Rabobank: It’s Orwell, Not Ends Well

By Michael Every of Rabobank

“If you want a picture of the future, imagine a boot stamping on a human face—for ever.” So said Orwell in 1984. Nowadays one could add or conflate it with “Imagine a boot kicking a can—for ever.”

There is little to report on Brexit. Dinner last night between BoJo and von der Leyen was indeed fish and scallops. A load of scallops, in fact, because nothing was agreed. The latest deadline is perhaps this Sunday. However, there are also suggestions December 31 might be the day of days. GBP is down from nearly 1.3480 to under 1.34 this morning: presumably somebody thought the fish was a bit off. So is British travel to the EU from 1 January: its current virus status means no visits to Europe –which has no Covid at all– will be allowed.

There is equally little to report on US fiscal stimulus.

The EU starts its summit today happy the rule-of-law stand-off with Poland and Hungary over the 2021 budget has been “resolved”. A German-brokered deal was struck yesterday, but with no transparency whatsoever, which seems to run counter to the whole rule-of-law thing. The press suggest the importance of EU rule of law will be entrenched – but any financial sanctions stemming from breaches of it can’t be triggered before the European Court of Justice has ruled on the matter, which will take more than a year. So nothing is fundamentally resolved and yet everyone gets to claim victory and the money they want in 2021 – and so markets are happy. EUR tested to nearly 1.2150 yesterday but is just under 1.21 at time of writing.

The next big EU discussion point is Turkey: will the bloc agree on sweeping financial sanctions over Turkish actions in the Med? Of course not. Bloomberg reports the EU are “poised to reiterate the threat” of punitive sanctions, falling short of Greek demands. They will also seek to coordinate with the US. On which, the must-pass end of year US defence bill says the US president must sanction Turkey over its S-400 military purchase from Russia.

The ECB will meet today. We expect it to ‘recalibrate’ policy, with a very clear message that easing will be based around PEPP and TLTRO; they will choose stability over flexibility by extending both PEPP and the TLTRO discount by 12 months, pinning policy through H1 2022; and by shifting focus on the duration of PEPP, blurring the line between forward guidance and (implicit) yield curve control. While the size of the ECB package may initially disappoint inflated market expectations, its duration should be supportive. In short, rates on hold forever and more acronyms, more QE, more market distortion, and more attempts at upbeat messaging.

Big Tech is in the news. President Trump is threatening to veto said US defence spending bill because it does not remove Article 230 protections from US tech firms. Now Facebook is also being sued by 48 US states and the US government in an antitrust case alleging it uses its acquisitions to cause harm to the competition, following a similar case against Google. YouTube has started a new censorship row, following Twitter, telling video creators what they are and aren’t allowed to say about US politics. The FT also reports Europe is demanding Big Tech ‘police the internet’ or face penalties of up to 6% of turnover. Which conflates with other developments.

There are now 18 states, and the US president, attached to the election-related complaint made to the Supreme Court, the deadline for defendant replies to which is 3pm today. Legal opinion is universally that this a “long shot” or a “hail Mary”, or that it is of a piece with the Four Seasons Total Landscaping press conference held in a car park in front of a garage door next to a sex shop. Indeed, though docketed it may not even be heard by the Court, or may be heard and dismissed. Just be careful how you cover the topic if you want to post videos about it. On which:  

The DOJ announced Hunter Biden is under investigation over tax fraud and dealings with China, and that this investigation had been ongoing since 2018 before being paused around the election. Social media was not exactly enthusiastic about people sharing these allegations pre-election, if one recalls, and over 50 former US intelligence officials publicly stated the ’laptop’ allegations had the hallmarks of a Russian influence campaign.

On China, President Trump has appointed China hawk Michael Pillsbury to head the Defence Policy Board; the Biden team announced Katherine Tai will be their US Trade Representative, a fluent Mandarin speaker, and on record as saying China needs to be confronted strongly and strategically; a member of the US House Intelligence Committee previously known for breaking wind on live TV is caught up in a scandal over a Chinese spy ‘honey trap’; and The Guardian says Switzerland is being typically efficient and paying for Chinese spies to come and operate on its territory. Wall Street is nonetheless still diving into Chinese capital markets hard and fast, with capital inflows picking up to the point where it would appear that the PBOC (or someone for it) is intervening to keep CNY from appreciating too much.

Meanwhile, as the feel-good political and market can-kicking forever continues, Australia has followed Portugal to enter negative yield territory: it just sold 3-month Treasury notes at -0.01%, following New Zealand regionally on that path. This seems hard to square with everything else being bid through the roof, including AUD, until one recalls this is the ‘There can be no risk’ scenario that central banks have been stamping on the free market’s face for decades.

Yes, it doesn’t work in the long run, and the more it doesn’t work the more of it we will need to see: it’s Orwell, not ends well. But let’s ignore that and lie back and think of the short run.

War is peace; Freedom is slavery; Ignorance is strength.

We are at war with inflation. We have always been at war with inflation.