“War For Longer” – To Think Markets Can Keep Sailing Through What We Are Seeing Is “Delusional”

Authored by Michael Every via Rabobank,

Friends: The One With the Pogroms

This Daily tries to hammer home that the world we all loved from 1994 to 2004 is over. Symbolically, actor Matthew Perry, Chandler Bing from Friends, the must-watch sit-com from that era still popular on streaming today, sadly died this week at 54. Of course, the world where you were ‘always stuck in second gear’ and yet lived in vast apartments in Manhattan on low-wage jobs went long before Matthew. Contemporary Friends episodes would be ‘The One Where Nobody Can Afford to Go to Central Perk’, or ‘The One With Homelessness’.

Friends also took place under the invisible shield of US global hyper-power. 9/11 was three years before the show ended, but it didn’t ruffle Rachel’s hairdo. The second Iraq War was in 2003, yet nobody enlisted. Yet now we have rolling coups in Africa, war in Ukraine and the Middle East, and worries of where next. Indeed, some argue the “US isn’t ready for a war of great powers”, and, “America’s adversaries are preparing for wider conflict – to prevent war, it needs to do so as well.” Do you know what that will cost given that the US cannot *physically* do it? And do you know what the cost is of not doing it? The Friends episodes here are ‘The One With Rate Hikes and MMT’, and ‘The One With Global Bifurcation’. Even if Biden and Xi meet this month, it’s no longer the day, week, month, or even the year to think that there are friends out there.

At home, a Friends episode few would have foreseen in 2023 is ‘The One With the Pogroms‘. The ‘Hannukah Armadillo’ needed his armour-plating to waddle round Manhattan or Brooklyn this year, as real-life Borat scenes play out in Dagestan’s airport and in Western schools and universities, and Stars of David and swastikas are sprayed on Jewish homes and businesses in Western cities.

My Alma Mater just saw its academic union call for “Intifada until victory”, being a “socialist federation in the Middle East”, which is not what Islamist Hamas is aiming for: even Joey could see that.

It should go without saying that no matter how angry one gets, how well intentioned one is, or how just the cause might be, Star of David graffiti, broken windows, and modern echoes of “Deutsche, kauft nicht bei Juden!” trigger painful memories in Europe and Israel. They only harden attitudes; and at worst, they are part of the pogrom, not the solution.

Russia blamed Ukraine for events in Dagestan(!) However, the Moscow Times notes, ‘‘National Emergency’: Russian Officials Slam Failure to Prevent Anti-Israeli Riot in Dagestan”, and adds:

“The anti-Israeli riot in Russia’s republic of Dagestan has exposed the Kremlin’s failure to maintain stability as it has exerted total control over the country, three Russian officials, a former Kremlin official and independent experts [said]. 

“This is a national emergency. It’s a failure of everyone: the domestic policy supervisors in the Kremlin, the special services and the local authorities,” said a Kremlin official who previously worked in the security services… 

[Another] former Kremlin official… agreed with that assessment.

Another… in the Russian government said he and his colleagues felt confused as they watched the events….

“In my inner circle, almost everyone is at a loss. This is a complete replay of the Prigozhin rebellion,” a Russian government official said.”

For markets – because this IS about markets, even if markets can’t see it – anyone with historical memory or cross-disciplinary thinking, or common sense, can see that once societies get to the point where ‘pogrom’ is reintroduced into the vocabulary, things can spin out of control fast.

In related respects, they already are.

One of the Stanford law students who organised the shouting down of a federal judge judge this year has just been appointed to serve on a search committee for the Law School’s next dean; and the final of a prestigious US national High School debate contest on the role of the IMF (a good economic topic!) was just won by the team which (“bravely”, said judges) refused to debate that topic at all, instead talking about social justice.

In reply, evolutionary biologist Bret Weinstein argues:

“These kids ARE learning. They aren’t learning how to think, but how to get what they want with credible threats.

Imagine you’re on trial for a notorious crime of which you are innocent, and one of these kids, now all grown up, is representing you but doesn’t like your politics.

Or the judge, prosecutor and defence attorneys all agree that your adherence to some belief that nearly everyone shared at the turn of the 21st century makes you very bad – and so the facts of your case are beside the point because society is better off with you safely locked away. This madness is already affecting the courts. At some point it will dominate them. And there can be no West without impartial courts obligated to follow rules that favour no one. We must #RekindleTheWest. Immediately.”

One of the key problems we face in doing so is that the IMF represents the ideas responsible for economies that produces the zero-sum outcomes that have led us to a mentality where we can win debates about it by not mentioning it; and that was before we threw the truly zero-sum Middle East conflict into the mix.

As comedian Konstantin Kisin noted in a recent address to the ‘Alliance for Responsible Citizenship’, a new think-tank aimed at rekindling the West while the Global South wants to throw it on the kindling, our youngsters won’t try to conserve a system which gives them no hope of a good job or ever owning a home. He exhorted the rich and big business to develop a higher calling and give back in order to save the system that made them wealthy. As I’ve flagged before, this echoes the economist Schumpeter’s late-life switch from free markets to backing ‘Catholic Economics’ with a moral core focused not on the bottom line, but on the common good.

Can you imagine the market implications?

Better start trying, perhaps(?)  

Meanwhile, an Israeli airstrike has killed dozens in Gaza after buildings collapsed into the cobweb of Hamas tunnels built underneath them. Yemen’s Iran-backed Houthis have declared war on Israel after firing more ballistic missiles at it, which were brought down by the US and Saudi Arabia. Israel has stated it intends to deal with Hezbollah once it is done with Hamas, underlining our view that Hezbollah is likely to fight alongside Hamas once Israel fully commits on the ground, and that Iran will back Hezbollah, leading to a regional war. The Saudis confirm they are still ready for an Israel peace deal and US defence guarantee (once the war is over: if the US wins), which surely brings them into the future line of fire: their military went on high alert yesterday. Elsewhere, Turkish protestors are threatening to force the US to remove nukes from the Incirlik airbase, and Chile, Colombia, and Bolivia are all recalling their ambassadors from Israel.

For those thinking that China might help, note Baidu and Alibaba have both removed Israel’s name from their online maps, and have changed the country’s border back to those prevailing under the UN Partition Plan (which Israel accepted and the Arab states universally rejected).

China is incredibly fastidious with map names and the lines on them, as we know.

Think past the BOJ moving away from yield curve control as JPY slumps past 151, bringing pointless threats of intervention; German CPI being close to its 1994 level again; the Fed presiding over the largest yield-curve shift since 1994, even as they do nothing on Fed Funds today; and China saying it will set up an unspecified long-term mechanism to resolve local-government debt, as it did in the 1990s (when it actually just grew its way out – something no longer possible).

To think markets can keep sailing through what we are seeing within the West and between the West and others is delusional.

You want rising “term premia”?

How about military figures saying “war for longer”, or intellectuals asking if Western society as we understand it will even exist in a decade or two?

Try to put the right price on a stock, the long bond, or the exchange rate in a humourless world where there are no Friends, and everything is ‘Bang!’ not Bing.

Day ahead

Today’s key data already saw a drop in the pace of growth of Q3 Kiwi wages with unemployment up to 3.9%, the highest in two years, and a m-o-m tumble in Aussie building approvals, along with a dip in the China Caixin manufacturing PMI from 50.6 to 49.5.

Next, we see monthly PMIs from the UK and Europe, ADP employment in the US (+113k vs +150k exp), then the US S&P PMI, JOLTS job openings, and the ISM manufacturing survey.

Then it’s the Fed, where no changes are expected.