Rabobank: “Game Over, Man, Game Over”

Submitted by Michael Every of Rabobank

Game Over, Man, Game Over

Markets are currently on fast-forward as politicians are also on fast-forward on when we will remove economic lockdowns and go “back to normal” – as if the virus isn’t the one in the driving seat in all this. In that regard let’s reconsider some of the projections we made in a report published on 13 March titled “28 Weeks Later”, which tried to guess what the world might look like once the immediate threat from COVID-19 has faded. We are just over 28 days on from that report and yet we seem to have already reached many of its conclusions – history on fast-forward along with markets, it seems. Specifically, we argued we would see:

• Massive fiscal stimulus;
• Fiscal and monetary policy joined at the hip via MMT;
• A stronger role for the state;
• Talk of a structural shift in market paradigms as globalisation breaks down;
• Discussions over supply-chains shifting based not just on price, but on national security – on which note Japan’s latest fiscal stimulus has USD2.2bn set aside to help encourage Japanese firms to leave China, and even China dove White House Economic Advisor Larry Kudlow has stated he’s like to incentivise US firms to do the same; and
• A stronger USD, most so vs. EM FX.

Moreover, we argued “we can expect a further significant deterioration in US-China relations.” This looks to be arriving – and yet it is not an area where the market seems willing to play fast-forward…for the moment.

For example, from the US side President Trump openly says he is “not happy” with China and is threatening unspecified “consequences” if evidence emerges that Beijing was complicit in allowing COVID-19 to spread internationally. Even meeker voices such as the UK and Australia are demanding transparency on this front – and bolder ones, like the Henry Jackson Society, have posited that China could be liable for USD trillions in damages. Indeed, as we enter the 2020 US election run-up we also have Trump dubbing his likely Democratic challenger as “Beijing Biden”, while Biden is attacking Trump as having been duped by China’s leaders in allowing COVID-19 to spread. None of this bodes well for future US-China relations – or what parts of the “Phase One Trade Deal” will remain once the dust settles.

Meanwhile, from the Chinese side we have seen aggressive “Wolf Warrior” rhetoric from Chinese diplomats, which has ruffled feathers globally. There have been widespread reports of discriminatory actions targeting foreigners in China, who are now seen as potential virus carriers: this has led to official protests from some African states, for example. Moreover, last week saw a slew of actions in Hong Kong, which has obviously slipped from global focus this year compared to last.

First, China’s liaison office (the de facto embassy) accused opposition law-makers of “malicious filibustering”, suggesting they should be dismissed from office for breach of oath; Reuters reported three anonymous senior judges had told them that judicial independence and rule of law are under threat from Beijing interference – a claim rebutted by Hong Kong and Chinese officials; the liaison office then openly lobbied for the rapid passage of new national security legislation to “prevent foreign interference” and prohibit “treason, secession, sedition, and subversion” against Beijing, which Hong Kong CEO Carrie Lam partly echoed; the same office then announced it is not bound by Article 22 of the Basic Law, which states mainland agencies cannot interfere with Hong Kong’s autonomy – again Lam demurred; and this weekend saw the arrest of 15 high-profile pro-democracy politicians, advocates, and activists in Hong Kong for partaking in illegal protests last year. This last step has drawn international condemnation and recent developments have worrying potential implications for the annual review the US undertakes on Hong Kong’s autonomous status. (And, again, Biden is attacking Trump for being too soft on China in this area.)

One other recent action in China also speaks volumes. Taiwanese media reports that China is to ban online gamers from interacting with foreigners. (Note this is a massive industry where China is the world’s largest single market). What is a vast informal channel of communication between China and the outside world is apparently to be severed. Moreover, the report also claims that online games will be monitored at all times and can no longer contain plagues, zombies, map-editing, role-playing, or any in-game group organizations, clans, or unions. Does this all speak to far larger Great Game playing out?

Of course, one can easily be distracted when China slashes its benchmark lending rate 20bp from 4.05% to 3.85% (for 1-year loans), which underlines that it is not recovering as well as it wishes to project, and yet is still far, far less stimulus than we are seeing elsewhere. Equally, one can be dragged aside by reports that the ECB is pushing for the establishment of a ‘bad bank’ in the Eurozone to suck up non-performing loans – which Brussels apparently does not want to see. Let’s also not forget chatter that the US might have to start using yield curve control policies to keep T-bill yields where they want them to be as issuance soars – which would be a further nail in the coffin for capital markets as actual markets rather than political liquidity channels, something we have long suggested would be logically congruent to MMT. Naturally we should also not overlook that West Texas Intermediate oil dipped below USD15 per barrel on Monday morning, a 21-year low.

However, if we really are seeing ‘game over‘ for US-China relations post-COVID then at some point markets are going to go into fast-forward again….and this time they can’t bully the Fed into cutting rates to zero because we are already there.