Rabobank: The World Is Just Fine… If You Wear Two Pairs Of Rose-Colored Glasses

By Michael Every of Rabobank

Double and quits

What does any rigid system do when under attack? It doubles down.

The much-shorted US stocks bid-up by Redditors are once again all deeply that color, as the buyers failed to keep doubling down. Cue Establishment delirium at the idea that the revolting peasants deliberately ran into the murder hole of the financial castle to clog it up with their bodies in order to ‘show the lords how feudalism really works’.

Dr Fauci is arguing that in order to defeat the new, more infectious strains of Covid-19 –as Israel reports an individual who caught the virus, recovered fully, and then got sick with the new South African strain– we may need to wear two masks, not one(!) Given most people can’t wear one mask properly, or at all, this does not seem to be any more likely to produce the desired outcome from the health ivory tower (zero Covid) than the constant central-bank ivory tower doubling of QE will get them to their outcome (zero deflation). The former has a path laid out by the likes of Yaneer Bar-Yam; but we just get yada-yada; the latter keep failing to jump-start the wage- and investment-driven growth we used to enjoy before they started to target inflation (i.e., wages).

To get that recovery would take major structural reform and a government also prepared to let the economy “run hot” on jobs and wages: we don’t have any. Yes, we likely have the slimmest of majorities for a Covid-19 stimulus package in the US senate after Congressional manoeuvres. However, it is no Green New Deal, Democratic Senator Manchin is opposed to the USD15 an hour minimum wage provision, and while something, it is likely to fall short of the initial USD1.9 trillion floated months ago. It really isn’t any doubling down.

In New Zealand, we did see strong wages data – up 1.1% q/q in Q4 vs. an expected 0.3%, and with employment rising 0.7% y/y vs. an expected -0.1%, and unemployment fell to 4.9% from 5.6%. This is despite the utter destruction of the tourism sector, but obviously yet another housing boom/bubble and bumper agri production is helping in a housing- and agri-led economy. There is even market chatter that the RBNZ will be hiking rates in 2022(!) Good luck with that and keeping NZD at a level where all that lovely agri is affordable. The RBNZ started the inflation-targeting and fiscal prudence paradigm that lies at the root of our new normal: are they really going to try to normalise rates when everyone else is going the currency war route? Didn’t we see that end badly once already? I call quits on that double-down call. After all, Aussie building permits also surged 10.9% m/m, and yet the RBA was dovish this week and is extending QE.

In Europe there is the suggestion that former central-bank governor Mario Draghi should run Italy after the technocratic government finally collapsed. The markets obviously love that idea. It is the epitome of the new double-down trend, like moving Janet Yellen from the Fed to the Treasury, or Christine Lagarde from the Ministry of Economy to the ECB via the IMF. Yet this seems to be the only fiscal and monetary coordination officially approved of: all the de facto debt monetisation seen during 2020 is being covered up, not extolled as the path to recovery. Would Mr. Draghi fiscally pledge to “do whatever it takes” to get Italian unemployment down and wages back up? The Italian people won’t get a new election to see if they approve of this idea or not due to Covid (though Israel will soon hold its second vote under the same conditions). However, a PM Draghi would likely invigorate both Establishment and anti-Establishment forces in equal measure, not just in Italy but globally. Questions would surely need to be asked (if not by the financial press) as to how ‘neutral’, ‘independent’, and ‘apolitical’ a central bank can really be when its top dog can have been part of the political pack, or when they can quit to join said pack.

Meanwhile, Amazon CEO Jeff Bezos has quit. As Bloomberg reports with absolutely no sense of irony, “He’ll transition to the role of executive chair and continue as one of the richest people in the world.” What a waste of talent. Couldn’t he run a finance ministry, or a multilateral, or a central bank? Another “one of the richest people in the world”, Elon Musk, is showing he might have the chops for Secretary of State with his tweet arguing “We will coup whoever we want! Deal with it” in regard to allegations that the US toppled the Bolivian government to ensure cheap supplies of the lithium required for the green auto revolution. Maybe Musk was just grouchy because the SpaceX Mars rocket prototype exploded again, slowing our species’ double-down-and-quit shift to the Red Planet.

On failure to launch, the story that has not gotten much market coverage so far is that China has delayed releasing its annual births data for 2020. Covid-19 provides a rational explanation for why this hasn’t happened. However, some provinces and cities have shown theirs – and they say ‘quits’ far more than ‘double down’. Birth rates have collapsed: Guangzhou -17% y/y; Ningxia Hui -16%; Hefei -23%; Wenzhou -19%; and Taizhou -33%. The South China Morning Post quotes a researcher from a state-backed think tank who states: “We can say that even though the number of births in 2020 might be the lowest in recent decades, it is likely to be the highest in the next few decades.” Market bulls don’t want to hear it, but such demography is destiny, barring a miracle. Where does future growth come from with no kids? How are future pensions to be paid? And India is now expected to overtake China as the world’s most populous country as soon as 2027. That’s not the kind of overtaking we keep hearing about.

There is also no good news on US-China relations. Axios reports the Biden administration will adopt a ‘whole of government’ approach to China, not one of détente; and China’s Politburo member Yang Jiechi just gave a speech that is regarded as not helping to build bridges with D.C. So doubling down.

US relations with Russia are also unlikely to get any better with opposition leader Navalny now sentenced to 3.5 years in prison for violating the conditions of a suspended sentence. They are not likely to improve with Myanmar either, which the State Department says just experienced a coup (on which Elon Musk is silent) and with sanctions to follow. While few follow the country closely, the Burmese government, now toppled, was actually building bridges to China, and the army, now in charge, is the force more suspicious of Beijing. The waters remain muddy on what this means for regional geopolitics going forwards, but we can add another potential flashpoint to a long and growing list.

But those shorted US stocks are down again, so the world is just fine: if you wear two pairs of rose-tinted glasses that make it look like we already got to Mars.