Magic Mushroom Clouds

By Teeuwe Mevissen, Senior Macro Strategist at Rabobank

No, relax, we are not forecasting world war three this time. But with some fantasy one could argue that markets have been subject to quite some explosive events this week. We will come back to this later in today’s global daily. But this week it also became formally known that during Janet Yellen’s last visit to China she was offered a dessert with magic mushrooms in it. “There was this delicious mushroom dish. I was not aware that these mushrooms had hallucinogenic properties.” Yellen told when asked. While it is everything but uncommon that governmental and business leaders suffer from hallucinogenic episodes, we can only hope that this won’t cloud their judgement too much!  

But let’s look back at the over-abundance of explosive events we have witnessed this week. Indeed it is hard to cover them all, so we will stick to the really explosive news that potentially could develop into financial market mushroom clouds. Let’s start with global bond markets where global yields reached a 15 year high, evaporating trillions of market value where small US banks were already struggling with higher rates but also with significant exposures to the commercial real estate sector. Please read Philip Marey’s special regarding this topic for more information. Japan had its own bond market dynamics with a 20Y bond auction that went everything but well and 10y JGB futures selling, pushing rates higher. A 10y Japanese government bond now yields 0.63% against 0.44% on the 27th of July.

We also learned that US housing affordability hit its worst point in almost four decades because of higher interest rates and a shortage of housing supply. Since the US is everything but unique when it comes to unaffordable housing, we can already be sure that this will work as an accelerator for the demographic (or, depopulation) bomb that is staring at us from the not too distant future. If young couples can’t afford a house to raise a family in, they will simply stop raising families. Talking about mushroom clouds! This might become a big if not the biggest challenge for the current young generation and future generations to come. But contrary to the baby boom the current/upcoming baby bust is to be regarded as an implosion instead of an explosion and this fall out will contaminate the economy in a negative way.

We also received explosive news from China, where the real estate market reported yet another decline in real estate values (-0.23% for new home prices). Moreover, the decline in property investments accelerated from an already sobering -7.9% in June to -8.5% over the month of July. These figures are at odds with earlier expectations that the real estate crisis might be bottoming out. Moreover, estimates from local real estate agents and private data providers suggest that actual declines in real estate prices far exceed the official data. While official data signals a decline of 2.4% for newly build houses and a decline of 6% for existing homes, a decline of 15% in many of China’s bigger and tier 2 and 3 cities seems to provide a more accurate estimator of the situation on the ground, according to a recent Bloomberg item which can be viewed here. In some cities the decline is seen to have gone as far as 25% from August 2021 highs. And we are not even taking into account the increasingly explosive situation regarding local government finances.

And what to think about Russia’s attack on a Swedish ball bearing manufacturer in Ukraine? Indeed the situation in Ukraine remains highly explosive and more escalations are to be expected. With Ukrainian troops on the brink of a breakthrough of Russia’s first lines of defence in the Zaporizhia -Oblast region and the established bridge head in the Kherson region which provides multiple vectors to further advance the offensive, Russia could become increasingly cornered in the Crimea. Luckily Putin is always able (as he already did numerous times) to change the reason and or aims of the so called ’Special Military Operation”. Perhaps a mushroom dessert could help with the process.

Finally, the situation in West Africa also becomes increasingly explosive. The Economic Community of West African States (ECOWAS) gathered yesterday in Ghana to discuss a potential military intervention in Niger where a coup took place on the 26th of July. During an earlier meeting in Abuja, ECOWAS agreed to “standby force to restore constitutional order” in Niger. Although this may seem “far away” for markets in the West, political instability in this part of the world would not only raise risks with regard to the future supply of key raw materials, but also of economic hardship (and hence migration flows) in the region.