By Michael Every of Rabobank

Blinken You’ll Miss It

Quite the bundle of news to unbundle this morning, and once again most of it is politics threatening to trespass into market territory.

For example, we just had the virtual G-20 “held” in Saudi Arabia…and did anyone actually notice? Even media like Bloomberg, which would bleed G-20 if punctured, notes ‘One of the starkest moments…came when US President Donald Trump skipped a sessions on the pandemic to hit the golf course. Just as telling was how many other leaders seem checked out.’ Putin arrived late, Spanish and French leaders were caught looking at their phones, and Boris Johnson looked ‘uncombed and reading from his notes’. Indeed, while ’many leaders are relieved to have Joe Biden take over as US president,…they think four years of ”America First” cannot be easily undone, according to officials present.”

Quite. For all the talk of Great Resets, what we still see is a Great Reflex to go back to the status quo policy. For example, massive fiscal stimulus, which will linger a while yet because the virus will too, is being matched by massive new pledges on the Green and defense fronts. This smacks of industrial policy at best, and co-opting of central banks at the worst. However, there is also talk of pay-freezes for public-sector workers, of tax hikes, and of higher pension contributions, hitting all those at the bottom of the ladder whom Covid-19 already hit hardest. So we see both MMT and austerity/MMonetarism: let’s push in demand via higher state spending and yet simultaneously suck demand out via austerity…to deal with the massive government debt pile that central banks have already de facto monetized! Genuinely new economic thinking post crisis? Blink and you missed it.

Likewise, those who have a thing for acronyms are abuzz over new global trade deals; we have RCEP and CPTPP to play with, and Biden is obviously in favour of such things. Yet the RCEP is comprised of major net exporters, who can all try to net export to each-other. The CPTPP was supposed to have the US as the end-consumer, but doesn’t, and a mercantilist China will hardly replace it. Moreover, is the US really crying out for yet more imports (and fewer jobs) via new trade deals? In fact, is anyone crying out for more imports, or just more exports… and if so, to whom? Once again, blink and you miss any new economic thinking. Which might be why the G-20 had virtue to signal, but its ideas were indeed virtual.

Meanwhile, President Trump still isn’t giving up on being president. Yesterday saw his legal team distance itself from lawyer Sidney Powell, and it would appear Team Trump will press ahead with challenges to the election results on primarily constitutional grounds. These will be in terms of the process by which vote-by-mail was introduced (which should only have been via the state legislature), or the precedent established in Bush vs Gore in 2000 (i.e., that in some states voters had to show ID to vote in person, but not by mail, so “unequal treatment”): those cases will likely end up at the Supreme Court soon.

At the same time, Powell will press ahead solo with her “Kraken” suit alleging orchestrated election fraud via manipulation of voting machines by foreign “communist” forces, possibly intelligence agencies, and aided by members of both the Democrat and Republican parties. To many, including Supreme Court justices no doubt, all this lacks is Milhouse from The Simpsons talking about “reverse vampires” and saying “We are through the looking glass here people.” Then again, so much of what has happened over the past four years would not have been believed ten years ago: and, boy, will it fire up the Trump base as an unavoidable civil war in both US parties of centre vs. populists starts to play out ahead.

Trump also continues to try to salt the earth vs. China on trade. Reuters reports that a further 89 Chinese firms are now subject to export bans due to their alleged links to the PLA: China hawk Peter Navarro also underlined that the time for policy action against China is now. With technology and capital controls against Chines firms being accelerated by the Trump administration specifically due to claims of military links, one might also want to consider that increasingly-popular Chinese government bonds, by their very nature, also encompass military spending. The next few weeks could see plenty more Trump action on China.

Of course, Biden continues to push ahead with his own planning. Word is that his long-time advisor Blinken will be named as Secretary of State. Notably, while Blinken has been a critic of Trump’s tariffs on China and has previously stated that full decoupling from China is unrealistic, he has also made hawkish statements about the need for a more comprehensive US response to Beijing. Indeed, he has specifically spoken about the need to utilize the tool of the recent Hong Kong Autonomy Act (HKAA) to impose sanctions as needed.

Not that Europe is short of its own politics > markets dynamic. There is the UK, with all its Byzantine political machinations over who is really in charge; there is the related odyssey of Brexit; and in the EU there is the rule-of-law/fiscal stimulus stand-off.  

The market mood is nonetheless ebullient at the moment. Stocks are trending up (hooray!), bond yields are trending down (hooray!), and so is the USD (hooray!). The awful virus is likely to be defeated ahead! Vaccines are here and do work! Schools can even reopen! And skiing holidays will soon be back! Life could not be better!!

Just recall that Great Resets and the Great Reflex, promising infinite liquidity for the lucky few and austerity for the many, are only going to lead to a Great Reflux of even angrier anti-establishment populism. It’s just a question of where and when. So enjoy this moment. Blink and you may miss it.