Rabobank: Very Soon Our Comfortable Market Narrative Will Collapse Like A House Of Cards
By Michael Every of Rabobank
The US PPI print yesterday laid bare the surge in input costs still coming through the pipeline, most notably in that while the headline was up 1.0% m/m, almost double expectations, and 7.8% y/y, the core component ex- food and energy also spiked 0.9% m/m and 6.2% y/y. As we have already seen in China, somebody is going to have to swallow that. Will it be producers, compressing their margins? Or will it be consumers, depressing their real incomes? Considering around 25% of capacity at China’s third-busiest port just closed down again due to Covid-19, which will push global shipping further past its limits just as the US needs to restock for Black Friday and Xmas, the one thing that does not seem likely is a rapid drop-off in supply-side inflation.
That underlying dynamic is not new. Neither is the market’s lack of concern about it, with US stocks at a fresh all-time high: apparently it does not matter if margins are compressed, or real consumer incomes fall. Neither is the will-they/won’t-they of US fiscal stimulus. And neither is Fed speak suggesting tapering soon, this time from Daly, who doesn’t want to dilly-dally: which stands in complete contrast to what Fed Chair Powell says and does when he is in the spotlight.
The key point is that not long from now, our narrative is going to collapse like a house of cards. Either fiscal stimulus will happen and consumer inflation follows producer inflation higher, and we get Fed tapering and a move towards higher rates – and it is a complete mess in liquidity-addicted markets; or fiscal stimulus will happen, etc., and the Fed still doesn’t taper and move towards higher rates – and it is a completely different mess in liquidity-addicted markets; or fiscal stimulus won’t happen and consumer inflation follows producer inflation higher, so stagflation, and the Fed does not react – and we get happy markets but a complete mess in a society promised (Build Back) Better.
Until those cards come tumbling down, we can cling to our comfortable delusions supported by comfortable theories and comfortable gibberish, peddled by comfortable people in comfortable jobs, with comfortable pensions or comfortable after-dinner speaking fees. But tumble the cards will, nonetheless, and quicker than people think – and very uncomfortably.
For a physical example, after 20 years of war, $2 trillion in spending, and many lives lost, on 14 April, US President Biden announced a full US troop withdrawal from Afghanistan. On 2 July, US forces left Bagram airbase overnight. The comfortable thinkers in comfortable jobs in DC were sure the well-funded, US-trained Afghan army would defeat the Taliban: instead, they fled, or handed their weapons over to them. The Taliban are now threatening Kabul, and the US is sending 3,000 troops back in order to evacuate all of its citizens and its embassy, reminiscent of the 1975 helicopter retreat from Saigon.
This is not a political critique of the decision to withdraw. The key point is that the expensive US presence in Afghanistan was –like the QE that ironically paid for a slice of it– just a house of cards, for all of the comfortable DC assumptions otherwise. The second point is that the geostrategic ramifications of this event will reverberate for years. Markets could care less: but they may well care about some of the uncomfortable potential outcomes, from renewed terrorism to refugee flows to war: and all the powers in the region, from China to Russia to India to Pakistan to Iran, will have an interest in what happens in the country – as will the US.
On one level, this is a humiliation for a US already being told its position as global hegemon is in tatters. Then again, the States survived the 1975 debacle and came back even stronger. More near term, what is happening in Afghanistan may mean less US flexibility over negotiations with Iran —which has just agreed to join the Shanghai Cooperation Council— though that is far from certain given the obvious US imperative to disentangle itself from the Greater Middle East regardless. More importantly, however, it suggests the risk of the US being far more likely to draw red lines in the Indo-Pacific so the Afghan retreat does not define its approach to security guarantees in that region. And red lines open up fat-tail geopolitical risk scenarios that comfortable markets don’t want to look at.
Even avoiding red lines on maps, there are red lines in calendars. We have:
The looming deadline for US intelligence to release their conclusions on the origins of Covid-19 – though it appears the CIA will reach the comfortable conclusion that they cannot say;
The Phase One Trade Deal lapses in December, with no sign of anything to replace it;
The White House has to decide if it will invite Taiwan to attend its upcoming summit of democracies, which is a red line for Beijing. The Global Times states that if this happens, Chinese fighters will overfly not just Taiwanese airspace, but the island itself. (And who will attend the summit given controversies over liberal vs illiberal democracy is another Manichean headache); and
There is the White House decision over what position to take on the Beijing Winter Olympics.
Still sitting comfortably, everyone?
Meanwhile, as markets absorb –or ignore– yesterday’s clear message from Beijing that China will see far greater nationalist/populist state regulation and policy centralization until at least 2025, with enormous implications locally and globally, the US is already pivoting further in terms of its policy response. As Bloomberg reports, “CIA Weighing Creating Special China Unit in Bid to Out-Spy Beijing”, with the CIA Director talking of “intensified focus and urgency.” This is the same agency that was probably telling President Biden the Afghan army was capable of holding off the Taliban six weeks ago. However, it is an uncomfortable sign of the underlying US-China dynamic when the spooks get big new funding.
So uncomfortable that I am sure markets will ignore it all completely. Markets are best at that after all. For a physical example, see The Guardian back in 2010, talking of ‘Kabul’s glitzy property boom’; or 2011’s ‘Afghanistan: The Surprising Destination for Luxury Real Estate’; or 2013’s ‘Afghan suburbia: Luxury construction boom grips Kabul despite uncertain future’; and this website is still offering luxury property for sale in Kabul – for now.
Happy Friday. For the comfortable ones anyway.
Fri, 08/13/2021 – 10:15