Rabobank: The Great Greek Gamble

By Michael Every of Rabobank

The Great Greek Gamble

Back in 2017, when the Fed was pressing ahead with its last hiking cycle under FOMC Chair Yellen, we referred to it as ‘The Great Gamble’: it could pay off handsomely; but if it failed, we would end up in a world where central banking was seen to have failed in the eyes of populists, and talk would be of fiscal policy, MMT, universal basic income, protectionism, and geopolitics. One global pandemic later, here we are; and yet markets are again focused on the next Fed hiking cycle, on even more fragile foundations, and with more ridiculous global liquidity to be removed. 

Except it’s not even true that the global pandemic is in the past. Yes, media have largely stopped putting it on the front pages: vaccinations are up; cases are down; deaths are sharply down; people are rightly frustrated and bored of reasonable and totally unreasonable restrictions for many good reasons; and the socio-economic damage has not even begun to be properly tallied. However, and very regrettably, it seems another great gamble is underway here too.

The vast majority of mankind has NOT been vaccinated. I am not talking about refuseniks in the West, but around 90% of global population – and not just in the poorest countries: Thailand and Indonesia are both being hit very hard by Covid at present, and both lag on the vaccine front. So is Australia, albeit in splendid isolation, and with intermittent lockdowns to prevent outbreaks. This leaves not only massive human suffering, but an equally-massive human ‘petri dish’ within which Covid can keep mutating, to what end we do not yet know. There are already suggestions the so-called Lambda variant from Latin America may be vaccine-resistant – and there are plenty of Greek letters left in the alphabet before we get to our Omega.

The two leaders in public vaccinations, the UK and Israel, are also both seeing an acceleration of growth in cases of the dangerous Delta variant. Israeli data suggests over 40% of those now seriously ill in its hospitals are aged over 60 and are fully vaccinated with Pfizer; and that the vaccine only offer 64% protection from all illness – though importantly the figure remains at 93% in terms of avoiding hospital and critical illness. Nonetheless, this is a step back from where we looked to be a few months ago: once again, the elderly and unhealthy *may* be vulnerable even if vaccinated, so trade-offs need to be made. Israel is now looking at reintroducing some of the virus controls it recently removed, while controls on international travel destinations remain.

By contrast, UK PM Johnson has announced that ‘Freedom Day’ to roll-back virus measures will go ahead on July 19 – despite the government stating virus case numbers could rise to 50,000 daily by that point, and BoJo admitting many deaths will follow; furthermore, international travel without quarantine for anyone who has been double-jabbed is on the cards. The strategy, if that is the right word given the track record so far, is again now to “live with it”; to open up for the summer…and keep fingers crossed this will not mean disaster in the autumn/winter. As the government’s own scientific advisors note, if a more pathogenic variant emerges when case numbers are high and have to be brought down “then restrictive measures would be required for much longer.”

So, a great gamble on Covid and rates. For markets, however, it’s all upside. Either the bet pays off and we open up -bullish!- or we can’t, and so get free liquidity forever – bullish! The risk of society and the economy freaking out if the virus comes back stronger and/or vaccine resistant is not being focused on; neither is that of the Fed hiking too much.

Yet markets have other high stakes too. China’s Caixin services PMI yesterday was a major downside surprise at 50.3 vs. 55.1 in May and the 54.9 expected. Consider that as Bloomberg publishes an article today (“When Will China Rule the World? Maybe Never”) echoing what we published back in 2017 on the risk of a new Cold War: there is no guarantee China’s economy will ever be larger than the US. Yes, China could overtake the US in nominal dollar terms by 2031; or it may level off as a permanent number two given its population is shrinking, its capital stock is already over-built/supplied, and its tech sector is likely to be increasingly isolated, hitting productivity. On which, are Americans going to continue to gamble with China tech IPOs after the latest state crackdown on Didi and two other tech platforms? And when the Wall Street Journal reports Chinese regulators had suggested that Didi executives delay the IPO “but Didi pushed ahead, under pressure to reward shareholders.”? Meanwhile, Facebook, Twitter, and Google warn they may halt operations in Hong Kong if proposed legislation is introduced that will make them directly responsible for any comments or content users might post/tweet/share.

Call this US-China gamble right and it will pay off handsomely: call it wrong and lose your stake.

Which is a nice segue to EU president – sorry, I mean French president Macron – and EU Chancellor Merkel -sorry, I mean German Chancellor Merkel (for another few months anyway)- holding another video chat with China’s Xi Jinping yesterday. The rest of the EU will be delighted at this latest Franco-German diplomatic outreach, especially the two EU presidents who squabble over sofas. The meeting saw a Chinese offer of high-level dialogue on trade, tech, and climate; of “fast track” personnel exchanges; a request for support for the Beijing winter Olympics; and a Quadrilateral (a new Quad!) offer for France and Germany (alone) to join China in developing infrastructure in Africa. M&M asked for more passenger flights to China and more open Chinese markets for EU firms. In short, M&M are being wooed; and both like being wooed because it feeds their “global strategic autonomy” dreams.

As the White House will note, this comes just weeks after France and Germany announced at the G7 that they would stand behind a US-led effort for a green, democratic “B3W” alternative to China’s Belt and Road. Ultimately M&M -and the EU if they get a voice- may still need to decide which strategic road to go down; or if they will just to do the catering for the rest of the world and have no real say on anything. That is also a truly great gamble – and from one leader who is shortly to be handed her chips.

Allow me to finish by tying all the above threads together via the following conclusion from an expert on green energy transitions – which the EU (and US) are so very big on:  

“…Governments need proactively to anticipate energy security risks surrounding market concentration, critical minerals and an increased reliance on electricity systems, including their vulnerability to cyber attack: in 2050, almost 50% of global energy would be used in the form of electricity, up from 20% in 2020. This will necessitate a huge increase in the production of lithium, cobalt, nickel, graphite, rare earths and copper, whose supplies must be secured by individual nations. As the mining or processing of these resources is concentrated in only a few countries, potential geopolitical problems seem almost inevitable.”

Or, just carry on as if they aren’t, Mr Market and Mrs Merkel: there’s a great gamble for you!