Tulip/Lehman/Sputnik/Splat-nik
Three news items stand out as particularly important today, even among the stiff competition.
First, we have one of the clearest examples of how we have collectively lost our minds in terms of pricing. No, I am not referring to energy squeezes, or the supply-chain problems that are nowhere near being resolved by the token efforts proposed by the White House. Nor am I am referring to the multidimensional idiocy of crypto/NFT space, the digital version of Keynes’s idea of allowing people to dig for printed money buried in glass bottles in a giant pit to keep them busy. (“Yes, they are ‘printing’ digital flatulence and making thousands of dollars a day flipping it to each other: but at least they aren’t revolting against neoliberal global capitalism!”) As someone far wittier than myself noted this morning: “Let them eat fake.” (Though he was referring to an internet meme of a US supermarket which has stapled pictures of food to its shelves to make them look full. The Soviets would have proudly done the same but didn’t have the printing technology.)
Second, we have the usual official view that nothing can go wrong. In China, we got an echo of a Lehman moment on Friday. Specifically, the PBOC said Evergrande was “controllable” as the entire property sector is reeling, an echo of the Fed’s Bernanke stating, “subprime is contained”. Of course, no 2008 financial crisis is possible within China because it is not a free market, as 99% of those who salivate about it don’t admit, or praise. Yet to presume the *economic impact* is controllable is something else. Yes, Friday saw the PBOC ease mortgage and loan restrictions to the property sector in Q4; but yet we also got a speech about ‘common prosperity’ (see “Pro-Fund or Profound Revolution?”) with specific stress that housing is for living in and not speculation - hence prices are not going to be allowed to soar, as before - and that a property tax is on the cards. That will shake up the sector, if so, to put it mildly, on top of a surge in government bond yields as hopes for policy easing fade. And the Chinese economy, which reports Q3 GDP today.
Third, the weekend saw a things-can-really-go-wrong potential Sputnik moment as China test-launched a new hypersonic orbital weapon that left US jaws dropping: “We didn’t know they could do that!” is the meme from the same US intelligence services who didn’t know there weren’t WMD in Iraq, did think there was a Russiagate, and didn’t see the fall of Kabul days before it fell. While hardly www.Janes.com, we are capable of pointing out that: 1) This tech, FOBS (Fractional Orbital Bombardment System), is not new – the USSR was playing around with it in the 1960s; 2) All existing ICBMs are already hypersonic; 3) It is a first-strike weapon capable of delivering a nuclear warhead incredibly quickly from any direction, including the south where, Maginot Line-style, US anti-missile shields do not operate; and, tellingly, 4) This is clearly related to escalating geopolitical tensions.
Indeed, the story itself is again the story. Was this a leak from the Chinese side, as a response to AUKUS and ‘news’ that US forces are in Taiwan? Or was it from the US to try to generate a firmer response in the White House? As the $3.5 trillion Biden spending bill continues to be pared back (green energy and universal child tax credits both to be gutted, it seems), don’t bet against a “superweapon” headline generating new US defense spending. To be fair, first-strike options against you tend to generate that response everywhere…except the parts of the world that think this kind of thing could never happen to them (“because markets”), even as they aim for ‘strategic autonomy’.
Arms races are at least good for key parts of the economy: just not for a kumbaya free-trade vision of the world. Or for neoliberal labor markets, as the Wall Street Journal reports “Unions Push Companies as Workers Stay Scarce”, and that “Union leaders say Covid frustrations spur ‘new militancy’ among workers as critics warn that efforts hit companies already struggling with supply-chain problems,” which economists (only) now think will last well into 2022. There is only so much fake you can get people to eat, after all.
But back down to earth, and one of the locations where geopolitics doesn’t happen (so far), New Zealand. There, Q3 CPI surged to 2.2% q/q, 4.9% y/y, the fastest pace in 10 years, lifting the NZD and Kiwi yields given the market consensus was only 4.2%. The BOE’s Bailey is also jawboning about the need to act on rates if required, i.e., if people get pay rises. The Fed is likewise just weeks away from pouring less vodka into the punchbowl each month, and the latest Bloomberg Fed headline is Barkin telling Larry Summers that, no, the FOMC isn’t “woke”. I don’t think anyone thought it was: I think people were saying it is *pretending* to be woke – and it will tighten policy to choke off union militancy even as it keeps saying it cares deeply for social justice and small-town Main Street.
Mohammed El-Erian sagely notes today that we can expect greater market swings ahead. I’ve been saying the same for a while, even if almost everyone I speak to in markets presumes that nothing bad can happen --“because markets”-- so we keep moving into a higher orbit. Clearly, what central banks are talking about doing (tightening, to stop any degree of labor-capital rebalancing), and governments are doing (taxing more) or not doing (more logistics), is also a superweapon capable of evading the intellectual and hedging defenses we have built facing the wrong direction, and of blowing us up. That’s a potential Splat-nik moment than a Sputnik – but geopolitical ‘fat tails’ continue to fatten on the vine too, and they are correlated with market developments.
I leave you all with this heart-warming scene depicting the greatest minds of our global system collectively deciding on where we need to go next.
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