Rabobank: Free Speech And Free Markets Go Hand In Hand; We Have Neither

Submitted by Rabobank’s Michael Every

I keep repeating that (some) markets are not properly reflecting reality and that the power of markets is not in their elevated heights (“Dow 36,000!”) but in their honest price discovery. They are supposed to be the little boy pointing out that the Emperor has no clothes. If they don’t do that, they aren’t good for much. Except perhaps acting as a substitute for wage growth, if you want to join me in believing this has been global central-bank policy for the past few decades. (And which may be needed again soon given reports in the Fed’s latest Beige Book that wage and benefit cuts are already being seen; they also make the rich much richer, of course – which I am sure is just a coincidence.)

At a time when the corpulent Emperors of monetary policy are sitting on as many little boys as possible to shut them up, and the financial press are mainly throwing bouquets of flowers at their bare majesty, it seems appropriate that in a general sense we are seeing arguments about news-flow as a corollary to pricing signals. Yes, ideally we don’t want to be recommended bleach to drink as a virus cure. However, as philosophers have pointed out, and market theory is supposed to accept, all voices may contain a slice of the truth. As Voltaire said “I disapprove of what you say, but I will defend to the death your right to say it.”; nowadays that would more probably be “I defend to the death my right to disapprove of what you say.” After all, Voltaire was a rabid anti-Semite who should probably be de-platformed.

As such, it seems appropriate that we are seeing US President Trump get drawn into a row over Twitter, which slapped a ‘fact-check’ label on one of his latest tweets. There are claims that he will sign an executive order today to strip US social media giants of the legal immunity they claim as ‘platforms’ if they act as censors, which de facto makes them publishers instead. (As well as being gargantuan corporations that like the things that gargantuan corporations do.)

So is this Trump censorship, or is it censorship of censorship? Expect arguments to rage. Yet consider that this month alone we have seen passionately anti-Trump Michael Moore’s new film ‘Planet of the Humans’ dropped from YouTube “for copyright reasons”, and YouTube also admit that a “software glitch” had seen a series of videos critical of China all demonetised. That’s a trend many other YouTubers have complained about, and which has led the incredibly-popular Joe Rogan podcast to move to Spotify to ensure freedom of speech. (And USD100m as a signing fee.)

Also, if we are going to fact check Tweets, how about ones from all politicians or economists? Is it “true” that austerity is a great idea in a recession, as so many voices said post-2008 and some still say again now? The policy has failed utterly by many measures. Is it “true” that free trade always generates prosperity? Country after country is scrambling to bring supply chains home in the Hamiltonian argument I have been making for many years. Is it “true” QE narrows the gaps between rich and poor, as an ECB tweet last year tried to show graphically? I say otherwise: do I get flagged for it? Is it “true” we will see a ‘V-shaped’ recovery in a 2-metre/6-foot economy, as some central bankers are saying? Is it “true” that debt liability sharing within the Eurozone is a good thing? There are two very different answers to that, depending on which side you stand – as we see with the new proposal of a huge new EU budget, including grants(!), and the pushback from the opposed Frugal Friends. In short, free speech, freedom to see all sides of complicated arguments, and free markets ideally all go hand: and if one goes, they can all go.

And perhaps they have. Because markets are again largely ignoring what just happened between the US and China. Yesterday US Secretary of State Pompeo told Congress “Hong Kong does not continue to warrant treatment under United States laws in the same manner as US laws were applied to Hong Kong before July 1997. No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground.” It is now a certainty Congress will vote to trigger the ‘nuclear option’ of removing Hong Kong’s separate legal status, which would open the door to restrictions on trade, visas, and technology, as well being a huge psychological vote of no confidence in Hong Kong’s future. The Hang Seng reaction? To go up, while CNH is flat. This was probably party due to mainland money – or perhaps the locals mistook the US response for that of Angela Merkel, who in bold EU values-based foreign policy fashion basically shrugged.

Indeed local Hong Kong chatter is again that this latest US step, which wasn’t going to happen a few weeks ago, now does not mean anything as China is the trading future and the US is the past – and powerless. Fact-check, please! If the imposition of a Hong Kong national security law is approved by the National People’s Congress today we will almost certainly see US sanctions against Chinese entities in Hong Kong (on top of the risk of other sanctions stemming from a Uighur human rights bill just passed by the House of Representatives). These could make Hong Kong of no de facto use to Beijing as a capital conduit – and hence of little use at all. Welcome to the Eurodollar weapon. Some say this no longer matters because China can just access USD via other banking centres. Let’s put a fact-check marker on that too, because is the US really going to let China circumvent sanctions that easily? What just happened with Iran, for example?

Today we will find out how China is going to react to the US action – and also to the Canadian court decision to proceed with the “outrageously wrong” extradition of Huawei CFO Meng Wanzhou to the US. On the US the Global Times editorial today notes: “A long-term rivalry between China and the US is inevitable.…[a] core advantage of the US is its financial hegemony, which will make China’s exchanges with the outside world inconvenient. If the US dares to resort to financial means, it will hurt the integrity of the financial system it leads. If a financial war spirals out of control, it is the US that will suffer the most.” Again, we need a (partial) fact-check there given the Fed is and can do whatever it takes and the PBOC isn’t and can’t. (Moreover, the editorial also says China will leap up the technology ladder to overcome US tech dominance: this as a report published yesterday argues China is “unlikely” to achieve its target of 70% self-sufficiency in semiconductor production by 2025. Tech, trade, and capital; tech, trade, and capital.) On Meng, the Global Times says Canada’s upcoming decision on Huawei is now key and “Whether Canada can keep its stance or will surrender to US pressure…will influence whether the already strained relationship will come to a full head.”

From underneath the Emperor’s ample posterior a muffled voice is shouting “Geopolitical risk!”; and while little boys may be stifled by layers of liquidity/flab, they still have sharp teeth that can bite – as can geopolitics. This may not matter for stocks given they can always be bought by central banks if needed – but it does arguably matter for key FX crosses, which along with low, low bond yields are still a fact-check we can rely on…like the honest brokers of social media(?).