Rabo: We Prefer Irrational Markets Under Conservatorship

Rabo: We Prefer Irrational Markets Under Conservatorship

By Michael Every of Rabobank

Being ‘rationally irrational’ one more time

It’s no longer a secret that markets are irrational due to central bank action, and where we see suggestions of less action, they are increasingly volatile. This is taken as a bad thing because we prefer markets under conservatorship, like poor old Britney Spears was until recently. (“Get out there and perform, stocks/yields!”) The establishment loves hearing “Oops, I did it again” and/or “Hit Me Baby One More Time,” and it is rationally irrational to do so given the money keeps flowing to them. Other headlines today also show the same rationally irrational thinking.

President Biden ‘asks the FTC to Examine Oil, Gas Companies’ Role in High Gasoline Prices,’ citing “mounting evidence of anti-consumer behavior” and possible illegal conduct. While fully supportive of the anti-cartel executive order passed in July, is Standard Oil or the White House’s shift away from fossil fuels more to blame? At the same time, after a judge blocked a proposed ban, it is moving ahead with an oil-drilling auction in the Gulf of Mexico that climate action groups call legally dubious, “dangerous”, and “hypocritical.

The EU has proposed a measure that would restrict imports to “deforestation-free” goods. Importers of coffee, cocoa, soy, beef, palm oil, and wood –as well as products made from them, such as furniture and chocolate– would be required to identify the geographic coordinates of the land where they were produced. To qualify as “deforestation-free,” the land cannot have been degraded since December 31, 2020. This shows ‘soft’ EU consumer power. However, it will surely increase price pressures in commodities further. At the same time, yesterday saw a leap in spot EU gas prices following Germany’s decision to stall Nord Stream 2 certification, which will keep fertiliser prices high, and so food prices with a lag.

Germany’s outgoing Chancellor Angela Merkel has stated regarding China, “Maybe initially we were rather too naive in our approach to some cooperation partnerships. These days we look more closely, and rightly so.” Not so much at Russian gas. But on China, she adds “Total decoupling wouldn’t be right in my view, it would be damaging for us.” Do we see *any* German decoupling? The EU just postponed a confidential plan to upgrade its trade ties with Taiwan, allegedly at the insistence of von der Leyen. Merkelcantilism is dead: long live Merkelcantilism!

The Edelman Institute have a study on Thought Leadership which says 81% of c-suite executives want provocative ideas which challenge their assumptions on topics. I can recommend a certain Daily to them if so…😉 Yet the survey also shows only 48% awarded new business to thought leaders. Here’s a thought: that’s a coin-toss. Edelman also have a survey of 7,000 global workers which shows most now feel more trust towards their employer than pre-Covid, while employers now see their employees as more important than customers. Yet this comes with quid pro quos.

First, job-quitting is universal, which muddies the waters for central banks telling assets to put on their glittery costume and get back on stage.
Second, employees are now seeing their firms as an extension of their core identity, with a majority saying: “I would never work in some industries because they are fundamentally immoral” (but oddly, Wall Street is fine?); “I will not work at a company if I disagree with their stand on social issues”; “Organizations I choose to work for are one important way I express my opinions on issues”; and “I’ve left my job solely because the organization remained silent on an issue they had an obligation to address.” In our increasingly polarized times, with a growing list of things we are all worried about, won’t that make our workplaces ‘interesting’.

For employers grappling with supply chains and struggling to retain workers, it certainly promises headaches. Indeed, with most populations split 50-50 on socio-economic issues, or 80-20, but the 20 doing all the shouting, how will this work? (“We just lost Dave from marketing. He quit because he is opposed to the loss of hedgehog habitat as part of the A53 bypass route.”) Do we slowly end up with ‘our’ firms vs. ‘your’ firms that reflect social values rather than the market price of a widget? I can think of a pillow company seen that way. In the same way the West’s liberal revolution was predicated on separation of church and state, the alternative endpoint is logically a separation of work and politics.

In the interim, the BIS makes Edelman’s point in tweeting “#GenderDiversity within an organisation can help combat #ClimateChange: a 1 percentage point increase in female managers in a firm leads to a 0.5% decrease in the firm’s CO2 emissions. #Cop26”, linking to a report that argues: “Our hypothesis finds support in the literature which suggests that women are more inclined to counter climate change as they may be more likely to consider overall societal well-being without focusing narrowly on shareholders’ interest.” Isn’t this “correlation = causation” or gender essentialism? It also runs counter to other research suggesting board diversity increases shareholder returns – unless reducing CO2 equals higher profits. Gender diversity is a good thing – full stop; so is fighting climate change; can we leave it at that?

And the implied impact of the Edelman survey also flows back to food, as Cargill’s CEO states at the Bloomberg New Economy Forum in Singapore that food prices will stay high through 2022 and, “I thought inflation in ags and food was transitory. I feel less so now because of continued shortages in labour markets. That’s one of the inputs to the supply chain that we’re watching most carefully.” He also noted the search for greener airplane fuel and biodiesel is pitting food against energy production –palm oil has soared about 50% in the past year, soybean oil 60%, and Canola is near a record– and the food-versus-fuel tension will become more intense: “The day will come when more agricultural products will be used for energy than food, so it will be incumbent upon the farmers of the world to innovate and become more productive,” he concluded.

Meanwhile, questions linger over what comes after all this stockpiling and inflationary demand: the over-stocking and deflationary collapse? Or the nice calm return to the 2% CPI world we didn’t have pre-Covid? I repeat that this is a metacrisis, which requires metasolutions. We are being offered no macro, and only micro and meso ones.

Now where did I put my sequined leotard? Somewhere near my copy of Lyotard, I think…

Tyler Durden
Thu, 11/18/2021 – 11:05

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