Rabobank: “Should We Be Thankful For This Central-Bank Support?”

By Michael Every of Rabobank

Today is Thanksgiving in the US, a public holiday that generally confuses non-Americans, but which all understand involves markets and businesses closing. Most of America is therefore out today. Not that we weren’t short of news in the run-up, which all of us get to digest globally while Americans do the same with their Turkeys.

First and foremost, US economic data yesterday were not much to be thankful for in some key areas: initial claims in particular spiked again to 778K, far worse than the 730K expected; durable goods then surprised to the upside with a 1.3% rise and an upward revision to the previous month; that was followed by personal income, which collapsed -0.7% m/m while spending was up 0.5%; and then new home sales came in stronger than expected at 999K.

The FOMC minutes also underlined that fact. Nothing changed in election week, as expected. However, the message they send is that we are likely to see further changes (read ‘increases’) to QE as soon as the mid-December meeting.

Should we be thankful for this central-bank support or not? Where would we be without it? Yet where are we going with it? And what is it doing to us while we are doing it? It is akin to having a Thanksgiving dinner consisting of two whole cans of cranberry sauce alongside a small serving of Turkey with no trimmings: better than nothing if you are hungry, fun for some perhaps, and certainly a sugar high – but a great way to get acid reflux, diabetes, heart disease, and dental problems if you keep it up.

Thanksgiving is also traditionally a time of coming together and unity. However, despite the usual statesmanlike homilies for the same from the Biden camp, there is still little evidence of such today.

Out of the spotlight of a US media which has so many socks to look at and so little time, the Pennsylvania State Senate yesterday held a public hearing where the Trump legal team produced a flood of complaints of election irregularities (that only mentioned Hugo Chavez as a tangent); Michigan and Arizona legislatures will hold public hearings next week; a Nevada judge has allowed an evidentiary hearing on 3 December; the partial recount in Wisconsin drags on; new court cases have been filed over the constitutionality of the voting process in several states; and recall only after a state vote-count is certified can its public file an actual election contest – which will now surely follow. In short, this is probably going to drag on into December and could likely end up in the Supreme Court. Yes, a Trump legal reversal is still a long shot; but his defeat is going to be polarizing rather than uniting.

Relatedly, President Trump also elicited a bipolar response with a pardon for his ex-national security advisor Flynn yesterday (‘In like Flynn’ is now ‘Out like Flynn’): those who believe the 2016 election was somehow rigged are furious; those who believe the 2020 election was somehow rigged are ecstatic. Equally, initial Biden policy proposals being floated will appeal to his base but not Trump’s: amnesty for 11m illegal aliens; cancelling student loan-debt; and taxing ownership of guns. In short, K-street in DC, where the lobbyists play, is going to have a K-shaped economy and society as its backdrop: which it has long had, of course – but now it’s far, far worse. Is that an environment that says higher or lower rates? Does it say a stronger or weaker USD? Part of that depends on what the rest of the world is doing too, of course.

Isn’t the above also a backdrop that suggests the need for more unity via the one thing everyone in Congress now seems to agree on: China-hawkery? Which might explain why Beijing offered an olive branch yesterday via its press and its official congratulations to Biden. (And as an aside, note an official order from China’s Premier yesterday to “tell the truth” about the economy.)

Meanwhile, the rest of the world carries on as usual. That means further uncertainty over where we stand in the Brexit process, even as final deadline after final deadline continues to pass. The French are now accusing the British of foot-dragging, and the EU and UK sides remain “extremely far apart”, apparently. Well, there is a lot of that about. The coming days will be “decisive”, says the EU’s von der Leyen. How many times have we heard that one? Perhaps the Brits could try to synchronise with the US Supreme Court for maximum market attention(?)

Within the EU, the stand-off between Poland and Hungary (and Slovenia) over the rule of law element of the proposed Rubicon-crossing USD2 trillion fiscal stimulus package also continues. Hungary’s PM Orban has told German Chancellor Merkel that what she’s asking for is political ‘suicide’, and Orban and Polish leader Morawiecki will meet today. One wonders what they will say. Like I said, there is a lot of “extremely far apart” about.

Regardless, we do all have something to be thankful for – the virus vaccines that appear to offer some of us (at first) light at the end of at least one dark, cramped, locked-down tunnel. It’s just that the other end of the tunnel is still quite far off for many, very far off for poorer emerging markets, and still does not lead back into a landscape of sunshine and roses by any means, as we see above.

Yet markets really do have so much to be thankful for. The fear and greed index is all the way up to ‘greed’, longs are all in and short are all caught, and global equities continue to gorge themselves on can after can after can of quivering, crimson, tart-yet-sugary central-bank cranberry sauce. After all, in this case it is other people who will be getting the acid reflux, diabetes, heart disease, and dental problems.

Happy Thanksgiving!