Rabobank: Markets Decided To Get High Again Rather Than Grapple With Reality

By Michael Every of Rabobank

Fear and Loathing in Los Mercados

We were somewhere around Barstow on the edge of the desert when the drugs began to take hold. I remember saying something like “I feel a bit lightheaded; maybe you should drive….” And suddenly there was a terrible roar all around us and the sky was full of what looked like huge bats, all swooping and screeching and diving around the car, which was going about a hundred miles an hour with the top down to Las Vegas.

Yesterday’s US PPI number reinforced the giant custard pie factor of the CPI number, soaring 0.6% m/m headline to 6.2% y/y and 0.7% m/m core to 4.1% y/y. In short, in the near term prices are going to get high. The market response: sell commodities and crypto, and buy stocks and bonds. In short, markets decided to get high again too rather than grapple with reality.

Yes, the Colonial pipeline is back on line, and so energy prices reversed. And despite Elon Musk pumping Dogecoin –because it was a day ending in ‘y’, and Tesla’s shares were dropping again?– Colonial paid *Russian* hackers a ransom of USD5m IN CRYPTO, which could not make a clearer case for why the SEC might want to be step in. Yet to think risk is suddenly on again for real is an interesting lifestyle choice.

The pipeline cyberattack, which put a swathe of key US military airbases out of operation(!), saw President Biden claim Russians were involved – but not the Russian government; that as he publicly announced the US is considering a response in kind. Will it be via the government, or just some people he knows in Langley, Virginia? Japan is extending its state of virus emergency, even as the Olympics is still apparently on very soon. India’s Covid crisis is still raging. And in Gaza, Hamas declared it deliberately fired rockets at Israel’s nuclear reactor in Dimona –which missed or were shot down– despite being downwind and not far from it. Time to roll out this meme again.

Of course, Wall Street wanting to get (stocks) high is hardly new: think of ‘The Wolf of Wall Street’. And a world flooded with QE and central-bank intervention like cheap heroine can justify trading that looks like what one would normally do on a combination of laughing gas, poppers, and K. But are we perhaps taking things too far? The PPI and CPI numbers, many claim, suggest we are close to a QE overdose as too much liquidity chases too many real world things. However, markets are going to market.

Indeed, at a micro level – literally – I think back to news from a few weeks ago that a US start-up dismissed its CEO because he took LSD before a meeting: he told Bloomberg he was experimenting by taking a limited amount of the drug, or micro-dosing, in an effort to boost his focus(!) Perhaps the most straight to the point one can make here is that anyone who thinks taking LSD before a business meeting to enhance focus really shouldn’t be in charge of anything. Even making a bowl of cereal. However, I can perhaps see what the CEO was trying to ‘grok’.

Consider Hunter S Thompson and ‘Fear and Loathing in Las Vegas’. The book, and movie, are not exactly the stuff which Zoom or Teams meetings should replicate (though many of us may have been tempted to want to throw something electric into the bath at some point). Yet it isn’t just a hedonistic tale of Olympian proportions. It has genuine cultural, and even socio-economic significance. In the words of one reviewer, it “holds an almost mythic quality in its mix of Gonzo reportage, drug frenzies, and soulful meditation of the Sixties’ generation of America. It reflects the loss of a utopia and chronicles its spiral into violence and mass cultural sell-out.”

Far less splenetic, Huxley’s ‘The Door of Perception’ is all about trying to get a wider vision through psychedelic experience: “The man who comes back through the Door in the Wall will never be quite the same as the man who went out. He will be wiser but less sure, happier but less self-satisfied, humbler in acknowledging his ignorance yet better equipped to understand the relationship of words to things, of systematic reasoning to the unfathomable mystery which it tries, forever vainly, to comprehend.” Doesn’t that sound a better trading mind-set than “Buy all the things?”, or “Buy a crypto that insults Elon Musk with your life savings at 100 times leverage”?

Or turn back closer to Vegas and Yaqui psychedelic mysticism via Carlos Castaneda and ‘The Teachings of Don Juan’: “The average man is hooked to his fellow men, while the warrior is hooked only to infinity”; and “A man of knowledge is one who has followed truthfully the hardships of learning, a man who has, without rushing or faltering, gone as far as he can in unravelling the secrets of personal power.” One can see the ego trip involved in wanting to become a Man of Knowledge in markets (which the Don specifically warns about the dangers of, by the way).

Yet all of that extra perception of how things really connect, and even the ability to turn into a crow, won’t help when it comes back to the simple fact that central banks are still pumping, and all the hawks have turned to doves. Sometimes ignorance can be bliss.

My own personal, prosaic, and melancholy response is to harken back to an old movie from 70’s/80’s US narco-comedians Cheech and Chong –I forget which one– where Chong is tripping in the back of a car while in drag, and wearing a feather boa. (“Because Cheech and Chong”.) At some point, he starts to get The Fear and wails to get the boa off of him because it’s alive. Cheech tries to calm him down that it is in fact dead. Which only sees Chong freak out even more because he has a dead object round his neck.

In short, there’s no ‘happy ending’ that springs to mind with all the conflating problems we have right now. Inflation and rate hikes? Bad. Inflation and no rate hikes? Still bad. Stagflation? Very bad. Deflation? Really bad. And let’s not get started on the underlying big picture risks. Nonetheless, markets are going to market while they can: by focusing on getting (stocks) high.

“No, this is not a good town for psychedelic drugs. Reality itself is too twisted.”