted would emerge in the US in our ‘In Deep Ship’ report. However, we never claimed it would come from *politicians*, and it obviously won’t come from US corporations. Yet once the national security guys see it, it eventually percolates upwards S-L-O-W-L-Y. Unless geopolitics accelerates it.
Likewise, a recent Forbes op-ed argued ‘Dwindling US merchant fleet is a crisis waiting to happen’, and “What the nation really needs is a bigger domestically-owned and operated commercial fleet that can be made available for defence-related cargoes in an emergency. The most practical way to accomplish this would be to mandate that a certain percentage of imports and exports be carried on US-flagged vessels.” Industry arguments have also been made that re-flagging a US-owed but Panama-registered ship back home would cost around $13,500 a day in higher crewing costs, so $5m a year. That’s a bill of $500m if 100 ships were told to. And that’s literally pocket change for the Pentagon. So changes can be fast if things get furious. But, of course, this won’t help supply chains now.
Not unrelated to all of this, even if not everyone sees the link, the the UK announced a free-trade deal with New Zealand. 97% of tariffs on Kiwi exports will be eliminated on day one, with dairy, beef and lamb to follow in later years. The Guardian, previously saying this deal was not making progress because the UK was seen as a bad actor, now underlines it will have no benefit for UK GDP (because New Zealand is so small): no post-Brexit sour grapes there. The key points are that this is a big win for Kiwi farmers, and for New Zealand’s ability to diversify its exports in order to become more geopolitically resilient. For the UK, it unpicks a lock that may allow entry into the CPTPP, and more trade with both the land of milk and manuka honey, and the Indo-Pacific, where H.M.S. BoJo (and the odd aircraft carrier) appears headed.
As I said at the beginning, in markets things can of course be fast and furious. Bitcoin, for example, is having another moment, hitting a fresh all-time high of $66,000 (and, yes, at one point I believe someone saw it at $66,666.66) due to the excitement of the launch of its first ETF. So now you can indirectly own a libertarian asset whose logical appeal is if you own the real thing, like physical gold vs. gold ETFs. We are back to $300,000 Thai banana plants that produce 50 new plants rather than destroying 50 rivals.
In FX, CNY is also continuing to push higher against the dollar, with market bulls doing their usual job of chasing their own tails. In doing so, they are paying no heed at all to Evergrande, where talks to offload a stake in some of its assets have failed, which can only say very bad things about the quality of said assets. Worse, sales of its apartments have recently slumped 97%, drying up liquidity almost entirely. Its shares start trading again today after a three-week freeze is lifted, and it has a 8.25% note due tomorrow currently trading at 23.6 cents on the dollar.
In rates, US 10-year yields are back at 1.66% as they start to creep back towards the closing 2021 high of 1.74%, as 2-year yields have actually drifted lower at 39bp vs. a high of 44bp last week. Did my comment on the US labour market finally having a moment again hit home? I doubt it! Surely a yield-curve steepening trend is the fast and the ludicrous, unless one presumes that central banks are not going to act in the face of a genuine recovery, rather than the obvious risks that they are going to act in the face of a stalling recovery being choked off by a supply-side inflation shock? But what do I know? I didn’t buy Thai banana plants when they cost $5 in 2019.
Finally, a New York Times article about a cancelled speech at MIT, that pinnacle of global STEM excellence, contains the following quote: “This idea of intellectual debate and rigor as the pinnacle of intellectualism comes from a world in which white men dominated.” Culture wars aside, it’s true that a great deal of ”intellectualism” is arrant, arrogant nonsense: like the economics that plugs ‘nothing can ever go wrong’ long, complex, supply chains based on selective editing of Ricardo and Smith, and editing out of political-economy. Engineering hasn’t usually had the same problem, because if you ‘assume’ too much, the bridge literally falls down. It’s also true that in a Gramscian sense, one should always try to invert words to see where power lies: the semantic opposite of ‘social security’ is ‘private insecurity’, for example. But on that same ground, is the pinnacle of “new MIT intellectualism” to be the absence of debate and a lack of rigor, i.e., lazy group think? It seems to me that is the only thing we don’t have a shortage of; and isn’t our physical infrastructure bad enough already?
Anyway, let’s see if it is a fast or a slow, and a happy or an angry day in markets.
Thu, 10/21/2021 – 10:36