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International Economic Emergency & Pork Pies

Courtesy of ZeroHedge View original post here.

Submitted by Michael Every of Rabobank

Dramatic developments all round, folks. Friday saw China announce retaliation for upcoming increases in US tariffs, which will now rise step-for-step on 1 September and 15 December. We didn’t have to wait long for the response. US President Trump’s blistering set of tweets shouted:  “Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA. I will be responding to China’s Tariffs this afternoon.” Trump also alluded to seeing China as an “enemy” in another tweet.

He then followed through: the 25% tariffs already in place are now 30%, and the additional 10% tariffs due to kick in on 1 September and 15 December are to be 15%. Briefly, it then looked like Trump might be expressing “regret” – but the White House immediately clarified Trump only regrets not setting China tariffs at a higher rate to begin with. Moreover, Trump--and China ‘doves’ Mnuchin and Kudlow--have made clear he is willing to use the International Emergency Economic Powers Act against China, if needed, which could have a far larger impact: goods or firms could be excluded from the US market, or access to the USD denied.

The People’s Daily has stated none of the extreme pressure tactics and intimidation by the US will work with China, which will “unswervingly protect itself” and that “the country's countermeasures will be more rational, firmer and more powerful”; the Global Times added “China will not succumb even if US companies all leave China”. More important for markets is that this morning in Asia CNH briefly hit a low of 7.19; CNY fixing this morning was 7.0570, as on Friday, to try to show that this is actually not the PBOC’s desire: but will that be enough if things keep deteriorating like this? My bearish CNY call has long raised eyebrow: well, since April we have moved 50 big figures. What’s another 58 over 12 months given the current backdrop? In short, we are close to a tariffs up – FX down spiral, which risks panicking everyone. US 10-year yields were at 1.48%, for example. Of course, we have been flagging a trade war since early 2017, calling it a Cold War since late 2017, arguing there is no deal to be done, and recently noted that we expected a full trade escalation. That is, by any definition, an international economic emergency.

But now to the pork pies. Among a potential shattering of supply chains, whether US-China or UK-EU, there are also new connections being made. UK PM Johnson had breakfast with Trump and in front of the cameras pushed him on market access for pork pies as well as cabotage (which Trump probably thought was something you eat). The prospect of a US-UK trade deal within a year is being dangled – but BoJo can only do that OR a deal for closer ties with the EU. The US has already just agreed in principle a trade deal with Japan that has “geopolitics” as much as  “local politics” written all over it. The Japanese government has decided that it suddenly needs to slash tariffs on US beef and pork and dairy; and the Japanese private sector has suddenly realised that it needs to buy massive volumes of corn and wheat. How convenient for all involved – and how inconvenient for rival agri exporters like Australia and New Zealand

Meanwhile, the “Biarritz-Krieg” I spoke of Friday is also in evidence on other fronts: Merkel vs. Macron over Macron Vs. Bolsonaro over the Amazon; Macron vs. Trump by trying to sneak in Iran’s –sanctioned- foreign minister to the G7 for a “surprise” visit; and Trump vs. everyone else in wanting to readmit Russia to the grouping as they are key to many of the issues being discussed.

But pork pies have another meaning. For anyone who grew up within the sound of Bow Bells, or who has watched East Enders since birth, will know that “pork pies” means “lies” in Cockney rhyming slang. And there is a lot that about.

For example, at the central banking retreat of Jackson Hole BOE Governor Carney gave a speech where he argued that it was time to contemplate the end of the USD as the global reserve currency! However, note that while safe haven FX like JPY is rallying this morning on trade fears, so is USD against EM FX (including another flash crash in TRY). Indeed, we recently published a report on how Facebook’s Libra could be the spine of a new global reserve system…but added that politics meant this would not happen. Is Carney--whose bank is contemplating being moved from EU to US orbit--unable to realise that real politik? And why did he say it while a guest in the US? Remarkable times – unless he wants a job with Facebook(?)

Furthermore, consider what was supposed to be the main event Friday – Fed Chair Powell’s Jackson Hole speech. I was wrong to say it would have keine weltanschauung. It did: it’s just that it was a vast pork pie. “Challenges for Monetary Policy” argued central banking has seen three phases: a post-WW2 era where policy wasn’t responsive enough and we got start-stop growth –lessons were learned via inflation targeting; a period where policy thought it had found a new “great moderation”, which then ended up with the global financial crisis – lessons have been learned via greater regulation; and now a phase where low inflation and low unemployment can coexist and where horrible trade wars are making decision-making really hard. No suggestion of massive Fed action to come – but the expected blame on tariffs as the cause of all our troubles. Frankly, that’s a High School level of economic history at best.

In fact, post-WW2 central banks were not independent and didn’t have a pure inflation mandate; moreover, the global economy was highly tariffed and on a gold standard (to which USD was pegged); yet that era’s “stop-start” growth created the West’s middle class. Then, as Triffin had predicted, the system broke down and USD went off gold as Bretton Woods collapsed. In the new fiat era an immediate oil shock meant serious inflation for a decade. Then we had a new phase of tight monetary policy, inflation targeting, and labour-power-destroying globalisation…and so the “great moderation” – which Minsky correctly argued would lead to a crisis. Post that crisis we now apparently have a Fed who doesn’t seem to realise that Minsky dangers lie in SHADOW banking, and in the push-pull of domestic politics vs. the Eurodollar system (an echo of Triffin that Carney does seem to understand) and in China’s massive over-building and over-production. They also don’t realise that labour vs. capital is still the key issue – or won’t say so. As such, while central banks are saying we are at the end of an era--and we are!--pointing fingers at “trade war” as the cause is as helpful as Trump pointing fingers at central banks as the “enemy”. Both are merely symptoms.

In short, international economic emergency, and pork pies, mean rates and bond yields are going lower; gold is going higher; so are havens like JPY and CHF; and yet so is the USD vs. EM FX.


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