They Are The Knights Who Say “Mon-Ni!”
By Michael Every of Rabobank
Monty Python’s Flying Markets
“It’s…” Monty Python’s Flying Markets. Not on Friday, as yields, stocks, risk-on currencies like AUD, and risk-off assets like Bitcoin all went down. Even the Wall Street Journal now says stocks face a key test in coming weeks. Yet buyers are ready to snap up Treasuries if yields edge much higher, driving stocks higher, and risk-on FX higher, and Bitcoin too: and elsewhere, our Pythonesque world remains fully intact.
The US has made an official statement of concern over voting irregularities and violence in the Ugandan presidential election, which it did not observe, as tens of thousands of National Guards are in DC for Wednesday’s inauguration. Mexico’s president has upped his language to claim US social media censorship is like “The Spanish Inquisition”. Nobody seems to have expected them, and some still say this is only threatening “the soft cushions” and “the comfy chair”; that as Twitter suspended the account of a US Representative for 12 hours for tweeting “I encourage all Americans, not just the 75 million who voted for President Trump, to mobilize and make your voices heard in opposition to these attacks on our liberties.” Overall, the global political atmosphere is akin to: “Is this the right room for an argument?” “Well, I’ve told you once.” “No, you haven’t!” ”Yes, I have!” “No, you haven’t!”
New management in the US, and over the next 12-18 months in Germany and perhaps Italy, the Netherlands, and France will maintain the quest for The Holy Grail: an economic recovery with the right kind of inflation; shared by all income deciles; and all demographics; tackling the climate crisis; rebuilding geopolitical relations; and not upsetting Flying Markets. “That’s a good idea,” as King Arthur says in The Holy Grail. “Of course it’s a good idea!” is the reply – but how?
The economy, climate, inequality, and geopolitics are the Black Knight whom Arthur dismembers. Yet markets keep shouting “It’s just a flesh wound!” because they are The Knights Who Say “Ni!”, or rather “Mon-ni!”. They demand a sacrifice: free money; and then more free money (“and you must place it here beside this first pile of free money, only slightly higher so you get a two-level effect with a little path running down the middle.”) This means rates can’t rise to reward savers, reduce risk, or deal with the inequality driven by asset bubbles.
The priests of central banking dole out that mon-ni while reading the liturgy of The Grail:
“And the people did feast upon the lambs, and sloths, and carp, and anchovies, and orang-utans, and breakfast cereals, and fruit bats, and large chalupas,” they promise. Their economists debate the weight ratios of African swallows and coconuts, and give practical advice such as: “Then shalt thou count to three, no more, no less. Three shall be the number thou shalt count, and the number of the counting shall be three. Four shalt thou not count, neither count thou two, excepting that thou then proceed to three. Five is right out.”
The media are minstrels strumming: ”Bravely bold Sir Robin rode forth from Camelot; He was not afraid to die, oh, brave Sir Robin; He was not at all afraid to be killed in nasty ways; Brave, brave, brave, brave Sir Robin.” Or singing nasty songs about the other knights.
The EU is the ‘wise’ Sir Bedevere (Sir B-EU-devere?) who “follows the science” but forgot to order enough (of the right) Covid vaccine, which was one of the causes of Friday’s down day. Moreover, having just agreed a key China investment deal, the EU now wants to reduce the USD’s global role by pricing commodities and settling trade in EUR to build “strategic autonomy”. That investment deal was a victory for China, and reducing the status of the USD would be a major defeat for the US; so the EU is not propping up the liberal order unless the US is no longer an ally(?)….yet the EU remains reliant on it vis-à-vis the Eurodollar market and for its physical defence. What’s next? Build a giant wooden rabbit and let the enemy wheel it inside their castle while you wait bravely outside in the bushes?
Critics say the US is Sir Lancelot, eager to hack and slay while believing it is the hero. Swords at the ready(?): in terms of economic violence, there are now yet more US tech restrictions imposed on Huawei. Moreover, North Korea has doubled down on its nuclear plans; even France admits Iran is developing the components for a nuclear weapon – to which Sir B-EU-devere’s response is “Stop immediately, or we will negotiate!”; and Russian opposition leader Navalny has flown home and immediately been arrested.
Sir Galahad the Pure (Treasury Secretary Yellen) is due to speak tomorrow and will reveal the ‘surprise’ that the US wants a “market-determined exchange rate” and not a weaker dollar: that after the greenback has been smashed for months by the markets so we got a weaker USD anyway. Apparently this speech will reaffirm the market view that the Biden administration isn’t going to enter an FX War in the way the Trump administration did – during which the USD of course soared vs. most EM FX. At the same time Yellen is said to make clear that other countries should not seek a weaker currency to gain competitive advantage,….or what? Sir Galahad would obviously never be tempted to take any sinful policy actions that would end up with a weaker US currency. Never.
Today will see Chinese GDP Q4 numbers. They are going to be presented like Camelot, shining on a hill far off on the horizon, rising an expected 2.7% q/q and 6.2% y/y. To be fair, in comparison with the awful data we are about to see in the US and EU for both Q4 and Q1 2021, they indeed are. Yet as someone mutters as an aside in The Holy Grail: “It’s just a model.” Indeed, the closer one looks at the sustainability of the underlying fundamentals, the more one needs to ask if there are not the occasional two halves of a coconut being bashed together and pretending to be a horse. Markets will ride it all the way, regardless.
Finally, I just transited a bustling Dubai airport and beheld the glorious sight of all of mankind coming together again…to not wear masks properly (under chins; on foreheads; noses showing; bunched up like a hedgehog). I don’t know if it is fake or not, but did anyone see the social media image members a school band playing flute wearing masks with the entire mouth area cut? I cannot help but think of the idiot guards trying to follow the king’s simple instructions to: “Make sure the prince doesn’t leave this room until I come and get him.” Then again, the instructions about how to deal with the virus we are being given are mostly also written by the same guards.
There are any number of other Python analogies that one could draw, of course: I haven’t even dipped into The Life of Brian. But one thing is certain: whatever happens today, the underlying paradigm we live in was drawn by Terry Gilliam; and all the lead actors are determined to maintain Flying Markets, even if we are nowhere near the Holy Grail.
Mon, 01/18/2021 – 11:25