By Michael Every of Rabobank
A Plague on Both Your Houses
It’s Tybalt today, and for more than one reason. First, the midterm election results continue to dribble in. And dribble is the operative world. There was no Red Tsunami and no Red Wave. Moreover, once again many key races are again failing to be able to count small pieces of paper. Nevada says it might take until the end of NEXT week to be able to do so; Georgia will need to go through the whole thing again, again.
As things stand at the moment, the Republicans look set to take a very slight House majority, and have a reasonable chance of taking a slim Senate majority too. That would seem to deliver the gridlock markets were hoping to see, on the view that this means less fiscal policy and so less aggressive rates policy. However, it means much more than that.
If there was a key message from the election results it is that the US remains deeply divided, and yet very closely so, which is why so many races right across its huge geography were so tight. The second message is that everyone seems to be united in being unhappy with BOTH parties. Nobody is enthused about President Biden, who of course is now running again in 2024 (though of course we don’t mean literally given his age); or Trump and his oddballs; or the mainstream Republican sweater-vest wearers; or bland mainstream Democrats; or new Progressives. Many votes were cast ‘against’ rather than ‘for’. The only major exception was Florida’s Ron DeVictorius and his growing base of voters, who outperformed the Moist Red Sponge wiped across Congress.
Now wait until 2024 on the other side of more high inflation –it’s US CPI today– and high unemployment, and a recession – that will be a doozy. Indeed, that economic dynamic is starting to unfold even before the 2022 vote is in.
Crypto firm FTX may go under after fellow crypto firm Binance walked away from saving it. Owner Sam Bankman-Fried’s $16bn fortune was no bank, man, and is fried. He is ironically on the public record talking about how much safer and more transparent crypto is than banks. Now the public sees this nebbish talks rubbish, and crypto can be crapto. Yes, Cryptonites can rail all they like about fiat and ‘The System’, but humans are humans. Unless you build your own server and run your own crypto exchange just for yourself –in which case what’s the point?– you are going to get episodes like this, until crypto is regulated like banks – and then what’s the point?
Swathes of the market have no idea what just happened even as hedge funds reel: but the US Justice Department does, especially if the funds FTX donated heavily to the Democrats might have to be returned. Expect this to be the ammunition needed to bring the hammer down on the whole sector. (And Biden is implying Elon Musk might separately be in the firing line for his relationships with other countries / slash buying Twitter.)
What FTX shows is that when you raise rates towards 5%, lots of stupid stuff stops happening. Like $16bn fortunes created by allegedly playing ‘League of Legends’ through meetings which wax lyrical about being much more than a bank while not being regulated like one. Indeed, add the ‘Bankman fried’ story to job losses at Twitter and Meta –whose employees can go live in the metaverse, so I don’t know what they are complaining about– and you have the start of a serious tech downturn, to match a housing downturn. On top of that you can add a logistics downturn, as that sector goes from feast to famine, according to FreightWaves.
Like I said, wait for 2024. Nobody seems to know what they should be doing about the mess we are in now, let alone one where we have high unemployment and blowing out budget deficits alongside blowing up digital rivals to the US dollar.
Which is a segue to the geopolitical space, where Kevin Rudd has another double-barrelled piece in Foreign Affairs (‘The Return of Red China’), which makes clear if you want to talk about a Red Wave, it is not the US you should be looking at:
“That means foreigners must set aside the comfortable analytical frameworks many of them have used to analyse China for the last two generations. Most countries, including many in the West, are predisposed to think that when China’s leaders speak in ideological terms, it is not to be taken seriously (or that if it is, the ideology purely applies to the party’s domestic politics). But that is no longer the case. As I wrote in Foreign Affairs shortly before the party congress, “Under Xi, ideology drives policy more often than the other way around.” He is a true believer in Marxism-Leninism; his rise represents the return to the world stage of Ideological Man. This Marxist-Nationalist ideological framework drives Beijing’s return to party control over politics and society with contracting space for private dissent and personal freedoms. It also drives Beijing’s born-again statist approach to economic management, and its increasingly assertive foreign and security policies aimed at changing the international status quo…
He is also intent on pushing China’s economy away from market-based capitalism and back toward statism by rehabilitating state-owned enterprises and designating the state as the primary driver of technological innovation… Party members are now required to “grasp both the worldview and the methodology of Marxism-Leninism” and apply the “analytical tools of dialectical and historical materialism” to understand “the great challenges of the time.” In reinforcing once again this traditional Marxist ontological and epistemological framework for understanding and responding to the world, Xi has also called on the party to “develop a new form of human civilization.” This now extends to Chinese foreign policy, where Beijing is increasingly comfortable using pressure, leverage, and force.“
Rudd concludes this is generating a Western backlash, yet “as a practicing Marxist dialectician, Xi Jinping is probably already anticipating that response – and preparing whatever countermeasures may then be warranted.” For those who *still* haven’t read any Marx, i.e., everyone who thinks talking about CNY fixing or Chinese stocks makes them an expert on the place, Rudd is saying Marxism is all about projecting action and counteraction. Hence Xi knows what he’s doing will drive a response, but he’s assuming it’s a positive one somehow.
Relatedly, Biden, with a newfound spring in his step, and Xi, with the same, will now meet next week in Bali at the G20. The former is quoted as saying, “I’m not willing to make any fundamental concessions,“ and instead wants to “lay out what each of our red lines are,” and “how to work it out,” as well as underlining his commitment to defend Taiwan. That’s just after Xi told his military to prepare for war. (Which, to be fair, is what militaries do.)
Very high stakes stuff. Many in markets, including many purported US allies, will be averting their eyes, saying “A plague on both your houses.”