The Shills Are Alive With The Sound Of Music
By Michael Every of Rabobank
NOUN: an accomplice of a confidence trickster or swindler who poses as a genuine customer to entice or encourage others. “I used to be a shill in a Reno gambling club.“
VERB: act or work as a shill. “Your husband in the crowd could shill for you.”
I find myself having to use the word ‘shill’ depressingly often of late, but became aware that not all readers were aware of its definition – which is why the shills are alive with the sound of music.
First example: USTR Tai’s crucial speech on US-China trade policy.
I stayed up late to watch it in full, which was a good decision given the spin was shill-tastic, e.g., the South China Morning Post reporting that “Washington set to exempt some products from tariffs”, then saying 2/3 were to be open to an exclusion process. My initial reaction was shock given this was an obvious geostrategic error. Just as global supply chains are considering shifting and ‘building back better’, the US would make them 25% cheaper staying in China, and vs. new buddies such as Vietnam and India, or even Mexico. Moreover, doubling down on “Too Big to Sail” while sailing more military vessels around China would give Beijing greater relative ability to fight while feeding its fears this might actually be needed. That’s as *56* PLA planes went through Taiwan’s ADZ yesterday, worrying even Forbes magazine, and as a US/UK/Japanese carrier group exercises nearby.
However, this is not at all what Tai said. It was, in fact, continuity-Trump trade policy that expands on its policy direction, potentially substantively. Yes, the language was schmoozy not spikey, with a clear emphasis on the wish to avoid inflaming trade tensions. And, yes, SMEs can apply for exclusion from tariffs for intermediate inputs –which was also the case under the Trump deal until the end of 2020 before that expired– and some might be granted given the strains many firms are under. Yet Tai made clear that: the US must keep a large industrial and manufacturing base for long-run R&D success and its overall economic complexity; US supply chains must shift to “resiliency” away from “efficiency”, so national security over price; the US “must defend, to the hilt, our economic interests”; the ‘phase one trade deal’, where China is running well behind target in its purchases, will be enforced; China will not reform or shift away from a state-led economic model; Nothing is off the table to deal with that, and new tools will be developed as needed; Decoupling is unrealistic, but recoupling will only be on US terms; and although there is a desire to work with allies, if trade diversion happens due to the phase one deal,…it happens.
Some will point out that there were no substantive policies beyond what Trump left behind, others that China will never accept the new trading relationship to be proposed in “honest” bilateral conversations. If so, the implications were: tariffs; buy-local provisions; industrial policy; perhaps even pan-Western standards that exclude goods on various grounds (subsidies, human rights, etc.) Get ready for the shills being alive with the sound of music trying to cover this up. Bloomberg gets top prize so far with the totally-misleading headline: “US Trade Chief to Engage With China on Trump-Deal Shortfalls”.
Second example: Stagflation.
Bloomberg is pointing out today that stagflation fears, which have knocked US stocks down by around 5% from their peak, and the Nikkei 10% as of this morning, cannot be correct if we are seeing bear steepening of yield curves: as such, “Buy now while stocks last!” Such claims are true if they imply central banks hiking to deal with a surge in energy prices and a shortfall of goods are not doing anyone any good, least of all themselves, and that such hikes would mean curve flattening as a result. Yet if central banks are not going to hike because energy prices reach into the stratosphere and goods supply dries up, then what are yield curves –and stocks– supposed to do, short term? Take comfort that central banks aren’t doing anything?
Consider that as the Atlantic Council, albeit via the head of the Ukrainian Naftogaz, says “Europe is under attack from Putin’s energy weapon”; in the EU, EEX prices are now up 895% over 2020’s average; German energy firm Uniper states NordStream 2 certification “will definitely be so late that this pipeline will no longer help us this winter”, while gas-rich Azerbaijan’s offer to help still means that even if negotiations started now, the soonest they could supply the EU would be the winter of 2022; and as US oil prices hit the highest since 2014 after OPEC+ resisted calls to accelerate production. (And imagine how high other key commodities will go when everyone globally tries to build out new power infrastructure at the exact same time.) Yes, that backdrop spells enormous economic damage ahead: but it spells much higher supply-shock inflation first…which is by definition stagflation, whether Bloomberg, or stocks, like it or not.
Third example: the anti-sanctions law in Hong Kong.
For some time, Hong Kong has been on tenterhooks over the promised introduction of an anti-sanctions law to mirror the one in place in the mainland. Critics feared this would place firms and banks located there in the impossible position of not being able to comply with both US and Chinese law: proponents stressed this was not an issue. It is now being reported by HGK01 that this law will be dropped “in the short term” as “executives from Hong Kong and Chinese financial institutions had directly raised concern to Vice Premier Liu He that the law would put the institutions in a difficult situation.” This is a reprieve, and a major retreat from Beijing. It also underlines the power the US can still wield via the US dollar and the global financial system. Don’t think the same people who are pushing AUKUS and The Quad, and are insisting on a new US trade relationship with China, can’t and won’t join those dots. Expect much sound of music to cover this discussion up too.
Fourth example: anything in Congress.
The battle over the debt ceiling, the infrastructure bill, and the reconciliation bill rages on, even into the new arena of the public toilet, literally not just metaphorically: is such haranguing of senators in toilets or at home going to become a normal part of the US political discourse? As USTR Tai said yesterday, US trade policy will from now on line up with its domestic policy: so are both then a flush in the pan?
Meanwhile, another Chinese property developer, Fantasia, has defaulted on its debts, denting the shills who kept saying Evergrande was OK, and a one-off. And Facebook, WhatsApp, and Instagram had their own little power-cut for a few hours, putting alternative platforms such as Telegram and Signal under stress, in their own little supply-chain squeeze. Even the virtual world can’t escape what is happening in the real, it seems.
Tue, 10/05/2021 – 10:15