Rabo: Up Until Now It’s Been All China: Now It’s Going To Be All The US
By Michael Every of Rabobank
Shut Up ‘n Play Yer Guitar
Last week I was sent a video clip of hard rock legend and former Deep Purple and Rainbow guitarist Ritchie Blackmore giving an interview with the ‘cool cats’ of Russia Today. Resplendently syrup-ed, his monologue to a politely nodding interviewer flowed thus:
“We all have to look within. I think a lot about death. More than life. Because we are going towards death. And I think death is very important. I think it’s going to happen to all of us. Most of us. Not all. Some of us might get away with it. It’s what Bob Dylan said. Bob Dylan came up to me once and he said: ‘Hey – who the hell are you?’. And I kind of admired him for that.”
Pure Spinal Tap! My point today is yet again that much of what we read and see in terms of geopolitical and market analysis can sound deep – but it’s nonsense wrapped around elements of the painfully obvious.
Chinese stocks slumped again because the PBOC introduced a policy that *must*, if followed, induce a huge slowdown in future economic activity – or “pulling back stimulus gradually”, as Bloomberg describes shifting liquidity growth of 35% y/y to 8-9%. Then the same stocks went up because ‘the National Team bought them’. So what the economy and asset prices do are to remain two unrelated factors entirely: because it’s one thing not to have enough fiscal stimulus, and hence low rates, and hence high equity multiples; but China is going to *delever* its bubbles and ensure they don’t burst. Good luck with that.
Another narrative not being discussed: the underlying signal that the US and China seem incapable of *both* managing to put their foot on the fiscal accelerator at the same time. Up until now it’s been all China: now it’s going to be all the US. (Chinese CPI and PPI today saw the former rise from -0.3% to -0.2% y/y and the latter jump from 0.3% to 1.7%: so input prices are rising and sales prices are falling – time to scale back borrowing? US CPI is out later today.)
That lack of willingness to coordinate, or perhaps ability given the problems if 50% of world GDP stimulates in tandem(?), has serious implications for markets and geopolitics. Instead, we get the press ‘scoop’ that China wants to meet with the US in Alaska to “reset relations”: perhaps because someone from the White House can see China from there?
Take off the syrup, and ask from which of the two possible sides this story came; and who would want the narrative out there; and to what end. Journalists, like the Russian who sat listening to Ritchie Blackmore pontificate about evading death, seem to have lost that art: but the RT/RB example was no more ridiculous than the New York Times salivating about ‘secret’ US plans to attack Russian cyber facilities. So secret it’s a good job no Russians can read the US press and find out about them there: Эти жалкие одноязычные русские шпионы!
But back to Anchorage and its handy view of China: is a relations reset compatible with the same Bloomberg coverage today(!) talking about China firing an anti-aircraft carrier missile in the South China Sea to send “an unmistakable message”, according to a top US admiral testifying in Congress? With the 6.8% y/y increase in Chinese defence spending? With Xi Jinping telling the PLA to “be prepared to respond in uncertain times”? With recent hawkish statements made by Secretary of State Blinken? With plans from both the US and China for tech supremacy? Or with building up a foreign policy “Quad”, which continues apace?
Perhaps, yes: as a necessary de-escalation, some might say; and look at what is happening with the US and Iran despite what Iranian-backed actors are doing in the region, others would add. However, good luck getting anything past Congress.
Now back to the fiscal: the US is going one way and China the other – what does that tell us about how well the globe can handle any real Building Back Better? Is US fiscal stimulus going to buy Chinese green goods, which they will have too many of for local demand if their own economy is slowing down? How do we manage the relationship between these two as at least partial decoupling becomes a domestic political priority? We need Bob Dylan-style questioning here. But expect lots of Russia Today style nodding, or Spinal Tap analysis instead.
Meanwhile, from the big picture to the small, and despite the USD having a down day for the most part vs. G10 FX Tuesday, the meme is still rapidly shifting to “America is back” in terms of higher long-end rates, and hence a bid for the buck against emerging markets in particular. Moreover, the OECD has just released their updated global GDP forecast in which they see world growth 1% higher than previously seen, and the US bouncing to 6.5% in 2021 – though Europe will lag behind yet again: who can VDL blame for that one? Well, we had a few months of Spinal Tap dollar bearishness at least – even if higher yields pushing the USD up are themselves Tap-py.
Recall the great line from Tap bassist Derek Smalls (who looks the spitting image of Blackmore today): “We’re very lucky in the band in that we have two visionaries, David and Nigel, they’re like poets, like Shelley and Byron. They’re two distinct types of visionaries, it’s like fire and ice, basically. I feel my role in the band is to be somewhere in the middle of that, kind of like lukewarm water.” There is no such middle role in a K-shaped US economy, where fiscal stimulus is too much for some and not enough for others: so yields will shoot up and ultimately crash down again, and the USD will likely do the same – unless and until we get Fed yield curve control that is. Watch those stage pyrotechnics play out in awe.
The very small(s) picture is of the RBA belatedly reminding markets it might be able to set up a committee to include ‘whatever it takes’ on the agenda, but it will require a qualified majority vote that then goes to a special commission for review in a plenary session. In short, Governor Lowe verbally defended the yield curve control policy and reminded us he isn’t about to raise rates. This worked in regards to the 3-year: but on an underlying level arguably because parts of the global market can still react to what the PBOC said it is going to do. At least Lowe can be happy about what AUD has been doing, yesterday aside: but again that’s about what the US government says it’s going to do, not the RBA.
As Frank Zappa would have put it: Shut Up ‘n Play Yer Guitar. (An album whose tracks include “Five-five-FIVE”; “Hog Heaven”, “Treacherous Cretins”, and “Soup ‘n old clothes”, all of which sound like potential Bloomberg, Russia Today, or New York Times headlines.)
Wed, 03/10/2021 – 08:49