“The Market Backdrop Is One Of Extreme Uncertainty, Extreme Volatility, Extreme Profits, And Extreme Desperation”

By Michael Every of Rabobank

The Market’s ‘Metterling Lists’

We got more wild moves in markets yesterday, and some wild attempts to justify them.

A Wall Street Journal ‘whisperer’ said the Fed is going 75bps this month, as the BOC did too, and Fed dove Brainard stressed the Fed will fight inflation for “as long as it takes”. Yet Treasury yields reversed a large part of Tuesday’s surge, 2s -7bp and 10s -9bp.

Europe talked about capping the price of energy it does not supply, as Russia warned it will stop all oil sales to anyone trying to impose price caps. Yet oil slumped below $85 for the first time since January. Russia also suggested it could interfere with the ‘grain corridor’ allowing at least some of Ukraine’s agri produce to get to global markets – which coincided with a 3.3% rise in wheat on the day.

Apparently, both the bond rally and oil slump happened due to “sudden fears of recession”, when that outcome has been baked into the cake in Europe for some time. Recent US data suggest a further downturn might still be dodged, but Gallup reports 56% of Americans saying rising prices are causing hardship. The Beige Book noted the US outlook over the next year “remained generally weak” because of rising rates,… but also because of labour and supply shortages. Yet despite this recession fear, US stocks were up sharply.

In FX, the dollar soared at first. JPY, below 140 on Monday, tested to 145. CNH flirted with 7, with trade data showing both zero import growth and a worrying grind lower in export growth. GBP hit the lowest level since 1985 at 1.1420. Yet despite the Wall Street Journal saying the dynamic driving non-dollar FX lower is about to get worse, all then rallied back.

Market analysis of why such things happen in cohort is always comical. So much so that it reminds me of Woody Allen’s ‘The Metterling Lists’, which mocks the academic search for meaning in the laundry of a fake 19th century European intellectual:

“List No. 1: 6 prs. Shorts; 4 undershirts; 6 prs. blue socks; 4 blue shirts; 2 white shirts; 6 handkerchiefs; No starch

serves as a perfect, near-total introduction to this troubled genius, known to his contemporaries as the “Prague Weirdo.” The list was dashed off while Metterling was writing Confessions of a Monstrous Cheese, that work of stunning philosophical import in which he proved not only that Kant was wrong about the universe, but that he never picked up a check. Metterling’s dislike of starch is typical of the period, and when this particular bundle came back too stiff Metterling became moody and depressed. His landlady, Frau Weiser, reported to friends that “Herr Metterling keeps to his room for days, weeping over the fact that they have starched his shorts.”  

I see similar insights in the financial press daily at the moment; and the scrutiny continues onto:

“The obvious enigma of the second list

List No. 2: 7 prs. shorts; 5 undershirts; 7 prs. black socks; 6 blue shirts; 6 handkerchiefs; No Starch

is the seven pairs of black socks, since it has been long known that Metterling was deeply fond of blue. Indeed, for years the mention of any other colour would send him into a rage, and he once pushed Rilke down into some honey because the poet said he preferred brown-eyed women. According to Anna Freud (“Metterling’s Socks as an Expression of the Phallic Mother,” Journal of Psychoanalysis, Nov., 1935), his sudden shift to the more sombre legwear is related to his unhappiness over the “Bayreuth Incident.” It was there, during the first act of Tristan, that he sneezed, blowing the toupee off one of the opera’s wealthiest patrons. The audience became convulsed, but Wagner defended him with his now classic remark “Everybody sneezes.” At this, Cosima Wagner burst into tears and accused Metterling of sabotaging her husband’s work.”

I see similar insights in academia and the mainstream press at the moment; and finally:

“List No. 6: 25 handkerchiefs; 1 undershirt; 5 shorts; 1 sock

and it is not surprising to learn that it was at this time he entered analysis with Freud.”

You get my point, and hopefully a laugh. Less amusing is that the global market backdrop is one of extreme uncertainty, extreme volatility, extreme profits, and extreme desperation.

Nobody knows what is coming next, and markets can’t compute so many variables. As a result, we have an extreme lack of liquidity, and so extreme volatility. Just as these are not normal times, these are not normal markets – they are now moved by far fewer hands, and by far more. We also have extreme profits on the table for some who might be happy to lock in; and extreme desperation from those who have been wrong all year and will take a wild punt on anything to try to get out of their hole. That is a real laundry list of problems!

Yet one must use 19th-century European intellect to see that the post-1945 and 1991 global economic order is very evidently collapsing into one that 19th-century Europe knew very well – Great Power struggles and mercantilism. I have written reams on this before so won’t repeat it today, even if recent headlines make the point for me.

For markets, that backdrop means the ‘stinky’ US dollar remains the least dirty shirt in the dirty-laundry basket; and as others push back against US hegemony, the Fed will keep putting extra rates ‘starch’ into the greenback to stiffen it up.

One can draw up one’s own list of what the flow-through might be: a further surge in the dollar index; a far weaker JPY starting a domino-effect across Asia; as export growth slows, Asian holders of US assets having to sell them to access dollars needed to service debts – so higher US yields and/or escalating waves of defaults; more risk off; and an even higher dollar. The non-linear move away from our previous geopolitical and geoeconomic equilibrium would accelerate. And what is the alternative on the table? A rates pivot into deflation and deep recession, as everyone scrambles to export their way out, or reflates behind tariffs? That’s almost the same mess!

In short(s), focus only on market takes of ‘how many socks?’, ‘how many shirts?’, and ‘how much starch?’, and risk requiring serious therapy later, like Metterling:

“Freud writes of a key dream Metterling described to him:

I am at a dinner party with some friends when suddenly a man walks in with a bowl of soup on a leash. He accuses my underwear of treason, and when a lady defends me her forehead falls off. I find this amusing in the dream, and laugh. Soon everyone is laughing except my laundryman, who seems stern and sits there putting porridge in his ears. My father enters, grabs the lady’s forehead, and runs away with it. He races to a public square, yelling, “At last! At last! A forehead of my own! Now I won’t have to rely on that stupid son of mine.” This depresses me in the dream, and I am seized with an urge to kiss the Burgomaster’s laundry. (Here the patient weeps and forgets the remainder of the dream.)”

Worryingly, the ECB may also be a European parody today. Our expectation is a 75bps hike: is the risk a request for a pat on the back despite other central banks showing that is now the new 25? Worse, Powell speaks shortly afterwards, upping the ante… and yields and the dollar?