Blain’s Late Morning Porridge 24 May 2022 – What Chance Governments and Central Banks will still save markets?
“When you go looking for rescue, you end up trapped in your own weakness…”
This morning: The outlook for markets remains dire.. no worries! But what chance governments, central banks, the economy and growth enablers suddenly turn up the good news and put it all right again…? Are we over-estimating stagflation and recession?
We had an interesting debate in the office yesterday – while markets stumble and flaff-up-and-down in a continuing downwards spiral on the multiple threats now assailing them, what chance the negativity suddenly reverses and there are reasons to be cheerful again?
3 issues to think about:
- Politics and Central Banks
One of the most astute observations in politics was the Bill Clinton slogan “It’s the economy, stupid”. One phrase successfully turned around George Bush’s massive post 1990 Gulf-War approval rating as the US economy stalled ahead of the 1992 elections.
Next year will see the 2024 election cycle heat up in both the US and UK. What chance governments, with the connivance of supposedly “independent” central banks, decide their only hope of hanging on is to reverse the negative economic nihilism around them, and start juicing economic activity with yet more spending, tax-cuts, handouts and pushing for lower rates and a resumption of QE? To have any effect, it will likely happen sooner rather than later..
The inflation hawks and monetary hardliners will scream… but…
You can just imagine the scene in No 10 Downing Street as Boris chokes on the latest polls (showing the Tories at German bond yield numbers) and determines it’s time to spend and bluster his way to victory. You can just picture it – declaring a national economic emergency, huge spending programmes to hold red wall seats boost growth, tax cuts, student debt forgiveness, assassination of key* liberal democrats tax handouts and new democratic Nimby development powers in affluent Southern seats (oh, they doing that already)… and pressure on The Bank of England to do as they are damn-well told to support the programme…
Boris will know it’s an election he may well lose – his only upside being the Labour Party’s ongoing inability to win. (Which is why I may well choose a full-frontal lobotomy in order to vote Liberal Democrat.)
Less of a problem in the US.
If the US economy was drowning, the Republican’s would call a vote to veto the use of lifebelts. Their strategy remains one of encouraging the economy to destroy itself in order they can save it when elected, only to find themselves on the end of the same stick. The opposition Democrats will deny them sticking plasters to treat the gaping flesh wounds inflicted on the economy. Oh, and some senator from God-cares-where will stop everything in order to milk a few more dollars of subsidy for his particular interest…
US checks and balances.. the greatest political system ever. If nothing happens.. what can possibly go wrong?
The gridlock of the US political not-process and its general ineffectiveness may be a primary reason Jamie Dimon, CEO for Life of JP Morgan, is one the wires reminding us the US economy is strong, robust, and able to weather the storm clouds of recession. Sure, it will suffer from inflation and quantitative tightening as rates rise – but nothing to worry about.. move along there, nothing to see, says the head of one of the largest US banks which is pretty much dependent on there not being a devasting recession.. (Just an observation… )
Yet, one of the things I repeatedly here from traders is the hope (described as an expectation) central banks will be forced resume accommodative monetary policy as the multiple crises deepen…. After all, they argue International Central Banking Rescue has saved the global economy on multiple occasions since Ben Bernanke, Mervyn King and Jean-Claude Trichet set up a save-the-world trading floor under the swimming pool on that deserted tropical island with a rocket launcher in the volcano to drop helicopter money wherever required on the global economy….
Sorry to disappoint you all, but I suspect Thunderbirds are most definitely not Go this time. The long-term consequences of too much liquidity are now being felt in terms of underinvestment, declining productivity, income inequality and speculative bubbles (these are all topics and causalities I’ve covered multiple times in the Morning Porridge).
Central Bankers know they have the super-power to rescue and save economies, but if they keep applying the accelerator, as has been the case, then the effects become pernicious and create more distortion than benefit. At some point it has to stop – say about 12 years ago. After saving the world in 2008, it might have been a better thing to let the normal business cycle resume in 2010.
The expected reopening of Shanghai next month will paradoxically trigger fresh waves of supply chain instability as Chinese ports fully reopen. It will take months for logistics in terms of shipping, containers, lorries and orders to re-align and be put back in place. It’s not the overnight switch on/off process some economic observers assume it is.
It means months longer for supply shortage to ease, and years of crisis for major western firms, like Apple yesterday, considering where to broaden their production bases. The cost of goods is bound to further rise as supply chains generate scarcity, and that will continue to fuel wage demand expectations, further destablishing economies as workers demand more as they see other workers getting larger settlements.
And then there is the geopolitical issue – which rather depends on how much China wishes to re-engage with the West. Aligning itself with the military ineptitude of Russia has been an embarrassment, but one that has thus far cost them little – thus far. It’s spurred the West into a frenzy of rearmament and common-purpose. Biden’s “slip of the tongue” about military intervention if Taiwan were to be invaded is bound to have set Xi’s minions thinking…
The probability of a more isolationist US economy from 2025 and ongoing posturing across the Asia/Pacific sphere is high. It’s going to further change the global trade focus and continue to de-emphasise ongoing globalisation. That means the return of an inflationary push as the West trying to re-establish manufacturing businesses.
All it will take is a US politician ending every speech with Carthago Delenda Est to make a bad situation worse..
While China and US face off and decide whether to engage (positively or negatively), the situation is Europe will remain fraught.
The Ukraine Energy and Food inflation shocks have been just that… shocks. But they will not be temporary. It will take years to build new infrastructure and redefine energy policies and supply across Europe, spelling a long-term business block.
There will also be significant political consequences. These are already set in motion. Wheat shortages and higher food prices in North Africa may well trigger renewed social upheaval, and trigger a new refugee crisis for Europe, and empower Turkey to demand yet more unreasonable gains. In short, things get trickier rather than better.
The upside for Europe is the realisation they are strong together and have little to fear from Russia. The downside for Europe will be the realisation its political and economic structures – the EU and ECB – remain constructs designed without democracy or any particular path towards it in mind. Trying to adapt these and move forward in a period of high economic tension.. well that will be tricky. Perversely.. if thing were to get tougher, then that could we precipitate a positive unity surprise in Europe!
The question was – is it likely things get suddenly better and easier? No. Things remain tricky – but that’s not necessarily a bad thing. Taking some of the ongoing stupidity out the market and removing the fluff will be a positive long-term.
*Can anything or anyone Liberal Democrat ever be defined as key, or even anything a smidge higher than utterly pointless and useless? We shall see…
Five Things to read this morning
Out of time, and back to the day job..