Two Bears… And Nowhere Near Enough Cocaine

By Michael Every of Rabobank

Cocaine Bear

I get quite a lot of direct and indirect feedback to the Global Daily. Some of it is positive, some of it is negative – and a lot of that is downright unpleasant, and some of it is ‘eclectic’ – like a detailed analysis of the collapse of the economy of Atlantis. However, yesterday was the first time I was told I was “on cocaine” for arguing higher rates can, in some circumstances, lead to higher inflation. (For more on which, see here.)

However, the critic didn’t grasp the point I was making. As our own Fed Funds forecast rises to 5.50%, with upside risks of 6.0%, I was continuing the argument seen here since early 2022: that we risk even higher rates if the structure of the economy remains one of corporate concentration and “fictitious” bubbles in stocks, bonds, crypto, and/or commodities over “productive” capital investment in new supply chains. The ‘narc’ thought I was saying rates must tumble to protect those bubbles –as former BOE policy setter Blanchflower was arguing this week– when I wasn’t.

Interestingly, Bloomberg reports money is now piling into bets US rates will go as high as 6% as well as into opposite bets that rates collapse. In other words, two bears, but no Goldilocks. Indeed, her absence in 2023 was my own negative feedback to vanilla market year-ahead calls last month.

Even so, I guess I am a –totally teetotal– ‘Cocaine Bear’ of sorts. (Which is a B-movie by the way: “After ingesting a duffel bag full of cocaine, an American black bear goes on a killing rampage in a small Georgia town where a group of locals and tourists must join forces to survive the attack.”)

Once upon a time, and for a long time, I held the Blanchflower view. Using Kalecki and Marx’s critique of “fictitious” over “productive” investment, which parallels the Austrians’ and lives on in Minsky and post-Keynesians, I held that every lower rates peak had to be followed by a deeper rates trough, because labor was squeezed so hard by capital there was no end demand.

Coincidentally, at the launch of his book on ‘The Crisis of Democratic Capitalism’, the economics editor of the Financial Times, Martin Wolf, stated: “You can’t be an intelligent social scientist unless you’re a Marxist.” I’d argue you can’t be one if you don’t understand what Marx argued, and where he was wrong.

However, in recent years geopolitics has been my dialectic, and the interface between it and Marxism-Leninism in particular. Regular readers will know I came to the view in 2016 that as FX Wars began and Cold war and Great Power struggles re-emerged, the economic and market game would change. Inflationary actions and policies unacceptable under a global neoliberal consensus would become necessary under a raw, geopolitical paradigm. That made me a ‘post-post-Keynesian’ saying global neo-mercantilism lay ahead.

Ironically, most of the most unpleasant feedback I get to the Daily again confuses my core argument. If you think the US needs to go back on gold, that implies it needs to sharply reduce its trade deficit, because that’s the only way to be stable on gold. That means either a collapse in living standards or onshoring and reshoring to trusted partners; and that means a strong military to ensure security and the flow of goods to and from trusted partners. Which is called neo-mercantilism (and means no asset bubbles and higher rates too, even if the Fed doesn’t set them). I just think we will try it without gold given the legacy hegemony advantages of the dollar, including that you can spend what you want on the military when needed.  

Indeed, as the Pentagon says, “production is deterrence,” @LeeHudson_ at Politico notes the US DoD just entered into a Security of Supply Arrangement with Denmark’s Ministry of Defence, where both agree to provide reciprocal priority support for goods and services: Denmark joins Australia, Canada, Finland, Italy, Japan, Latvia, the Netherlands, Norway, Spain, Sweden, and the UK on that list.

President Biden’s State of the Union yesterday also talked about industrial policy in MAGA-nificent fashion, stressing, “I will make no apologies that we are investing to make America strong. Investing in American innovation, in industries that will define the future, that China intends to be dominating.” Xi Jinping spoke the same day to claim China’s “miraculous” development shows “modernisation does not equal Westernisation”, and call for more Marxism, “self-reliance”, and “social fairness.” That is called global neo-mercantilism.

As a result, a recent Reuters Events whitepaper (‘A generational shift in sourcing strategy: A global and European deep dive into near-sourcing, nearshoring and reshoring in the post-pandemic world’) showing:

• 67% of global retailers and manufacturers say that global supply chain disruptions have changed where they source materials and components from;

• 58% of those who have shifted sourcing say that further relocation remains a high priority, or the top priority, for their business;

• 76% do not expect supply chains to normalise in the 12 months following Q3 2022; and

• 37% are planning to change manufacturing locations.

This is called structural change, and that things are not as cheap as they used to be. If goods prices are going to trend higher, then services inflation needs to trend lower. That needs a central-bank interest rate response given where unemployment remains. Likewise, central banks need to encourage supply chains to move to them – and that means not allowing asset bubbles to divert capital from the productive to the fictitious.

Meanwhile, US journalist Seymour Hirsch reports, via an anonymous source, that it was the US and Norway, not Russia, which blew up Nord Stream – met by official White House denials. As I wrote the last time this rumor was floated, it doesn’t matter if it’s true or not in terms of how one should see markets. If Russia blew up the pipeline, we are in a dangerous geopolitical world where asset bubbles are no longer what The Establishment is most worried about. If Norway and the US blew it up then the same is true – on cocaine.

Indeed, let me refer back once again to the report we published on Friday on balance of payments -and power- crises, which showed if you assume a harsh geopolitical world of supply constraints, export constraints, no easy labour market rebalancing, and twin deficit constraints on fiscal and monetary policy for some economies, then their growth prospects are structurally undermined; rates are structurally higher; exchange rates are structurally lower.

Now imagine you are Europe, dreaming about an energy transition towards “strategic autonomy”, using minerals and technology you don’t have or control supply chains for, with growing twin deficits, and while reliant on US gas, US guns, and US Eurodollars… and you think maybe it was the US and Norway who blew up NordStream, while on the other side you have Moscow.

Two bears – and nowhere near enough cocaine?