Rabo: “Central Banks Are Gonna Need A Bigger Boat”

By Michael Every of Rabobank

“You’re gonna need a bigger boat” is still a classic movie scene that makes the hair on the back of my neck stand up. Clearly not just me: the meme still resonates with my generation, and John Williams’ instrumental sound of the shark still gets people my age straight out of the water.

It seems an appropriate title today given one wonders who said that about the vessel still blocking the Suez Canal: was it trying to do a U-turn? If one ever wanted to imagine what blockading the Suez Canal looked like physically, and what it would deliver to already-strained global supply chains economically, well, enjoy. This obviously risks exacerbating the cost-push inflation pressures we are already seeing in many sectors. It may also briefly refocus analysts’ attention on just how vulnerable global trade is to blockages in key logistical bottlenecks, such as the South China Sea. Just imagine if it, or the Straits of Malacca, or the Straits of Hormuz were to be subject to geopolitical disruption. It’s a good job nobody is talking about any of these things ever happening, isn’t it?

Yet back to ‘Jaws’. As a younger generation dives gleefully into the still, dark markets like the young swimmer at the start of the movie, one can hear that fateful daaa dum; daaaa dum.

Consider, for example, the picture presented by Bloomberg this morning –“This Sounds Like a Bubble Bursting”– underlining that “the most frothy part of tech stocks continues to bleed.” For goodness’ sakes, don’t get any blood in the water!

Apparently US tech firms that haven’t made any profits dropped around 7% yesterday, extending a decline from their February peak to 29%. Do you know what the graph of that particular market segment is starting to look like to me? A shark’s fin: and if that is indeed the case, we would soon see happy young traders suddenly pulled underwater and tossed around like rag dolls.

Yes: we know the central banks are watching, presenting themselves like the wizened mariner Quint who keeps the seas safe: “Y’all know me. Know how I earn a livin’,” he says to the concerned Amity Chamber of Commerce after scratching his nails down the chalkboard to get their attention. Central banks can certainly scratch their nails on chalkboards when needed as far as markets are concerned. Look at some of the swings seen in New Zealand’s markets of late.

However, aren’t the same central banks more like the sleazy Mayor Vaughn, who refuses to close the beach despite knowing the killer shark is out there (“because markets”), and who argues the police should say “Barracuda” instead of “Shark” so as not to worry the economy? Indeed, are central banks not providing the ultra-cheap liquidity that encourages college students to get drunk and go swimming at night in shark-infested waters in the first place? (“What’s your name again?” “Chrissie!” “Where are you going?” “To buy stocks of tech firms who don’t make any money!”)

Older analysts are currently sitting around Zoom meetings (though not on Fridays) and rolling up their trouser legs and shirt sleeves to share their scars of previous market attacks: the more senior talk about the GFC, which for the young is already just legend; the most senior sit back quietly before talking about really big Fischer and World War Two.  

So, yes, central banks are playing Quint to markets, politicians, and the public: “I’ll catch this bird for you, but it ain’t gonna be easy. Bad fish. Not like going down to the pond and chasing bluegills and tommycocks. This shark, swallow you whole. No shakin’, no tenderizin’, down you go. And we gotta do it quick, that’ll bring back your tourists, put all your businesses on a payin’ basis. But it’s not gonna be pleasant. I value my neck a lot more than three thousand bucks, chief. I’ll find him for three, but I’ll catch him, and kill him, for ten. But you’ve gotta make up your minds. If you want to stay alive, then ante up. If you want to play it cheap, be on welfare the whole winter.”

Yet recall that Quint is the one who ends up being eaten.

Central banks in general, and the Fed in particular, are gonna need a bigger boat. And we know what that boat is: the ability to say USD3,000 is now USD10,000 with the stroke of script-writer’s pen without yields rising in tandem.

Yet look at that huge great boat now blocking the Suez Canal; and consider what a world with truly Megalodon liquidity would look like for global trade and capital flows, and who and what would end up getting bitten or swallowed. Bloomberg today has another story explaining how the USD1.9 trillion Biden stimulus is expected to flow to China, with one businessman expecting sales up 30%. A global feeding-frenzy of production everywhere except in the US is not what the Biden White House wants to see: and there will be calls for a shark cage to be put in place (e.g., “Buy American”) Yet it’s handy timing for China given Bloomberg again explains: “Chinese Stocks’ 15% Plunge Shows What Happens When Stimulus Ends”. Quite, Quint.

Meanwhile, it was fair sailing for a time, but I’d long argued that if the US outperformed the rest of the world, expectations would build of Fed hikes, US yields would rise, and the USD would go up; and that if someone yelled “Shark!” as markets showed their teeth, then a risk off move would also see USD rise. It doesn’t seem that long ago that markets were bullish EM FX: some of them are looking like graphs of shark fins too.

“You go inside the trade. Trade goes in the water. You go in the water. Shark’s in the water. Our shark.

Farewell and adieu to you fair Spanish ladies; Farewell and adieu, you ladies of Spain; For we’ve received orders for to sail back to Boston; and so never more shall we see you again.”