By Michael Every of Rabobank
Deadly Serious Season
August really is not playing fair. This is supposed to be ‘silly season’ for news – but we have nothing but the deadly serious so far, even if it also approaching the farcical at times too.
China is slowing, as the latest data show, despite market expectations of better earlier in the year. Moreover, the latest news is that Beijing has not only tightened up laws on data storage and internet competition but will: 1) Avoid systemic financial risks, as Evergrande bonds continue to tumble; 2) Expand the middle class, as incomes are squeezed; and 3) “Properly adjust excessive incomes and encourage high-income and enterprises to give back more to the society.”
Is this just a tax tweak, more I-Can’t-Believe-It’s-Not-Marxism to ignore, or an echo of Smith and Ricardo, who both argued the “invisible hand” was the pull of patriotism that leads entrepreneurs to think of their country? Sinologist Bill Bishop notes that back in July an official reference was made by Xi to “Red capitalists” Rong Yiren and Wang Guangying as model patriotic entrepreneurs – ”who ‘donated’ all their businesses to the government.” Moreover, Vice Premier Liu He already defined “tertiary redistribution” back in 2019 –in a speech Wall Street did not read– as “voluntarily helping the weak through non-governmental donations, charity, voluntary actions under the influence of morals, culture, habits, etc.” In short, this could presage something far more than just a regulatory crackdown or a marginal tax tweak. Once again I refer readers to my past musings on the ideology of public/private capital vs. public/private goals, and what that means for markets over time.
Wall Street once again did not see this coming if it is more than just a tax tweak: it is always too busy dialing for dialectics. Ironically, just yesterday Black Rock flagged that China is no longer an emerging market (‘Because it’s big’!), and one should ignore crackdowns to step up equity allocation; which was also then followed by the US SEC tweeting an animated video underlining why Chinese IPOs are often just for opaque holding vehicles in the Cayman Islands.
Supply chains are still disrupted this summer, with key Chinese ports and airports being impacted again, longer queues at LA port too, and benchmark shipping prices surging to yet new record highs (Capes pushing past $40,000, for example). This backdrop is not going away any time soon.
The US is slowing too, as yesterday’s retail sales showed, on top of the NAHB housing index and the Michigan consumer sentiment survey. Fiscal stimulus is still stuck in the mud, it appears. And the Fed’s twin Town Halls yesterday did not touch on the economy or monetary policy at all other than Kashkari slagging off crypto once again. So we still have to wait and see if Jackson Hole on 26-28 August will see any step towards QE tapering – just as the US and Chinese economies may both be stepping towards a synchronised downturn.
Today sees a rate meeting from the RBNZ, where the market was sure Governor Orr –living up to his name– would reverse the flirtation with negative rates and deliver a 25bp or perhaps a 50bp hike. Then one person in New Zealand got Covid-19, there is a 3-day lockdown, and the market is not so sure.
Obviously the Covid-winner-to-loser story playing out in Australia is a real concern for the Kiwis, and you cannot only have one case of Covid except by immaculate infection, but the RBNZ has often bucked the rates trend – wrongly, and then forced to reverse. Yet while it was the thought leader that introduced inflation targeting first, and now house-price targeting too, this latest development really underlines the very small scale of events there, which mean it is not always a bellwether for larger economies.
Meanwhile, the geopolitical backdrop remains very much in the foreground. The US, and many other countries, still have tens of thousands of citizens and visa-holders trying to get out of Afghanistan against a Taliban-imposed deadline of 9/11 for the US troops keeping an semblance of order to leave. The White House appears unsure if it can get all US citizens out in time and what will happen if it cannot. President Biden may be back on holiday.
The international hit to the US image is palpable. Politico reports shock in the EU, where Angela Merkel’s likely replacement is calling it
“The greatest debacle that NATO has experienced since its foundation”. A former advisor to the UK Prime Minister also tweets “…it’s time to wake up and smell the coffee…The lesson for Europeans is clear: whoever is President, the US is unlikely to offer the same support that it used to in parts of the world where its vital interests are not involved.”
Which, as noted yesterday, is only one of two ‘Biden Conditions’, the second being “Will you fight with the US?”
But beyond the EU, even the pro-Taiwan Epoch Times has an op-ed worrying if the US can be relied on; the graphic design of the Defense of Japan 2020 and 2021 reports shifted from a pink stylised Mt Fuji with flowers to a black-and-white image of a mounted Samurai with a sword; and the Israeli press notes the country may be on its own in the future.
These are Trumpian earthquakes even if markets like to pretend Pax Americana is not the foundation that they are all ultimately built upon.
Meanwhile, the IAEA says Iran is now stepping up processing of uranium to 60%, in total contravention of the lapsed 2015 nuclear deal, but totally predictable convention when one sees the US stumbling its way out of neighbouring Afghanistan and apparently so eager for a new nuclear deal on any terms.
Thank goodness it is September soon and all this irrelevant summer silly news can end and we can get back to the serious stuff!