“It Only Hurts When I Laugh”

By Michael Every of Rabobank

It only hurts when I laugh

Minister: Good morning. I’m sorry to have kept you waiting, but I’m afraid my walk has become rather sillier recently, and so it takes me rather longer to get to work. Now then, what was it again?

Mr. Pudey: Well sir, I have a silly walk and I’d like to obtain a government grant to help me develop it.

Minister: I see. May I see your silly walk?

Mr. Pudey: Yes, certainly, yes.

(He gets up and does a few steps, lifting the bottom part of his left leg sharply at every alternate pace. He stops.)

Minister: That’s it, is it?

Mr. Pudey: Yes, that’s it, yes.

Minister: It’s not particularly silly, is it? I mean, the right leg isn’t silly at all, and the left leg merely does a forward aerial half turn every alternate step.

Mr. Pudey: Yes, but I think that with government backing I could make it very silly.

—————–

It’s another payrolls Friday. This time, can a weak print provide more ‘pivot-fuel’ for a market already so drunk on it that it won’t heed the Fed saying “WRONG!” over and over – as they just did yet again yesterday? Conversely, will a strong payrolls number sober the market up? We have to wait for the usual silly game of guessing a silly number and the sillier market reaction.

Meanwhile, government ministries are busily pushing out silly policies. Picking an example would be like shooting fish in a barrel, but closing down nuclear power plants in an energy crisis is very high on the list.

Central banks are pursuing silly monetary policy in the eyes of markets, where yield curves continue to invert and bond yields fall (even at the short end!) even as official interest rates rise. For example, as the Bank of England hiked rates 50bps to 1.75%, the most in 27 years, 2-year gilt yields fells from 1.91% to 1.84%, with future hikes being priced out and cuts being priced in, while the 10-year yield slipped 3bps to 1.88%. GBP fell against its peers.

The silliness also extends right across the commercial world. Warner Brothers just made a $70m ‘Batgirl’ film so bad they are opting to can it rather than put it up in any format on any streaming platform – which really says something given the pile of drivel on most of them. They also say they are going to drop the ‘spend, spend, spend’ streaming model though, which is actually very sensible.

Why is this silliness happening? Not from any love of comedy. In a recent interview, ex-Python John Cleese –still no dead parrot at 82– underlined the specific truism that, “In Hollywood, nobody knows anything… but they all laugh as if they do.” Relatedly, he recalls that back in the 60’s, almost all of the top BBC executives tried to cancel his legendary comedy show after just a few episodes because they didn’t get it. More broadly, he stressed such managers (rather than those with experience of doing or creating) are now in charge all over the place.

Indeed, in his experience, 90% of people in most professions don’t know what they are doing. Worse, 90% of those who don’t know what they are doing don’t know that they don’t know what they are doing, “which makes them the most dangerous and destructive”. And inadvertently funny – because if you don’t laugh then you cry.

One would like to think there are exceptions for surgeons, pilots, etc., but Cleese suggests this is not the case. He said that in a lifetime of deliberately asking people of different backgrounds to honestly tell him how many of their industry participants actually know what they are doing, the highest share he has ever been given was 15%(!) He didn’t say which industry that was for.

Are politicians, economists, or central bankers exceptions? Don’t make me laugh! Next British PM Liz Truss wants to put the BOE under review (like the RBA already is), perhaps threatening their independence, on allusions to Japan’s ultra-low rates policy – as if somehow that is applicable to a UK with traditional current-account deficits, rather than surpluses. Presumably slashing taxes and red tape needs to be matched by slashing rates, and growth will magically take care of itself. Let’s see how GBP magically takes care of itself if that comes to pass.

Of course, the BOE have made themselves few friends with their honesty about the staggering scale of the economic downturn and inflation upturn ahead – which they utterly failed to see coming. As Stefan Koopman notes in his review of the ‘Nightmare on Threadneedle Street’, the Bank just warned of the longest recession since the GFC, with a five-quarter downturn and cumulative GDP growth of -1.7% in the next three years. It also forecasts UK inflation to hit the highest in 42 years ahead at over 13%, and to still be around 10% a year from now. Worse, there will be a leap in unemployment from 3.7% to 6.3%, and the largest decline in real household income growth on record. Underlying this grim set of forecasts is a dark view on the UK’s structural rate of growth; a consequence of subpar investment and weak productivity growth, which makes the economy highly sensitive to shocks.

By contrast, the Fed says there is no US recession ahead, even as the US yield curve screams there will be one –what a good one-liner that is– and the White House and Paul Krugman dispute what recession actually means, taking us into more surreal comedy.

The ECB says the same about recession, even as EU wholesale electricity prices rise to industry-crushing levels, and Russia makes clear “sanctions and non-compliance with current contractual obligations on the part of Siemens make it impossible” to restart normal NordStream 1 gas flows again: resulting runs on diesel and heating oil are already being reported in Germany. Pure black comedy.

The RBA argues that while there is only a “narrow path” to avoid recession, GDP growth will remain strong, the labour market is red hot, inflation will peak soon and come down by itself, unemployment will hardly rise at all, and the wobbling housing market won’t be hit by higher rates because some households have large buffers. Yes, they are called households without mortgages. How one can argue that stops people with large mortgages from being pressured requires very silly random econometric walks. Presumably today’s Statement on Monetary Policy will have more such gems.

The PBOC aren’t saying anything much, as 1,666 Chinese property developers had missed commercial paper payments at least three times in the last six months as of June, up from 135 in January, and talk is still of when the mega-bailout happens, the cost of which will end up on its balance sheet. Recall when everyone solemnly said this was all about Evergrande, and was “contained”, and/or that the US had debt and asset-bubble problems, but China didn’t? It was ironic, and you didn’t get it at the time.

There are now lots of sensible financial media pointing to a deep ‘lack of Truss’ in central banks. Rightly so. However, they still aren’t getting the punchline about where this all goes next – it surely isn’t back to ‘2%-CPI targeting independence’. As such, many people with silly skill sets will need to learn to walk new walks.

And don’t delude yourself that current markets are any kind of exception from Cleese’s 10% ratio. After all:

Financial conditions continue to ease even as base rates rise, and the more they ease, the more rates will have to rise. US mortgage rates are now back to around 5% when they were recently at 6%, putting more juice back into the system. Is that another 100bps the Fed has to go?
Despite Saudi Arabia raising oil prices for Asia steeply, US WTI prices just tested below $90. Is it US demand destruction, or claims that its gasoline usage is now lower than in 2020 under lockdown that is most questionable?
A wider basket of commodities are also far off their recent highs even as there has been only marginal improvement in most fundamental supply-demand, and none in related geopolitics. That would make sense if the Fed’s aggressive rate actions were pushing commodity-backed ‘new world orders’ off the stage, as I have argued they will have to try to do – but financial conditions are easing, not tightening. Then again, ‘Copper Worth Nearly Half a Billion Dollars Goes Missing in Qinhuangdao, China’ says Bloomberg, pointing to why the idea of holding raw commodities over the greenback as a ‘safe haven/reserve’ leaves others laughing longest.
Yet stocks are trying to snigger at central-bank actions and/or looming recessions, “because markets”. And, as a colleague related to me this week, perhaps because so many funds are so far in the red that they have nothing to lose in going all in on leveraged longs, hoping hopium acts like helium. Actually, all it will do is make their voices sound high, squeaky, and silly.
Even the US market mega straight man is getting into crypto just as everyone else sees what a silly joke it was all along and new regulation looms.

Cleese also stressed something else important: the 10% rule does not apply to comedy, because you cannot fake being funny. You either are or you aren’t. Neither can you repress a laugh when something is funny, even when it ‘shouldn’t’ be. That’s why the role of the fool as truth-teller in medieval courts was so important, and why authoritarians are renowned for their lack of a sense of humor – the levelling nature of comedy is always deeply iconoclastic and revealing.  

Markets used to have that function. However, now *they* are the dangerously destructive bad comedy.

On that note, I will leave you to wait for US payrolls and all its related silliness – Happy Friday!