“Everywhere You Look You Can See The Lion Lie Down With The Lamb”

By Michael Every of Rabobank

They shall beat their swords into ploughshares

Many peoples shall come and say, “Come, let us go up to the mountain of the Lord, to the house of the God of Jacob; that he may teach us his ways and that we may walk in his paths.” For out of Zion shall go forth instruction, and the word of the Lord from Jerusalem. He shall judge between the nations, and shall arbitrate for many peoples; they shall beat their swords into ploughshares, and their spears into pruning hooks; nation shall not lift up sword against nation, neither shall they learn war any more.” (Isaiah 2:3–4)

Everywhere you look you can ostensibly see the lion lie down with the lamb; but as Woody Allen noted, the lamb won’t get much sleep.

President Zelenskiy toured Kherson and declared the beginning of the end of the war, but he didn’t mean peace negotiations: Ukraine, according to some, is now in a position to throttle both food and water going into Crimea. What does Russia do if so?

President Biden and President/General Secretary Xi Jinping talked détente in Bali. Well, we’ve got the same energy crisis, high inflation, and collapsing global financial architecture (FTX), as Binance tries to do a ‘JP Morgan 1907’ (buying with crypto or dollars)? Will the US rescind its national security strategy focused on China, its technology controls focused on semiconductors, which it is strongarming Japan and the Netherlands to comply with, and its protectionist green industrial policy? Will China halt its supply-side growth, its military expansion, the naval base it is allegedly constructing in Cambodia, the agreements it has struck with the Solomon Islands, and Argentina, and its dual circulation and technology decoupling strategy? Do I have to answer? Also recall that under 70’s détente, the Soviet bloc controlled around a third of the world by geography: there is no way that the US is prepared to see a parallel order emerge with a smile and a handshake. As such, for both sides Bali was about tactics not strategy.

Indeed, in the background see ‘US military weighs funding mining projects in Canada amid rivalry with China’ to decouple supply chains upstream to downstream, as Canada just ordered a Chinese firm out of the same sector; Australia is likely to see the same mining trend emerging; China is mirroring this elsewhere. Understand once the Pentagon is investing, the private sector gets the message, just as is true with China, Inc. Your shares are going to being beaten into swords.

On which note, the same day markets were celebrating both détente and a ‘China pivot to growth’, Beijing released draft plans for a Social Credit System Construction Act to ”innovate social governance mechanisms, optimize the business environment, regulate the order of the socialist market economy, increase the entire society’s awareness of creditworthiness, carry forward the core socialist values, and complete a credit reporting system covering the entire society.” That will include foreign businesses. The Economist also reports: “Xi Jinping has revived references to the “Fengqiao Model”, a Mao-era reference to a small town that was praised for mobilising people to denounce one another. Xi eschews the chaos of that period, but still believes in using people to police one another… parts of Sichuan, Qinghai, Zhejiang and Anhui have rolled out new “十户长” systems, putting households into groups of 10 with “politically reliable” group leaders. They ensure that Covid controls and other party policies are implemented “to the nerve endings of the grassroots.””

Does this sound like the foundations for a Western market-friendly détente?

For those who find this too esoteric, despite it being the base all else is now built on, US markets failed to absorb Waller’s shooting down of the latest ‘Fed pivot’ narrative; partly as Brainard –now being tweeted as a possible replacement for Yellen rather than the hawkish Summers– spoke dovishly about two-way risks from over tightening and the risks of spillovers – like into major Democrat Party donors like FTX. Understand there is also no détente between Brainard/the Treasury, who want to pivot/ramp markets, and Powell – and he still calls the shots for now.

And for those thinking supply chains and labor problems are both cooling, so we can pivot away, Australia is “facing chaos” as the nation’s largest tug boat operator has warned it will lock out its crews from Friday over a three-year pay dispute. No tugboats, no big vessels docking at Aussie ports with any goods of any kind. But don’t worry – this is all transitory.

So despite Evander Holyfield and Mike Tyson jointly selling edible cannabis ears, because ‘if Tyson and been on them, he wouldn’t have bitten Holyfield’s ear off’, the latest in a line of commercial bites at that topic, I am far from convinced “Nation will not take up sword against nation, nor will they train for war anymore.” However, I no longer expect the market to recognise anything happening along these lines until it gets punched in the face; again and again and again.

Not unrelated, Q3 Japan GDP came in -1.2% q-o-q annualised this morning, not +1.2% as expected, dragged down by net exports despite the slump in JPY. There goes the assumption behind every DSGE/Bretton Woods 2 model that projects a weaker currency = more exports. That’s not how the real world works anymore, sadly.

The RBA’s November minutes said the Bank was prepared to either pause its rate hikes (pivot!) or to step up back to 50bp again (divot!) – which is as clear as mud. Deliberately so, as the RBA also noted that its previous forward guidance –that it would not raise rates from 0.1% until 2024– had resulted in “substantial communication challenges.” Yes, in the same way feet in mouth result in substantial dental challenges. It now says that forward guidance “should be more flexible and is not always required,” and it’s best not to be “too prescriptive.” I think they hit that target today. But it doesn’t matter, as even having to decide for themselves, or perhaps because of it, markets are trading like they are on Mike and Evander’s edible ears.

China left its 1-Y MTLR rate at 2.75% as expected: but the October monthly data were shockingly bad, just after the last set of numbers were conveniently shockingly good. Industrial production was up 5.0% y-o-y vs. 5.3% consensus, and retail sales were -0.5% y-o-y vs. 0.7% expected, while fixed asset growth was 5.8% y-o-y vs. 5.9%, and property -8.8% vs. -8.3%, and residential property sales -28.2% y-o-y.

But don’t worry, little market lambs – stimulus and détente are coming! Just lay down here next to a predator and see how well things work out.

(Stimulus because of a lack of détente is my view; but that doesn’t mean lower rates and higher asset prices.)