Submitted by Michael Every of RaboBank
Where to start? How about with US President Trump, as is often the case. He has not only nominated Stephen Moore, an opinionated Wall Street Journal opinion writer, and Herman Cain, a former pizza CEO, and both of whom have previously been in favour of restoring the gold standard, to join the FOMC and set rates; he has also echoed Moore in talking about the Fed needing to cut rates immediately and reverse Quantitative Tightening (QT) in favour of QE4 (ever?). Specifically, Trump said “I personally think the Fed should drop rates. I think they really slowed us down. There’s no inflation. I would say in terms of QT it really should be QE.” So where does this end? Obviously the polite delusion that central banks are independent. Yet it was always a delusion: read up on how past presidents treated past Fed Chairs. And not coincidentally this is happening just as the equal delusions that central banks aren’t political is also ending, as is that they at least know how to get us out of what looks like another looming downturn or a further deflationary episode. We have warned about all of the above risks for some time: a downturn, lower inflation, and politicised central banks.
But does this mean that Trump will control the Fed ahead? No! But given the market actually agrees with what he is saying in pricing for a rate cut in 2019, Trump is taking out a political call option. If the economy powers through, everyone will soon forget what he said. If the economy tanks, then guess who can say “I told you so” and have someone to blame (and THEN have more influence over the Fed)? Consider that as hedge-fund manager Ray Dalio comes out to say that US capitalism is structurally broken and income inequality is a “national emergency” --a thesis we’ve been exploring for years with our “Lower for longer” US rates view and “Asset-rich, income-poor” calls-- and argues that part of the response should be a joining of fiscal and monetary policy to address it (which again regular readers will know we are no strangers to here.) That prospect is likely to keep US bond yields low/lower and, conversely, the USD strong despite periods of volatility: let’s repeat that if the US is in this kind of mess, where does everyone else sit? Somewhere worse is the answer.
Let’s stick with Trump re: trade, which is the other big issue ostensibly on the market’s mind. Besides threatening to close the Mexican border, or impose 25% tariffs if drugs don’t stop flowing over the border, last week also saw the prospect of a US-China trade deal kicked further down the road. If you read enough stories on what is going on, all the hard parts have yet to be signed off on, apparently, and where there is agreement is merely that a deal needs to be made. The latest suggestion is that there might be a 2025 or 2029 target date for China to adopt some of the reforms being pushed by the US. Seize on that date with a wry smile: do you really think any US president, and especially this one, is going to give Beijing until after his term in office is finished (presuming a win in 2020) to deliver on the goods? Exactly. Focus more on the Chinese promise to buy lots of US gas/food/agri commodities in 2020 pre-election, and you have a better handle on what is really going on – or so it would appear. As many observers note, the US view on China has changed, and it isn’t changing back anytime soon; and even the EU may be finally getting tough(er), given suggestions it is reportedly ready to refuse signing a joint statement with China at a bilateral summit tomorrow, as Europeans request stronger commitments on the economy, trade and human rights. I wonder how China will take that snub? With its usual grace? That prospect is also likely to keep bond yields low/lower and, conversely, the USD strong despite periods of volatility.
But talking of the EU being tough, let’s move to Brexit, where this week is going to prove truly pivotal. Where to start? Last week some saw PM May finally reaching out across the aisle to try to build a consensus with the opposition Labour party re: the form a Brexit deal could take given her withdrawal agreement (WA) has been rejected heavily three times now. As May might have chuckled to herself Bugs Bunny style, “He don’t know me very well, do he?” Because those discussions have of course come to nothing with Labour stating it has yet to learn even the basics of what concessions May is prepared to make: in short, it was a trap to try to share Brexit blame on Jeremy Corbyn and scare Tory hardliners into backing her hated WA. May is trying to do the same thing in a new video that says that Brexit itself is at risk if her deal isn’t backed, and that it’s WA or No Brexit. This deliberately, and delusionally(?), overlooks the fact that unless May revokes Article 50, it’s actually still the WA, which is dead, or Hard Brexit this Friday - unless the EU grants a new delay.
Even on that front May has shot herself in the foot with both barrels. Everyone recognises the UK needs a long extension to try to work out where to go next. And yet May deliberately asked until 30 June to ensure the EU is made to look the bogeyman for UK voters. One has to wonder how much EU patience there is for such obvious self-serving incompetence; doubly so when Brexiteer Reese-Mogg openly states that if the UK is forced to stay in the EU for the parliamentary elections it should use the opportunity to sabotage everything it can from the inside; triply so when the rumours are of Boris Johnson as the next PM, whom the EU trusts less than May, and whom is on the front page of the Telegraph raging against May talking to Labour.
In practical terms that leaves May with today to come up with a new plan that Labour can agree to; and which won’t split her party, where the knives are not just out but are being licked on tongues; and which won’t split the Labour party, where the knives are also out over insisting on a second referendum and yet more allegations of institutional antisemitism. By tomorrow, when the sherpas arrive for the EU summit, the UK position is going to have to be better than “We just need more time.” Where does this end? Let’s just say that the market continues to price for a happy ending and I don’t know why, because the odds are not clearly in that direction.
Oh, and let me just throw this into the mix. Hansard has released a survey today which states that public attitudes are emerging that “challenge core tenets of our democracy”. Public faith in the political system has reached a new low, and almost three-quarters of those asked said the system of governance needed significant improvement; when people were asked whether “Britain needs a strong ruler willing to break the rules”, 54% agreed and only 23% said no. Together with institutional antisemitism, and Big Men getting the trains running on time while building concentration camps, how 1930s (or The Age of Rage) does that all sound? And tell me again, oh Mr Market, where this ends?