Rabobank: “We’re Toast”

Submitted by Michael Every of Rabobank

I have made this reference before, but looking at euphoric markets I am again reminded of comedian Caroline Aherne as fake TV chat-show host Mrs Merton asking glamorous blonde Debbie McGee of her very short, plain, hair-piece wearing husband: “So what attracted you to the millionaire Paul Daniels?”

Indeed, “So what attracted you to central-bank-liquidity-driven markets?” Because where would very short, plain, wig-wearing assets be without the Fed throwing in hundreds of billions in repo operations and NOT-QE, and China going down the same old unsustainable debt path to juice GDP for 2-3 quarters? Feeling pretty unloved, one would guess – and probably very shorted. Yet having studiously failed to learn that this extra-liquidity doesn’t drive sustainable recoveries, or prevent socio-economic unrest–in fact it drives it–we are set for a whole lot more from central banks, no doubt.

Of course, the phase one trade deal, which virtually nobody sees as realistic or sustainable, also continues to drive market sentiment. Yet CNY is still only around the 7 level, underlining what I have said about the risk/reward being mostly to the downside from here. Presumably, however, when the trade deal does break down, which could be even sooner than many expect, more central-bank liquidity will be required. So let’s celebrate that in advance too, why not?

The afterglow of the UK election also seems to be encouraging markets. And on that front we see that fiscal stimulus is going to pick up, the right kind of liquidity for once, and in the north and midlands for once too, which is set to become BoJo’s mojo dojo as he hopes to release animal spirits in left-behind locations. However, Johnson is also going to amend the UK Brexit legislation such that December 2020 is a hard exit date with no extension of the looming post-Brexit transition period possible. In other words, the UK and EU will have 11 months from February to December next year to agree everything on a new relationship or Hard Brexit still looms. Clearly this is both a play to the new set of working-class voters who just backed Boris, and a continuation of his rip-the-steering-wheel-out negotiating tactics. Again, however, presumably this also means more central-bank liquidity as an airbag, so why worry?

Meanwhile European manufacturing data yesterday, which point to factory jobs being shed at the fastest pace since 2012 and to an even deeper slump in Q4 than expected, can also be seen as a reason for the ECB to try to save the planet even faster than it was already planning to. In which case…you guessed it! More central-bank liquidity.

So here’s a new reference for you all. In the long-running UK sci-fi comedy Red Dwarf there is a minor reoccurring character in the form of a highly-intelligent, AI-enabled talking toaster. Yet for all its technological wizardry, all it can ever conceive of doing is…offering to make toast.

Or crumpets. Or bagels, etc., etc. The ship may be crashing; aliens may be attacking; the universe may be about to end; but that’s all it can understand how to do, and one has to accept it as such. Here is an example, as it talks to the ship’s genius super-computer, Holly.

Toaster: “I have a question. A sensible question. A question that will test the limits of your new IQ and stretch the sinews of your knowledge to bursting point.”

Holly: “This is going be about waffles, isn’t it?”

Toaster: “Certainly not! And I resent the implication that I’m a one-dimensional bread-obsessed electrical appliance!”

Holly: “I apologise, Toaster. What’s the question?”

Toaster: “The question is this: given that God is infinite, and that the universe is also infinite…would you like a toasted teacake?”

Folks, in the current market environment we have to accept that we are all toast. And we will remain so right up until central banks themselves are toast – which is also inevitable, but which is a story for another day.