Rabo: Who’s Really In The Driver’s Seat?

Rabo: Who’s Really In The Driver’s Seat?

Authored by Michael Every via Rabobank,

Israel’s Benjamin Netanyahu passed a milestone last night when his 28-day mandate to try to form a government expired without him being able to do so. It is possible that for the first time in 12 years he soon won’t be prime minister. I mention this not because of any direct market relevance, but because ‘Bibi’ in at least one way exemplifies one of the problems markets are grappling with: working out who is actually driving.

For example, in recent years Prime Minister Netanyahu was simultaneously head of a combination of up to four of the following at one time: the Communications Ministry; the Foreign Ministry; the Economy Ministry; the Regional Cooperation Ministry; the Ministry of Welfare; the Defence Ministry; the Ministry of Health; and the Ministry for Diaspora Affairs. He could almost hold a cabinet meeting all by himself, and one comedian phoned in for a skit trying to get an interview with several on the above list just to make the pained operator have to explain that they were all just one man – who wasn’t free to talk. So at least in Israel the question of ‘Who’s driving?’ was always clear: Bibi. Elsewhere it still isn’t.

At the head of the ECB we have a former French government minister; at the head of the Italian government we have a former head of the ECB; and at the head of the US Treasury we have a former head of the Fed – and the latter just displayed yet again that it’s sometimes easy to be a back-seat driver. Indeed, Janet Yellen caused market ructions when she noted in public that: “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”

Firstly, because rates aren’t the Treasury Secretary’s job to comment on – EVER. Yes, there is the same need for endless hockey-stick-projection optimism on growth, the same silken spiel, and the same one-size-fits-all Panglossian policy prescriptions (of various vintages: Slash taxes! Raise taxes!) in both roles: but there is a separation of powers between the two.

Secondly, because that very same Panglossian policy from the Fed has got global markets to the point where the mere idea of small increase in US rates is going to bring a whole lot of precariously-levered objects tumbling down. It’s a good job that interest rates never, ever, ever have to go up again then, isn’t?

Naturally, Yellen immediately had to walk back these comments when qualifying that rate increases “are not something that I am predicting or recommending.” So just what was the correct verb then? Speculating? Hypothesizing? Imagining? Dreaming? Deluding?

For now, markets can happily seize on all of the usual Fed-driven speculative hypotheticals to imagine, dream, and delude themselves to greater wealth as usual. US couples everywhere can keep fantasizing that they too can one day get a billionaire divorce. Yet it’s not as if Yellen doesn’t have just *a little* bit of experience in this rate field thing. It’s not as if she might not end up thinking a certain way on autopilot in the new job, and saying the quiet part out loud – is it?

Of course, the question of who is driving applies to the Fed itself. Yellen added: “If anyone appreciates the independence of the Federal Reserve I think that person is me.” Yet unlike the BOE, for example, the Fed allows US banks a major role (if not “ownership”) in its 12 regional Reserve Banks, alongside balancing presidential appointees. So it a fusion body, and even if it is independent of the Treasury, that is hardly true of all influence: the reason for having 12 regional Reserve Banks was originally to water down that of Wall Street. Yet how is that working out, and where are the union/labour representatives, for example? That’s a structural issue the US press doesn’t talk about much even as much of it obsesses about power structures everywhere else; but, sadly, anti-Semitic conspiracy theorists more than compensate, because that’s their defined role.

Meanwhile, we all know the Powell Fed is still firmly in pedal-to-the-metal mode. Yellen just agreed to stay in the back seat in that regard, even if her proposed fiscal policy is the equivalent of winding down the window and sticking her head out of it, like a dog having a good time, which should see any caring central bank driver reduce speed accordingly.

The question remains, however, as to exactly what is driving the massive surge in commodity prices we are still seeing all round us? Headlines yesterday were that corn hit USD7 a bushel, the highest since 2013. Today Bloomberg reports “Raw materials surging across tighter markets and recovery; Consumer prices rising as manufacturers pass on higher costs.” Once upon a time, central banks used to do something when headlines like this were seen. So why no need to brake? Because this is all transitory, as Powell and Yellen, at the second attempt, just underlined.

But how so? Is it Covid-19 related? We already hear that semiconductor supply will be pinched for years. Or perhaps it is all just happening “because markets”, as seems to be the general consensus? Or, just maybe, the Fed, and other major central banks, are also playing a role via their pedal-to-the-metal liquidity? Another key driver is Wall Street realising commodities are an inflation hedge too – even as that creates the inflation they are trying to avoid. (Don’t worry: they still get to eat. Others might not though.) Another is China’s voracious commodity appetite. (Don’t worry: they still get to eat. Others might not though.) One thing we can be sure of. Prices seem to be moving significantly higher, and not just due to the expected base effects.

Ironically, the only way in which Powell –and Yellen– can be sanguine about this is in the knowledge that even if prices go up, US wages almost certainly won’t. Yes, at the moment we are anecdotally seeing US labour shortages as millions of previously low-paid workers prefer to live off of their last stimulus cheque rather than report for the daily drudgery. But have you heard any anecdotes of wages going up as a result – or rather of businesses closing down, or automating? As has been repeated here many times, are the structures *really* being put in place to support sustained higher wages? If not, it’s just higher prices – and so lower real wages.

I am not sure that the 12 regional Reserve Banks and those in DC are aware of what that will feel like to Joe Public. More so if their logical response is to keep monetary stimulus high, and so pushing real wages even lower. If mishandled, this could easily drive us off a cliff. As such, who is really in the driver’s seat?

In the bigger geopolitical picture the same question applies. The UK and US are pushing the G7 to agree a co-ordinated response to all things China and Russia; the EU parliament has paused the EU-China CAI investment deal; and yet US Secretary of State Blinken has rejected claims of a Cold War – or at least he just doesn’t like that label for what is happening. The EU still don’t for sure.

On which note, and also asking who is doing the driving, the ruling New Zealand Labour Party has refused to use the term genocide in regards to Xinjiang in a key parliamentary debate on the topic, instead opting for “human rights abuses” and “in the region”. Next semantic step: the “slight possibility of some naughtiness happening somewhere.”  

Tyler Durden
Wed, 05/05/2021 – 10:44

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