Rabobank: Markets Got To All-Time Highs Under An Admin Critics Allege Destroyed The West’s Superstructure

By Michael Every of Rabobank

Biden His Time

Today is the inauguration of President Biden, the culmination of his 50-year career in politics. Besides what will be the unorthodox inauguration ceremony, it puts things into stark perspective when Bloomberg’s Daybreak summarizes the Financial Times’s view that “there’s an air of the last chance saloon” about this presidency, which faces tougher prospects than Harry Truman did in 1945, and will either see “the shoring up of liberal democracy’s good name, or malaise hardening into fate.” Indeed, imagine if the next four years were to see the continuation of and exacerbation of our recent political, socio-economic, and geopolitical polarisation. Even outgoing President Trump has now said he is praying for the next administration to succeed.

Markets are naturally not paying the slightest bit of attention to the fact that liberal democracy is apparently teetering, with only the slimmest of Democratic majorities in Congress to save it, and a Republican party that could either return to being Reaganite under Mitch McConnell et al. (which does not offer much of an economic policy prescription: more corporate tax cuts, anyone?), or could instead become a fully Trumpian vehicle.

Markets are instead deep into celebrating that they got to all-time highs (in the US) under an administration that critics allege did so much damage to the West’s superstructure; and yet will now be pushed to even higher highs as the same superstructure bends to try to save itself from buckling entirely.

Given we are deep into the policy realm of what was the previously impossible, that isn’t the worst of short-term bets, but it is ignorant of history. To build on the FT’s point, markets have been drinking champagne as the revolutions they didn’t see coming break out around them uncountable times. Godwin’s Law aside, German stocks boomed from 1932, when Left and Right were rioting in the liberal Weimar streets; under the Third Reich from 1933, as the economy was flooded with MEFO bills (MMT – with one of the Ms being ‘military’); as war became inevitable; and once war broke out; indeed, right through to the siege of Stalingrad! Needless to say, it didn’t end so well: and the excuse that “I was only filling orders” was not accepted. Yet markets think “Yesterday’s history; tomorrow’s a mystery; today’s a gift – that’s why they call it the present” is deep; and when you make money being consistently wrong about the big picture, what’s not to like about shallow?

But back to that present. Listening to Biden cabinet nominees testifying to the Senate underlines we are going to see some radical policies by US standards. Treasury Secretary-designate Yellen talked about going big now “the world has changed”, which means more than USD1.9 trillion in stimulus. She made clear help to small businesses is where the biggest bang for the buck is to be found, and also flagged the introduction of a 50-year Treasury bond: the partial Japanification of the economy becomes ever-more evident to some. Yellen also reiterated that (unlike Japan) the US doesn’t want a weaker USD. Yet in terms of geopolitical pressures, there will be little tolerance for countries that intervene to stop their currencies from rising.

Notably, Yellen also attacked China for intellectual property theft, trade barriers, “abusive” product dumping, and “illegal” SOE subsidies, which the US would continue to take on via “the full array of tools” – not a stance one would previously have associated with her. She went on to add that the US needs to invest more in infrastructure and R&D to take on China.

Outgoing Secretary of State Pompeo went further, officially designating Chinese actions in Xinjiang as “genocide”; and incoming Secretary of State Blinken agreed with that definition, and said Trump had been “right in taking a tougher approach to China,” but was just wrong about his tactics. Beijing –which denies genocide claims and rebuts calls that it is pursuing “state monopoly capitalism”– will be furious; and those in markets expecting a US-China détente, or trying to build one, will be exclaiming ‘Good Godwin!’. No movement from CNY on that, but let’s wait and see. Elsewhere, after a slim government victory, as The Guardian puts it: “UK free to make trade deals with genocidal regimes after Commons vote”. So Global Britain is up and running!

Linking some of the above thoughts, I am currently reading a book on the history of the British monetary system from the time of the Norman Conquest, written back in 1862, where I came across this passage. It excoriates British political-economy and monetary management, which was free trade and a largely hands-off, financial-market focused Bank of England, vis-à-vis a rising France using trade mercantilism and an activist Bank of France to invest in infrastructure and R&D in order to challenge UK power:

“The editor of the “Economist” newspaper (January 28, 1860), speaking of the free-trade question, in connection with our foreign commerce, lays it down as a matter of essential importance, that:

“in the first place, as free-traders, we must not bargain for commercial advantages.” This (he tells us) “is one of the truths which mercantile nations have found it most difficult to learn.” And then, in reference to our commercial treaties with foreign nations, this very conscientious “Economist” says, “We cannot condescend even to use the language of bargaining. We cannot be parties to a fraud on the French, or any other people. We cannot truthfully say to them, ‘If you will take our productions free of duty, we will injure ourselves by taking yours free of duty, because (he adds) we believe that by so taking those commodities we shall not be injuring, but benefiting ourselves’“

Of course “ourselves,” here, means the consumers, to the exclusion of the producers, as the Coventry ribbon weavers and watchmakers can now testify to their sorrow. But another essential principle of the modem “Economist” is “always” to buy in the cheapest market, and to sell in the dearest. Any trader professing not to act upon this principle in transactions with his neighbors would be deemed to be either fool or knave; but these economists, who are thus proverbially keen in bargaining with each other at home, have the face to assure the public that they “cannot condescend, even, to use the language of bargaining” in their trading transactions with foreigners. That men should be found possessed of self-confidence enough to give utterance to these absurd contradictions is very astonishing: but it is still more astonishing that others should be found simple enough to be deluded by them!”

So The Economist was making the same purist free-trade arguments in 1860 that it was in 2020. How did that work out for the British and their hegemonic status? Or for GBP? Let’s see if for the US and the USD the world really has now changed under Biden.

Meanwhile, in Italy (the hegemon some millennia ago) the latest political crisis seems to have abated again, although to presume that in the long run it is out of the woods the US has wandered into (a century after Italy first ‘went there’) is a stretch: not that markets care when Bloomberg cheerily reports the “ECB is Capping Bond Yields But Don’t Call It Yield Curve Control”. All history is happy when you know that every one of tomorrow’s mysteries is going to be a central-bank gift-wrapped present….right?