The Preparations To “Buy All The Things” Are Taking Place
The Preparations To “Buy All The Things” Are Taking Place
By Michael Every of Rabobank
Inflation Dragon? Blame Canada !
Imagine you are Jay Powell . You come into the Fed being called the new ‘ Tall Paul ’. You then preside over the worst inflation since Tall Paul . So, you decide you have to do what Tall Paul did after all. All the other central banks agree: off you all go into battle against the Inflation Dragon and its evil army – except the BOJ, which nailed itself to the ground years ago.Markets throw all manner of things, and expletives, at the charge led by the Fed’s 75bp strides: but as the inflation-fighters are united, they have strength in numbers.Except almost immediately the RBA decides that while it is absolutely alongside the Fed, it suddenly needs to do up its shoelaces and then go at a 25bp pace. While down on one knee pretending to be doing so, it sneaks out a property magazine hidden inside its shirt and starts drooling over it while shouting, “Right behind you, mate!”Markets take this as a Fed pivot ahead. They price for an easing cycle, effectively strengthening the inflation foes on the other side via lower borrowing costs , higher commodity costs , and helping to arm the Inflation Dragon’s army by buying them ‘all the things’. Powell responds by running further ahead, like Aragorn in the final battle of The Lord of the Rings. The RBNZ is right alongside him, like the Hobbits in the same. Markets get the message.Then the BOE starts stabbing its own government in the back because it doesn’t like how badly-designed its armor is (being full of fiscal holes). It won’t be able to catch up with the front line inflation fighters, perhaps – but the PM is dead, long live the PM, so top hole!
Markets take this as a Fed pivot ahead again.
The Fed keeps running, and the others say they are still with it. Markets get the message again.
Then the BOC decide while it is right with the Fed, eh?, and all aboot policy tightening, eh?, it also needs to run at 50bp, not 75bp, and maybe 25bp next. (Because the property magazine it has stuffed up its shirt might fall out.)Markets are again aggressively pricing for a Fed pivot. The dollar has been smacked this week; 10-year Treasury yields have tumbled back to around 4%, and equities leaped before virtual tech firm earnings met actual reality; but the preparations to ‘buy all the things’ are still taking place.Apart from the RBNZ and the red-mist ECB, climbing up from an underground bunker, so still far behind –and seen going 75bp today– Powell is now way out in front in this battle.If the Fed is forced to go 50bp next week “because Canada ”, we are in Pivot-ville, population: Powell , as far as markets will be concerned. Buy pictures of monkeys in sunglasses. Buy pictures of Powell in sunglasses. Buy pictures of monkeys in sunglasses laughing at Powell in sunglasses. Also buy shotguns and duct tape, metaphorically. Nouriel ‘Dr Doom’ Roubini is predicting exactly that: a pivot, and an inflationary implosion in the US dollar.We will still get a recession… the Saudis just said they expect the next six months, and probably the next six years, to be very good for the Gulf. The quid pro quo is that it will be very bad for everyone else. Yet are very unlikely to be able to slash rates given the Inflation Dragon would still be there, and all those who want to hoard gold would be pushing the dollar into the mud.
Meanwhile, the Saudis are right.
BASF just said it is permanently downsizing in Europe due to energy costs. That is the European deindustrialisation market bean-counters aren’t focusing on because it isn’t on the Bloomberg calendar: where is the GDP growth to fill that output gap – more haircuts? South Korea’s Hynix says it may have to close a key China semiconductor plant due to recent US measures . China itself saw commentary that investors should expect an imminent “revaluation” lower in property prices because they had been pushed up to unsustainable levels by the finance sector: is that an extension of Common Prosperity? The economic impact would be enormous if so.While BASF is shifting output to China, because Germans, Hynix is more likely to shift to the US. Indeed, that is where the economic centre of gravity is going to be vs. both Europe and China, it seems. What does this mean for the Fed and rates, looking at things from a structural perspective?What we can all see is that if Powell keeps running ahead to fight the Inflation Dragon solo, we will see another violent market reaction. The dollar will soar; yields will soar too; and all the other central banks, who clearly are not as strong and brave as they want to make out, will either have to follow, or get together to try to intervene, breaking global central bank cooperation , or decide they don’t like this whole war and dragon business anyway.So, what to do, Jay? We shall see next week. But while he ponders, he can perhaps sing “Blame Canada ” to these lyrics:
“Times have changed; Other central banks are getting worse
They won’t stick to hawkish policy; They just want to pivot and reverse!
Should we blame their government? Or blame their society?
Or should we blame their idiots on TV?
Blame Canada ! Blame Australia!
With their teeny last rate-rise; And flappin heads so full of hawkish lies
Blame Canada ! Blame Australia!
We need to form a full assault; It’s the other weaklings’ fault!
Don’t blame me; For my investment plan
I saw their hawkish promises; Now my shorts are in the can
And my asset manager once; Had Burry’s picture on his shelf
But now when I see him he tells me to short myself!
Well, blame Canada ! Blame Australia!
It seems that everything’s gone wrong
Since Canuck-Aussies came along
Blame Canada ! Blame Australia!
They’re not even real countries anyway
My GDP could’ve produced doctors or engineers yes it’s true; Instead it’s heating up assets like pigs on a barbecue
Should we blame the matches? Should we blame the fire?
Or the low, low rates which pushed asset prices higher?
Heck no!
Blame Canada ! Blame Australia!
With all their Trudeau hullabaloo; And their housing addition too
Blame Canada ! Shame on Australia!
Fooooooooor…..
The pivot we must stop; The assets we must smash; Laughter and fun; must all be undone
We must blame them and cause a fuss
Before someone thinks of blaming uuuuuuuuuuuuuuuuuus”
Of course, these are not the lyrics I would have chosen myself, but as Eric Cartman sings so sweetly later in the same movie: “I want this V-chip out of me; it has stunted my vocabulary.”
Tyler Durden
Thu, 10/27/2022 – 10:51
They price for an easing cycle, effectively strengthening the inflation foes on the other side via lower borrowing costs, higher commodity costs, and helping to arm the Inflation Dragon’s army by buying them ‘all the things’.
Powell responds by running further ahead, like Aragorn in the final battle of The Lord of the Rings. If the Fed is forced to go 50bp next week “because Canada”, we are in Pivot-ville, population: Powell, as far as markets will be concerned. But while he ponders, he can perhaps sing “Blame Canada” to these lyrics:
“Times have changed; Other central banks are getting worse
They won’t stick to hawkish policy; They just want to pivot and reverse!
Should we blame their government? Or blame their society?
Or should we blame their idiots on TV?
Blame Canada!
