By Michael Every of Rabobank
I have repeatedly stressed how ridiculous it is to look at US jobs data when they are just estimates of the small monthly delta of a very large number strained through an algorithm and seasonal adjustments. The ADP report saw a shock fall in jobs, then non-farm payrolls --whose methodology the ADP uses!-- saw a shock surge. Yet the adjustment was far larger than normal despite more unadjusted jobs lost as the Great Resignation continues and the working week shrinking. Worse, there were vast backward revisions for years. The million jobs created last summer now happened this winter. Economic history was just rewritten – and we are supposed to take it seriously.
Regardless, a Fed policy error is now baked in…unless what went up in January comes down equally stupidly in February right before the FOMC has to pull the trigger pointed at its own head. Yet how can they not when ultra-easy fiscal and monetary policy, against a backdrop of supply chains now offshore (because “it’s cheaper”), or dominated by oligopolies or monopolies (because “it’s cheaper”), ends up with everything being more expensive? The market response, based on the yield surge we are seeing so far, is going to be very messy.
Bloomberg jumped the gun(s) Friday with a headline saying Russia’s invasion of Ukraine had started. Not yet. However, we still have an escalating military build-up. The US variously claims war could start as soon as today(!) and would see up to 50,000 Ukrainian casualties vs. just 4,000 soldiers for Russia, and 5 million refugees fleeing to the EU: Kyiv would fall in 72 hours. The US also believes Russia will hold a nuclear drill to coincide with an invasion to warn the world not to intervene: but some, like the Ukrainian government, are more upbeat; and some believe the US is only saying this to pressure Ukraine into surrendering – as more US troops arrive in the EU.
Germany’s Bild has even wilder claims that Russia plans to invade, rig a referendum, and absorb Ukraine – with internment camps for any resistance. This is hard for markets to believe: camps in eastern Europe - when has that ever happened? Yet China’s Olympics, where a Dutch journalist was dragged off air on live TV, had a Uyghur light its Olympic flame, which as the NBC anchor stated live is “quite provocative. It is a statement from the Chinese president, Xi Jinping… It is an in-your-face response to Western nations, including the US, who have called the Chinese treatment of that group genocide.” It also demonstrates Western markets and businesses don’t respond to such allegations after the fact, let alone before. And when they do get involved, it is to point fingers at the West. Ben & Jerrys tweeted: “You cannot simultaneously prevent and prepare for war. We call on President Biden to de-escalate tensions and work for peace rather than prepare for war. Sending thousands more US troops to Europe in response to Russia’s threats against Ukraine only fans the flame of war.” There are no Vegetius fats in their products, and on-line responses are that their newest flavour is “appease-mint”, now with “added Neville Chamberlain”. In short, don’t look to the hobby horse cavalry of Western businesses/markets to react unilaterally even if we were to see internment camps. ‘Market forces’ don’t work when morality costs money rather than making it. Realpolitik rules.
Which is why Russia and China announced an historic “no limits” alliance: politics, military, economics, trade (with a new 30-year deal for gas delivery, and Russia allowing all its regions to export grain to China for the first time), tech, space, and finance (to work around US sanctions) aimed at a new world order. China hence backs Russia’s security demands that NATO must be rolled back, and Russia is supporting China over Taiwan. The US now faces a two-front military challenge from an economic alliance loaded with arms and resources across two claimed ‘spheres of influence’: Europe/the Caucuses, and Asia-Pacific. It will need far more support in both, e.g., Russia is already now able to send troops from the Chinese border to Ukraine. Pointedly, the US National Security Advisor has already said that China would “end up owning some of the costs” if Russia invades Ukraine.
For those who like to ignore guns to others’ heads, also note the official Russian statement deliberately subverts the West in saying: “…democracy is a universal human value, rather than a privilege of a limited number of States, and…its promotion and protection is a common responsibility of the entire world community... A nation can choose such forms and methods of implementing democracy that would best suit its particular state, based on its social and political system, its historical background, traditions and unique cultural characteristics. It is only up to the people of the country to decide whether their State is a democratic one…Russia and China as world powers with rich cultural and historical heritage have long-standing traditions of democracy, which rely on 1,000 years of experience of development, broad popular support and consideration of the needs and interests of citizens.” So, both are now democracies, while the elitist West says it needs multiparty elections, the rule of law, press freedom, and not poisoning the opposition.
That new claim --and Mother-Russia-and-apple-pie stuff about peace, cooperation, growth, and the UN-- is to sell the alliance to the world and to Western markets/businesses. Indeed, Wall Street’s logical thought progression is likely to be:
And, given the relative scale of the two camps and the single-minded determination of one’s state-business nexus vs. the vacillation of the other’s, one could also add:
As I warned back in 2017, we are in a Cold War: this time between liberal(ish) democratic oligarchic financial capitalism with asset bubbles, and authoritarian “democratic” oligarchic state-capitalism with asset bubbles. Perhaps that lowest common denominator is why Wall Street does not see this will bite them. Yet bite them it will – or the concept and geography of ‘Western’ will not mean much long term/in as many places.
The US is already trying to decouple in fits and start, and this will only speed up; Sweden is reopening a Cold War anti-Russian fake news unit; and Der Spiegel reports Germany will now designate China as a “systemic rival” rather than competitor.
Yes, Western firms will say: “We need a foot in both camps.” But that was where they needed to be five years ago when all we had was a trade war. In a Cold War, playing both sides won’t play well with politicians if firms’ profits/vulnerabilities mean losses for ‘The West’. In a hot war, things will be far worse. And if we see the camps Bild is talking about, even more so and even faster.
Yes, Wall Street will say: “Yummy, appease-mint!” Yet a Cold War means some capital controls will come in, and capital won’t. In a hot war, things will be far worse. And if we see the camps Bild is talking about, even more so and even faster.
Or maybe the West will see the rift instead. French President Macron goes to Moscow to talk to Putin again today, saying in advance that: he is optimistic he can secure a de-escalation; Russia has no intention of invading Ukraine, but wants to “reforge” relations with NATO; and while “The security and sovereignty of Ukraine or any other European state cannot be a subject for compromise, it also legitimate for Russia to pose the question of its own security… We must protect our European brothers by proposing a new balance capable of preserving their sovereignty and peace. This must be done while respecting Russia and understanding the contemporary traumas of this great people and nation.”
What new balance? Does Macron think he can somehow flip Russia’s geostrategy (despite valid questions over how the two new friends really trust each other)? How much of Europe’s current security framework is he offering to de-escalate to try? As Romania asks for US F-35s, which NATO members will have to disarm? Munich, Yalta, and Potsdam will spring to said NATO members’ minds as they watch their security debated over their heads, just as the EU recently saw its debated just between Russia and the US.
We are in the crazy position now where, even against the backdrop of currently volatile markets, and flapping central banks, it may be easier to predict what the long-run cost of borrowing and key FX rates in Europe will be than which political geographies will be party to them!
Years ago, I argued history showed the unsustainable nature of Western capital funding a rival bloc’s military development while China and Russia sell their output to the West for dollars that are recycled to finance the US military. The unhappy breakdown of that contemporary echo of the pre-1914 UK-German dynamic should now be abundantly clear, even to the most somnolent and solipsistic.
Future historians will look back at the recent announcement of a Russian-Chinese alliance as a 21st century turning point. Markets would be wise to do the same, even as they focus on what is likely to be an historic policy error by central banks.