By Michael Every of Rabobank
Help!...It's the Blair Bear Bunch
As a kid, I vaguely recall watching Saturday re-runs of a second-tier cartoon called ‘Help!…It’s the Hair Bear Bunch’. Wikipedia reminds me it was about bear cousins in Wonderland Zoo, run by Mr. Peevly and zookeeper Botch, who would escape on "invisible motorcycles" to "improve their living conditions" and "embark on get-rich-quick schemes", and who would activate a hidden switch to reveal a cage filled with luxurious surroundings. Last Saturday, I watched ‘The Blair Bear Bunch’, as re-run second-tier ex-politicians Tony Blair and Hillary Clinton, usually associated with the kind of wacky antics described above, also gave a very bearish set of answers on the key topic of US-China relations on a giant Bloomberg stage in Singapore. Don’t take my word for it: watch it yourself and see.
To my eyes, the key take-aways were: Blair saying the Western perspective of China has changed fundamentally, and from now on policy would be to only engage with it from a “position of strength”; Clinton stressing her views on trade had changed, and while she believed some US tariffs would be removed, was in favor of trade ‘resiliency’; and Blair adding trade should be done more between politically sympathetic nations. (Or, as I have put it in the past when predicting people like Blair would eventually be saying this, that “Trade is about values, not prices”.)
This all matters given these bears presumably still have some influence/reflect the thinking of the Peevlys and Botches running our ‘Wonderland’ – and were cleared to say so in public; that, as the future global supply chain layout is still unclear, with huge implications for labor costs at a time of rising inflation; and because financial markets are operating in an entirely different headspace. After all, if we do bifurcate economically, some very rich people are going to be *very* wrong on some of their recent calls. On which note, just after the Biden-Xi summit, a US Congressional panel advised the States should restrict outward investment to China due to security concerns.
Meanwhile, there are plenty of China bears out there on strictly economic grounds: A PBOC advisor stated China could enter “quasi-stagflation” with relatively slow growth and excessively high producer-price inflation. Indeed, that scenario is “very likely” if existing risks in the economy are “released too quickly”: he called for a go-slow approach on structural problems such as local government debt and indebted property developers. We already see potential signs of PBOC easing given tweaks in the wording of Friday’s quarterly policy report to suggest room for a policy shift, if needed. However, Leland Miller of the China Beige Book, in an interview with Bloomberg’ Sherry Anh also worth a watch, underlined China is going to grow far more slowly – because Beijing is OK with that. And, leading from the back as usual, the IMF are calling downside risks to their China GDP forecast, prompting professor Michael Pettis to state their methodology is wrong if they think excess debt- and property-related growth for so many years does not imply a compensating GDP undershoot ahead. (Amen, says I.)
China is worried enough that SAFE is urging banks to limit speculative FX trading to prevent one-way CNY bets. The key messages: threats to the economy are real; a stronger CNY --one of the best ways to rebalance the global economy and boost Chinse consumption-- is not going to happen; and to presume CNY is freely-traded, one would need to be smoking enough to ride one’s own “invisible motorcycle”.
There are stagflation bears in the US too. Yet the St. Louis Fed, rather than addressing the ‘ag-flation’ making food more expensive, stresses: “A Thanksgiving dinner serving of poultry costs $1.42. A soybean-based dinner serving with the same amount of calories costs 66 cents and provides almost twice as much protein.” I don’t eat meat, but I am not sure Americans will enjoy central bankers telling them what they should ingest if they can’t afford poultry – as well as tipping us off about how the BLS may “hedonically-adjust” food prices to keep headline CPI lower.
Then we get to the bears of geopolitics. Russia may be preparing for a major attack on Ukraine by end-January, with Russian social media is again sharing pictures of a rump Ukraine sandwiched between the pincers of Belarus and ‘New Russia’ stretching all along the key grain ports of the Sea of Azov and the Black Sea as far Moldova. We can only wait and see while stressing what this would mean for food and energy prices, and for the international order, if so.
With EU gas supply coming from Russia, Bloomberg meanwhile bewails in a Merkel-esque voice, “When energy pipelines become political, everyone suffers”. Energy pipelines are ALWAYS political! (And “trade is about values, not prices.”) More broadly, one would suspect risk would be off for all of 24 hours in Russia moves before markets rally on the presumption war means less Fed tapering: which says all we need to know about our Soviet, or at least Pavlovian, markets.
And geopolitical tensions are going global. The Saudi coalition fighting the Iranian backed Houthis in Yemen is also flagging an imminent danger to navigation and global trade south of the Red Sea, Saudi state media also reported it had detected hostile movements and activity by the Yemeni Houthi forces using explosive laden boats, adding that measures are being taken to neutralize the threat and ensure freedom of navigation. As our ‘In Deep Ship’ report argued, this is how you take existing supply-chain and supply-side shocks and amplify them. Given this is another massive global energy production centre, keep an eye on it. Can markets Pavlov this away too?
However, they would probably be less sanguine if anything happened in the South China Sea too. Relatedly, and to the Blair Bear Bunch, the US Indo-Pacific National Security Council chief just stressed that Vietnam and India --not China-- “will define the future of Asia,” adding, “I believe whoever is in power in Washington, Democrat or Republican, will do what is necessary to build relationships with these countries.” Moreover, the Financial Times front page is again about Chinese military tech advances. Apparently the Chinese hypersonic missile test-fired recently fired its own missile over the South China Sea in flight, and the FT says “Pentagon struggles to understand how Beijing mastered technology that tests constraints of physics.”
Allow me to rehash what I said when we last got such “Sputnik” headlines: this is a placed/leaked story no doubt related to US defense lobbying; if there is a real military advance or not remains to be seen, but the US is clearly going to be spending more on defense regardless; and if there is a Chinese advance, how much do cynics want to bet that if one dug deep enough, the source would be at least partly US tech and/or capital? Or even friends and relatives of US politicians, including those who enjoy “riding invisible motorcycles" to "improve their living conditions" and "embarking on get-rich-quick schemes".
Mon, 11/22/2021 - 10:15