Rabo: The Street Can’t Resist Buying Things That Have Gone Down
By Michael Every of Rabobank
A market move of note yesterday was a 6bp rise in US 10-year yields back up to 1.38%, only partially reversed in Asia this morning. This was despite further market signs that the reflation trade is very much in the rear view mirror: which itself overlooks that aluminium and US fertilizer prices are soaring, meaning much more expensive soda cans, and US food, further down the line; but that is going to be deflationary with a lag if there isn’t any fiscal stimulus; and right now there still isn’t any fiscal stimulus, and there won’t be, even with reconciliation, unless Manchin and Sinema press play not pause over the still-unwritten $3.5 trillion bill. That as the debt ceiling looms, as does a White House request for another $30bn for hurricane and refugee aid.
There was also a notable 17% crash in Bitcoin, which was ostensibly driven by a glitch in El Salvador adopting the ‘currency’ as legal currency. That says about as much as is necessary on the topic if one thinks about it properly, which most involved don’t.
Yesterday also saw the RBA taper QE (from A$5bn to A$4bn) despite Covid, but push out how long we can expect QE to be around. It’s now at least February before the buying stops. However, in the eyes of cynics, QE is tied up in the outlook for the housing market, regardless of denials like this. Recall the cui bono message from yesterday? Try “Coo-ee, bonza!” Aussie house prices are fair dinkum bonza at the moment: but not so much if rates go up, or there were again other things to plough one’s money into other than property.
Likewise, the Wall Street Journal reports Federal Reserve Bank of Dallas President Kaplan made multiple million-dollar-plus stock trades in 2020. The full (famous) names he was holding are in public disclosure forms. Now this transparency is good; there is nothing wrong with being wealthy; and nothing wrong with trading stocks. Yet the Fed is in charge of financial stability – and QE explains why stock prices are as high as they are. The Fed holding stocks personally may help explain why they are as holy writ in the US as house prices are in Australia – where property portfolios are not a required public disclosure for officials.
The same cui bono message can be applied to the UK, where PM BoJo broke his election campaign not to raise taxes by raising national insurance by 1.25% for everyone, including the poorly-paid renting young, in order to subsidise the old-age care of wealthy elderly home-owners – or so says some of the press, and voters. Build Back Better clearly does not mean build more social housing, just as it hasn’t for any UK administration for over 4 decades. So it’s higher prices, higher taxes, and ongoing Covid disruption for the Brits. And supply chain problems in supermarkets. Apart from that, all is well.
The larger picture being painted here is, despite Covid claims of ‘all being in it together’, winners and losers are abundantly clear right now. On which note, George Soros just wrote an op-ed in the Wall Street Journal –“BlackRock’s China Blunder”– with the sub-heading “Pouring billions into the country now is a bad investment and imperils US national security”, and the conclusion: “Congress should pass legislation empowering the Securities and Exchange Commission to limit the flow of funds to China. The effort ought to enjoy bipartisan support.” That has not stopped BlackRock reportedly raising an initial $1bn for its first China mutual fund ahead of its own September 10 deadline, attracting 111,000 investors – an average of just over $9,000 per capita, suggesting this is more retail than institutional money.
This is not an equity-focused Daily, but equity-focused –and Hong Kong-based– Bloomberg markets and editorial teams both huffed and puffed in dismissive outrage at Soros, underlining it was 29 years ago that he broke the Bank of England: yes, and how many G7 central banks have Bloomberg markets and editorial broken with their out-of-consensus market calls in the last 3 decades? They also stated ‘money has to go somewhere’ —why not NFTs of penguins?– and ‘Chinese stocks look cheap’…which any asset hit that hard tends to. But does that mean buy it, as another tentacle of Bloomberg reports “China Property Crackdown Alarms Analysts as Economic Risks Grow”?
Anecdotally, yes, it does. US-listed China stocks are already rallying, and are up 22% from their lows – while still down 22% YTD; the hunt for yield still matters more than any real-world memories/Soros warnings of The Hunt for Red October; and the ahistorical Street can’t resist buying things that have gone down on the presumption they must go back up – a mean-reverting, mechanistic, V-shape view of the world they share with economists. Of course, both can be right – unless a structural break has occurred…as when the BOE was broken in 1992.
On which, Bloomberg will, at 11:00am Hong Kong time, explain ‘What “Common Prosperity” Means for Markets’ in a Q&A. Given there appears uncertainty as to this, even within China(!), we should be all ears; and presumably there will be a deep-dive into Marxist-Leninist-Maoist theory as a necessary part of the discussion – because we all know how well-versed Bloomberg are in such key matters.
Meanwhile, the real battle may now be moving to Congress, where Soros and BlackRock both know a few people who really like to huff and puff. But who knows more of the right ones before and after November 2022?
So in the end, who will be the market’s happy winners and who will be the ‘Soros’ losers? As I keep repeating, the answer lies in ‘cui bono?’ and structural choices nestled in both realpolitik and political economy. Until then, frankly, it’s all just NFTs of penguins – and good luck to you.
Wed, 09/08/2021 – 09:40