Rabo: What The CDC Did Is Blatantly Unconstitutional

By Michael Every of Rabobank

I See No Ships

US equity markets are at fresh all-time highs; and US 10-year yields are plumbing 1.14% and trending lower. It doesn’t get any more plain-sailing than that – but it is also a harbinger of a storm on the horizon.

If markets are saying we are heading for the New Normal at full speed, then we are doing absolutely no Build Back Better at all. In which case, watch out for the icebergs of social unrest and populism. If you want an example of that from the last 24 hours, consider that the US Centre for Disease Control has just announced an extended eviction moratorium. While that may allay some immediate economic pressures, it is also blatantly unconstitutional – which is why it had not been done until now. The Supreme Court already stated this is an issue only Congress can act on: and yet the House of Representatives is now already in recess until 13 September.

Of course, for all the concerned headlines about holding the ship of state together, which seem to have disappeared of late, markets are only really concerned for the very near term (and the very fast return) rather than the far off destination of the future: “Yes, society may collapse. But my fund will hopefully have outperformed the benchmark.” Fair enough, perhaps. Yet markets are also failing to see oncoming ships on the horizon that lie between them and that outperformance. “I see no ships,” they retort like Admiral Nelson: but it is unclear if this is echoing that famous sailor’s blind confidence, or just markets being blind in both, not one eye.

The ongoing regulatory crackdown in China now encompasses electronic gaming too – in what is the world’s largest e-games market. Was that on the ‘Yes, they flagged it’ watch-list of the canny global investors giving markets the all-clear signal from their crow’s nest? This latest volley from Beijing certainly gives a new twist to the Marxist “opium of the masses” argument for those familiar with Marx – which does not appear to be anyone in that crow’s nest. Where next in the private sector for the new “collective” approach to solving genuine social problems?

“Shipping braces as China goes into lockdown mode” as the Delta emerges. Most Chinese ports are now requiring a Covid test for all crew, with vessels forced to remain at anchor until negative results are confirmed, and/or requiring ships to quarantine for 14-28 days if they previously berthed in India or changed crew within 14 days of arriving. That spells further delays. After all, when Covid was detected at Yantian Port in late May, that key export hub cut its operations by 70% for most of June. In short, “I see no ships” might be a threat to take literally.

As India joins the list of countries sending warships through the South China Sea, the German frigate that made the rare decision to sail there with a Western flotilla has been told by Beijing that its plans to also pop in to visit Shanghai –to show that while Germany stands alongside its allies, it also stands just as firmly alongside its Chinese customers– are on hold until Berlin explains why the ship is there at all. In other words: pick a (sea) lane and stay in it.

The US, UK, and Israel jointly accuse Iran of having attacked a shipping tanker, killing one British and one Romanian sailor, and are promising “consequences”: presumably harsher than new concessions in Vienna? Yes, there has been a maritime “shadow war” going on between Israel and Iran for a while, but is now dragging mainstream shipping even more clearly into the firing line; Indeed

Lloyd’s states Iranian pirates have hijacked a tanker in the Straits of Hormuz and are sailing it towards Iran. This may be linked to the hard-line president who took office yesterday; Tehran cancelling its planned prisoner exchange with the US; reports of street protests against the government; and the US suggesting Tehran may walk away from the 2015 nuclear deal as a de facto nuclear-threshold state regardless of the concessions it is offered, which is also the messaging coming from new cabinet appointments and local media. (The fact Lebanon is slipping into ruin in the background is more kindling given Iranian interests there: and note this comes despite the world’s promises of Build Back Better aid after the Beirut explosion last year.)

Let me underline some key points regarding shipping and the consequences for global markets:

• Before this surge in shipping costs, most economists thought logistics were invisible, efficient, and of no interest. Like plumbing, you need it, but don’t let it dictate your plans for the day;

• Those logistics assumptions were only possible because since 1945 the US Navy has kept global sea lanes open and safe for all maritime traffic. Pirates and hijacking get attention today because they are *rare* – but they did not used to be. Indeed, global sea lanes used to be carved up by empires for their preferred shipping and production, not open to all;

• That paradigm starting to fray along with the rest of the post-WW2 global architecture;

• Current price surges are due to massive supply-demand imbalances that are not going to go away any time soon;

• But imagine shipping costs, and the broader implications, if we get maritime chaos in the Straits of Hormuz, around Suez, or in the South China Sea;

• Building new maritime capacity from ship to port to warehouse to rail to truck to store to home to address our supply-demand imbalances is tied to the post-Covid economic geography: is it still a post-1945 open economy?; if not, where will things be made? We still don’t know, but we BRI vs. B3W is an example of how things are trending; and

• In short, the ship of apolitical logistics has sailed. Just as ‘a conservative is a liberal who has been mugged’, so a ‘mercantilist is a free trader with squeezed supply chains’.

As such, markets are right to price for the risk-off of very low bond yields – if they are willing to look past the demand-destroying price surge that will precede that slump; and if they remain unsure about the map of the reflationary, more fragmented world that emerges afterwards.

Now for a brief port of call in the Antipodes, which are very much in the logistics firing line given they are effectively the Y and Z in the geographical A-Z of global shipping – but which is not bothering either government yet. Kiwi unemployment just fell to 4.0%, and private wages rose 0.9% q/q excluding overtime, which has the market pricing in a 25bp RBNZ hike ahead. Then again, the Bank just threatened to tighten mortgage lending directly, which would be far more consequential than a 25bp hike, and far less damaging to exports in terms of the upwards impact on NZD. The RBA meanwhile yesterday surprised by not rolling back its taper plans from September even as key areas remain under lockdown and, worse, as housing data tanked. Today’s retail sales numbers saw June spending slump -1.8% m/m, as expected, and Q2 excluding inflation rise 0.8% as expected. Still very much “I see no ships” from the RBA too then.