Rabo: Joining And Not Joining The Dots

By Michael Every of Rabobank

Joining and not joining the dots

Today is the start of the critical two-day Fed meeting. As out Fed-watcher Philip Marey reiterates in his latest preview note (see here), we can expect jawboning tomorrow; and if that fails to work we can expect a shift in asset purchases (“Operation Twist and Shout” as I will keep dubbing it despite it not catching on); and if that fails to work then we are counting down the clock to yield curve control. And if I need to join the dots to what that means, it also means you haven’t been reading the Daily up until now. I now take it for granted that markets can’t join those particular dots and only look at the last one. Then again, there is a lot of not-dot-joining going on.

Headlines are dominated by China allegedly to force Alibaba to sell off its shares in Weibo and the South China Morning Post “because of the growing concern about the technology giant’s influence over public opinion”, as Bloomberg puts it. Will the other Chinese digital giant, Tencent, which entered Beijing’s firing line over fin-tech issues on Friday, where Alibaba’s troubles started too, follow the same path because it owns WeChat? Crucially, the authorities seem to be sending the message that data and media must be state and not private-owned. China of course has massive tech ambitions, and these necessarily involve data and media: can one join the dots?

In the US, the Washington Post (“Truth dies in darkness”) has had to issue a public retraction for printing a false story about former President Trump’s telephone call regarding his challenges to election results in Georgia: they attributed quotes to Trump not made by him. The New York Times’ 2020 story about Russian bounties being paid to the Taliban to kill US soldiers in Afghanistan was also debunked by neutral sources. Fake News on all sides then? In Congress, US tech titans are facing the Journalism Competition and Preservation Act, which would force them to pay for news (as recently seen in Australia) to try to improve news standards by saving media’s financial model: yet Glenn Greenwald’s Congressional testimony made clear this also opens the door for shutting the door on the independent bloggers and journalists who find the US media environment too stifling. On which, see Matt Taibbi’s latest article, bewailing the Sovietization of the US press.

Does this matter? Well, how do you trade news when you don’t know what the news is? Then again, if we have to control the yield curve, so can’t price bonds, do we still *need* real news?

Relatedly, the White House is planning the first major tax hike since 1993. Details are sparse, but suggestions are that the corporate tax rate will rise from 21% to 28%, the estate tax will step up, and anyone earning more than USD400,000 will face a higher tax bill too. This will be used to fund the major infrastructure package to be rolled out. Let’s join some more dots.

First, that means the US stimulating China-style – and China not: plot that. Second, the fact we are talking about tax increases underlines this is still not an MMT paradigm: if we really were going all in on that front, the US would be spending and not taxing given it is not worried about inflation. Tax hikes are deeply unpopular, but ones that only hit the rich far less (though you won’t see that view expressed much in the newspapers owned by the rich). Indeed, raising corporate tax rates, if it means a shift from sitting on cash piles and stock buybacks into productive investment could, in theory, provide a major boost to US growth, and would be exactly the kind of structural shift that could force a repricing in the bond market – if done right. Yet that would likely mean alongside Buy American or Green tariffs; and that would mean the Fed really would have to make a major decision on the yield curve – and the USD is part of this picture too. Of course, equities will *hate* these proposals; and if they tank then the Fed might be on the horns of another dilemma given we all know how important they seem to think higher stock prices are to the well-being of poor people.

Some are trying to join the dots. Indeed, Bloomberg reports today that hedge-fund billionaire Ray Dalio, who likes the odd missive on big picture ideas like The Rise and Fall of Stuff, is saying: ”The economics of investing in bonds (and most financial assets) has become stupid.” He also believes that now is not the time to be holding any USD denominated asset at all.

As someone who over 20 years ago was wading through medieval UK inflation data, Homer’s ‘The History of Interest Rates’, and Kondratiev waves and their overlap with centuries of military conflict in Europe, I heartily concur with taking a big picture view; and with the idea that investing has become stupid; and that the price of most financial assets certainly is; and I would add that neoclassical economics is pretty stupid too when you dissect it.

However, I fail to see how looking at a shift that is about to either massively boost US fiscal stimulus and raise bond yields; and/or potentially reduce the cost of capital; and which would logically then have to see the US become more mercantilist too; at a time when the world relies on USD; and while the US remains the financial and military hegemon, argues for walking away from all USD-denominated assets and towards what Dalio suggests as a long-run hedge: Chinese assets. Why do all these kind of policies work for China (argues Ray implicitly) but not for the US? And did he even read the recent headlines mentioned in this Daily? (And so we are back to the importance of news: our dots are not a line but a circle – cod philosophy 101, which I have also been dabbling in for more than 20 years.)

Meanwhile, we see that much of Europe has now stopped using the AstraZeneca vaccine: how many more weeks of Euro lockdown does that mean in reality? What does it mean for the CDU in Germany, who just got smashed in the elections over the weekend? Perhaps they can start even more legal cases against the UK to change the topic of conversation?

The UK itself is apparently today going to do what I suggested yesterday: publicly announce that it wants to have a greater role in the Indo-Pacific region (‘the geopolitical centre of the world,” the government will apparently call it, not Brussels) while maintaining close ties with the US. That will put it at loggerheads with China; and perhaps with the EU too, as the UK still looks towards a trade deal with the US, if that is possible. To be continued…dot, dot, dot.

Australia will welcome the UK coming back to a region it seemed to have left in the 1940s, and can meanwhile be happy that house prices officially rose 3.0% q/q in Q4: they say that is equal to 3.6% y/y, but I think they may have dropped a zero. The RBA’s minutes today added: “The Board concluded that there were greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets,” which seems to imply that higher house prices somehow stabilise the economy(?), and that “the cash rate would be maintained at 10bp for as long as necessary…The Board does not expect these conditions to be met until 2024 at the earliest.”

If you wanted to be spooked by an FX market, the US would not be the first choice. That’s surely dotty?