Rabo: Any Suggestion The Fed Was Totally Wrong Again Would Send Markets Into A Tailspin

By Michael Every of Rabobank

Greenfinger (wah – waaah – wah!)

This week has Fed and BOJ meetings. Presumably both will do what has become the norm of late: keep on keeping on, and hoping everything works out fine in the end. That’s a strategy of sorts, even if the matching narrative is becoming increasingly strained.

For now the market is still split –if not evenly– between reflationistas and deflationistas. On that note US Democratic Senator Manchin is at it again. A few weeks ago, I noted ‘The Man of La-Manchina’ was potentially stopping the US heading off on a quixotic quest to tilt at windmills by refusing to abandon the Senate filibuster. Manchin has now told us he refuses to use the budgetary short-cut of ‘reconciliation’ to ram through the USD2.3 trillion infrastructure bill; opposes the huge slice of the fiscal package for social spending classified as infrastructure; and praises the Republican counter-proposal of USD600bn just for infrastructure as “a good start”. In short, we may get further US stimulus – but it may well be less than recent headlines suggested. The same is true for the subsequent USD1.5 trillion stimulus package and matching tax hikes.  

Of course, that doesn’t deal with the current supply-chain snarl, which is generating cost-push inflation across the board. Fed economists whose models presume supply chains, like banks and money, don’t exist —what irony, and what accurate models of a financialized, globalized economy as a result!– need to compute how high inflation will go, because stuff *cannot* appear by magic; *and* how much damage that does to the real spending power of those who *didn’t* see savings magically appear in their bank accounts during Covid; and then how weak the economy is again on the other side. Or they can put on a rictus grin and keep their fingers crossed. Because any suggestion they may have been –how can one put it best?– totally wrong, again, would send markets into a tailspin. (I’ve mentioned before that this reflationista vs. deflationista battle of markets vs. central bank is playing out rapidly in Australia too: keep an eye on that front.)

Elsewhere we see another clash of strained narratives, which I dub ‘realista’ vs. ‘surrealista’.

China’s giant state asset management company Huarong is delaying the release of its 2020 audited results for a second time – always a good sign. Not to worry, however. The market meme is that Beijing will bail-out or bail-in investors via the sovereign wealth fund or the central bank, underlining yet again it only allows Potemkin defaults. And not only Beijing, of course. At the same time, Chinese firms are listing in the US at a record pace, with USD6.6bn raised via IPOs so far this year, oblivious to US legislation that says these firms will have to let the SEC read their audited accounts ahead. Maybe they think the US central bank also only allows Potemkin defaults now,…and are they wrong?

The EU, which in late December signed the CAI investment deal with China, and whose Merkel and Macron keep holding Zoom chats with Xi Jinping, today sees the following headline: EU slams China’s ‘authoritarian shift’ and broken economic promises. The thrust of the matter is that the EU now seems willing to work more closely with the Biden administration in this key area. Meanwhile, the US is scrambling to repair enormous diplomatic damage done to the tentative new arrangements it is building with India, now suffering a terrifying surge in virus deaths from a terrifying new Covid strain. The US refusal to either export excess vaccines to India or raw materials for their manufacture, and a Friday tweet stating it was in the world’s best interests for America to be vaccinated first, generated a huge political backlash across India. Belatedly, the US (and EU) are now offering assistance —after China and Pakistan(!)– but it remains to be seen what the long-run impact of this geostrategy snafu will be. Still, at least DC didn’t accuse India of genocide, a charge now leveled at Turkey for its actions back in 1915, and which underlines the rapidly-cooling relationship between the two NATO allies.

You think it’s hard to see through the thicket of news and data to project inflation vs. deflation? Try doing that when the political tectonic plates on which global supply chains will be built are shifting – and even ‘small’ policy decisions can exacerbate this process.

One other story should really grab our attention. MI6, the British version of the CIA, are now “green spying” on the world’s biggest polluters to make sure they keep their climate-change promises(!)

Yes, let’s all titter at the idea of 007 being sent on a mission to see how many lights have been left on at night, and if Russian households are using gas boilers or heat pumps: “Dr CO2”; “Greenfinger”; “You Only Recycle Twice”. Yet it’s really “The Living Daylights” of solar power; “The World is not Enough”; and “No Time to Die”, at the highest levels of state too, apparently – and it’s now not just the US saying the environment is the highest national security priority. That’s an even bigger story than Manchin perhaps slowing a US Green New Deal.

It also sits alongside other recent suggestions that the US is prepared to impose green tariffs and subsidize green technology exports, proposals already floated by the European Commission – and, of course, there is no risk at all of China subsidizing green tech to try to gain market share. Color me unsurprized: the belief that we would end up with Green Keynesianism and/or Green MMT —and green protectionism— is not a new one in this Daily; and if even the spooks are spooked, then serious wheels are indeed turning.

Yet does this mean 007 will be (flying?) around the world to look for climate-change cheats – or will he just be looking at accusations of institutional ‘greenwashing’ that point fingers at Wall Street titans and even the EU? Which narrative do you expect to see there, folks?