By Michael Every of Rabobank
Being and Nothingness
With a solar eclipse as the epic backdrop, and 10-year US Treasury yields over 4.40% and testing towards 4.50% despite (or because of?) pledged Fed rate cuts, markets are focused on US CPI tomorrow. Without getting into omens or phenomenological ontology, or the workings of carry trades, one more hot CPI print could prove the existential difference between “being and nothingness” for some trades, especially if it’s seen as a harbinger of sustained inflation pressure rather than (yet another) ‘one off’. So, let’s try to focus on what matters.
Tellingly, as the Guardian notes, in August 1943, the French publisher of Jean-Paul Sartre’s new 700-page philosophical tome, ‘Being and Nothingness’, noticed it was selling unexpectedly well. Did his pretentious thoughts resonate with those enduring Nazi occupation? “Not quite. It sold well because the book weighed exactly one kilogram and so was a perfect substitute for copper weights, which had been sold on the black market or melted down for ammunition.” Today, we also don’t have time for pretentious sophistry: markets need to look at key weights and measures - and copper and ammunition.
Oil remains above $90; the Middle-East is on a knife-edge; Ukraine is striking Russian oil refineries, prompting the latter to ask Kazakhstan for energy; and Rabo’s Joe DeLaura has revised his Brent forecasts up to $89.5 for 2024, $93.5 for 2025, and $98.75 in 2026. Moreover, the cargo ship that brought down Baltimore’s Key Bridge *may* have suffered a power failure due to dirty fuel, as a similar containership tragedy was nearly just repeated at New York’s Verrazzano Bridge. If this is human error twice, it’s bad; but dirty fuel, it would suggest sabotage. In which case, things go from bad to much, much worse. One hopes that was not the case.
Russia claims the Tajiks who carried out the attack on the Crocus theatre were paid by Kyiv. Former president Medvedev blames the West. A Financial Times life & arts op-ed from Janan Ganesh, ‘The price of peace is stagnation’, zeitgeists, “I have no certainty that a war would be creative stimulus, just a nauseous feeling that we are due to find out.”
Japan is being invited to join AUKUS, bringing that defence pact up to China’s doorstep, as the White House is about to warn China it stands behind the Philippines in the South China Sea. This is despite the US Navy running years behind on producing the nuclear submarines it had already promised Australia. And it’s as the CSIS warns, “China’s defence industrial base is operating on a wartime footing, while the US defence industrial base is largely operating on a peacetime footing… China has a shipbuilding capacity that is roughly 230 times larger than the US.”
With Canada also looking at joining AUKUS, can the EU see an Asia-Pacific-focused alliance that could leave Europe to do its own heavy lifting vs. Russia, at vast cost? The latest €7bn German order of two new frigates is a drop in the ocean given the Houthis now claim they can strike the Indian Ocean too, which means container shipping may not be safe trying to get to the EU round Africa either. The Financial Times is also warning that the EU cannot rely on Chinese cotton, a byproduct of which, nitrocellulose, is used in ammunition, as the price of copper soars.
US Treasury Secretary Yellen just returned from China, where Bloomberg suggests “warming ties” between the two economic giants: that author only needs to wear a T-shirt all next winter, as they are such a good judge of “warm” vs. cold. Indeed, Bloomberg also notes, ‘Yellen Threatens Sanctions for China Banks That Aid Russia War’, which is not very cuddly. Moreover, David Fickling says, ‘Yellen junks 200 years of economics to block China clean tech’. Cold once again though, sorry. Not about blocking, but 200 years of economic theory.
Free trade is only a few decades old and has always collapsed when tried. It started with the UK in 1846, at gunpoint; was never embraced by the US; and in Europe, reversed into imperialism in the 19th century, then WW1; it failed with communism/fascism and WW2; trade from 1945-1973 was hardly free under Bretton Woods, before that paradigm also collapsed; and only after the end of the Cold War did it get tried properly, by those who thought history was over. Yet it’s failing again due to mercantilism and national security concerns. There is nothing new under the solar eclipse.
China has offered bilateral discussions over what the US (and Europe) calls its over-production. However, immediate follow-up statements, the clear heuristic, and the domestic imperative argue nothing will change without Western action, i.e., tariffs, which would up-end markets even if they don’t flow through to geopolitics directly: recall 1985‘’s Plaza Accord, and the less well-known 1995 ‘Inverse Plaza’, where the US dollar soared, leading to the Asian Crisis in 1997?
Even Wall Street titan JP Morgan CEO Jamie Dimon just made the following public statement, which I won’t apologize for quoting at length given what he says:
“We may be entering one of the most treacherous geopolitical eras since World War II… We remain wary of economic prognosticating… Instead, we look at a range of potential outcomes for which we need to be prepared. Geopolitical and economic forces have an unpredictable timetable - they may unfold over months, or years, and are nearly impossible to put into a one-year forecast. They also have an unpredictable interplay: For example, the geopolitical situation may end up having virtually no effect on the world’s economy or it could potentially be its determinative factor.
Many key economic indicators today continue to be good and possibly improving, including inflation. But when looking ahead to tomorrow, conditions that will affect the future should be considered. For example, there seems to be a large number of persistent inflationary pressures, which may likely continue. All of the following factors appear to be inflationary: ongoing fiscal spending, remilitarization of the world, restructuring of global trade, capital needs of the new green economy, and possibly higher energy costs in the future (even though there currently is an oversupply of gas and plentiful spare capacity in oil) due to a lack of needed investment in the energy infrastructure.
In the past, fiscal deficits did not seem to be closely related to inflation. In the 1970s and early 1980s, there was a general understanding that inflation was driven by “guns and butter”; i.e., fiscal deficits and the increase to the money supply, both partially driven by the Vietnam War, led to increased inflation, which went over 10%. The deficits today are even larger and occurring in boom times - not as the result of a recession - and they have been supported by quantitative easing, which was never done before the great financial crisis...
Therefore, we are prepared for a very broad range of interest rates, from 2% to 8% or even more, with equally wide-ranging economic outcomes - from strong economic growth with moderate inflation (in this case, higher interest rates would result from higher demand for capital) to a recession with inflation; i.e., stagflation. Economically, the worst-case scenario would be stagflation, which would not only come with higher interest rates but also with higher credit losses, lower business volumes and more difficult markets. Under these many different scenarios, our company would continue to perform at least okay. Importantly, being prepared means we can continue to help our clients no matter what the future portends.”
So, it seems we are at an historic juncture on multiple, conflating fronts; and past history does not suggest this ends with Goldilocks scenarios for markets. Something is going to give. Indeed, the real risk is that this is about being or nothingness: NOT “who is rate cuts?”
