Market Comments
It’s a big week for central banks, though nothing will happen in most cases – which itself is the talking point.
The RBA are expected to hold by our macrostrategist, Ben Picton. However, with as many eyes on their crazy housing market as above-target inflation, consider any hike wouldn’t add a single much-needed new home to supply; neither would a hold; and neither would any cut(s), which would juice demand both for homes and consumer goods and services, by lowering mortgage costs. In short, the RBA conversation today will be like a bald man discussing combs.
The BOJ, by contrast, are likely to see their first rate-hike since 2007, finally taking them out of negative territory, putting the final nail in the coffin of that neoliberal end-point madness that Kalecki warned of in 1943, and which no modern economist had read since. They will also apparently stop yield curve control (YCC) and buying ETFs. From where we were, it’s all very Argentina - and it could get Messi given carry trades.
Yet it’s the backdrop to all this that looks even more interesting. Japanese nominal wage growth is leaping with the backing of the BOJ and government, who want to jump-start domestic demand rather than just rely on exports. That ideological shift is far more significant than a tiny move in JGB yields, because that’s not how the global neoliberal system works.
Indeed, all central banks are now operating in a different geopolitical environment than the neoliberal norm, even if they fail to grasp or admit it:
The Houthis having a weapon that can sink ships trying to go round Africa instead of Suez is a game-changer, if true.
Niger kicking the US out of their $100m base in the country for disrespecting it, and potentially willing to sell Iran as much uranium as it needs is another.
Moreover, the ‘Long TelegraMacron’ is significant. The French President stated he will do ‘whatever it takes’ to stop Russia winning, up to and including the implied threat of going to war with it in Ukraine. It’s easy to mock such statements: one recent tweet had Macron, Tusk, and Scholz shoulder-to-shoulder over the caption, ‘The three stages of hair-loss’. Yet if this is a European comb-over, the outlook for its security is as grim as Macron says; if it isn’t a bluff, the EU will have to change radically, rapidly to gain geopolitical muscle (see more calls for the EIB to shift to finance defence); and then the EU either forces Russia to back off,… or risks getting dragged into a war with it, which newly re-elected President Putin just said is on the cards. I fail to see other realistic scenarios once starting down this road. The market just sees ECB rate cuts.
Academic Nicholas Mulder further underlines things not being as they were in ‘Confiscating Central Bank Assets: From the Paris Commune to the G7’. This argues we have had five different structural phases of global central banking in terms of their independence on inflation, and their immunity, the ability to resist the seizure of their reserve assets by others: (i) Classical Gold Standard (1870-1914); (ii) Economic War (1914-1940); (iii) Bretton Woods (1940s-1970s); (iv) Neoliberalism (19702-2008); and (v) Activist Neo-mercantilism (2008 to today).
Did you know we were in an ‘activist neo-mercantilism’ central-banking phase? I keep saying so, in one form or another, but don’t see much market recognition of it: again, it’s all ‘rate cuts.’ Indeed, the RBA probably thinks ‘neo-mercantilism’ is a new knock-off eau de toilette.
That deliberate blindness is because there have been different stages within the fifth phase. It’s one thing for a central bank to use negative rates and QE and YCC to inflate asset bubbles and push down their currency to steal global export market share (2008-2019), which markets loved. It’s another to see higher rates, efforts to push wages up, higher national security/defence spending, and protectionism to seal in domestic liquidity (2021 – today), which markets hate.
Meanwhile, another academic talks ‘The Treasury Standard: Causes and Consequences’, arguing the US dollar is the global reserve currency because US fiat seignorage is the latest step in an evolutionary process of public financing for vital military spending. In short, the US lets everyone run trade surpluses with it to back the buck so, in times of need, it can print the money to make F-35s, submarines, aircraft carriers, etc. I agree on the centrality of military spending in fiscal policy in the past, and the near future again: look at how the EU is having to reinvent itself to rearm. The problem with this argument, which Michael Hudson flagged 40 years ago in ‘Super Imperialism’, is that the US let this process run so far that it now can’t rearm while its likely opponents can and are.
Yet that again argues we are not in the Pax Americana neoliberal normal anymore: it just remains to be seen if the tipping point is back towards US protectionism and rearmament, or the US being tipped off top spot by those who control physical supply chains and production. On that front, The Wall Street Journal shares names of potential Trump Fed Chairs and economic advisors; but what caught my eye was a Wall Street Journal op-ed from Judy Shelton, whose name was floated in relation to the Fed under the 2017-21 Trump administration. Shelton is a gold standard fan, and argues in ‘Don’t Credit the Fed for Inflation’s Decline’ that the FOMC’s inflation-fighting policies are focused on demand, not the supply-side, where it misses the huge fiscal stimulus we are seeing, like the IRA – and which is another key structural difference between pre- and post2020 policy: now we have activist central bank *and* fiscal neo-mercantilism.
If it’s all about supply when we keep wrongly talking about demand, the likely next question will be ‘How do we get the right supply-side response in things like the military-industrial complex? To which the answer is arguably not ‘gold’, nor ‘Bitcoin’, nor a one-size-fits-all interest rate policy, high or low.
On which, the market now only expects 2-3 Fed cuts this year, perhaps starting after June. Our Fed Strategist Philip Marey has been saying that for months, and he’s now saying Fed cuts will halt in 2025 if Trump wins and brings in tariffs: like the 100% ones he promised on Chinese EVs made in Mexico. That’s as President Biden looks like he might block staunch US-ally Japan’s Nippon Steel from buying US Steel for national security reasons.
Mohamed El-Erian, on Bloomberg, expects CPI to be sticky around 3% due to geopolitical fragmentation, a corporate shift from just-in-time to just-in-case, tight labour markets, and the energy transition as reasons. While he welcomes the market and Fed aligning their views again, he also warns that trying to get back to 2% from here rapidly risks doing more harm than good, and the better choice is to try to sell “opportunistic disinflation” to keep inflation expectations anchored (while CPI is higher than it is supposed to be for longer). That doesn’t sound like the neoliberal ideal to me; neither does it sound like there is any solution without the supply side.
Whether it’s ‘Phase V’ we are in or not, we should recognise it’s a new central-banking phase in many ways. If one doesn’t, developments will just keep phasing you.
Isn't kind of weird that most if not all the countries the US went to War with in the last 50+ years.. Never had a central bank? But we stole their Gold in the way in.... But where is all of the US Gold? Tks Professor Vinny 😁
Sounds a bit like the macro is dizzy with bed-spins, and hasn't started drinking yet.
Macro, I'll take gold over crypto, just in case someone unplugs the electricity.