The Global Backdrop Is Bananas

By Michael Every of Rabobank

The market focus is this week’s confluence of Fed, BOJ, and BOE meetings. However, if you think there is room for uncertainty there, consider the global backdrop which they operate in – which is bananas, both in terms of the headlines and the banana skins it presents for policymakers.

In Europe, it’s ongoing sabotage in France and Germany, and self-sabotage in Brussels. EU trade negotiators are planning for a ‘tariff-ic’ Trump presidency by offering a quick deal to buy more –(checks notes) “lobsters”– to put a dent in the vast bilateral trade deficit; or the EU will slap up to 50% tariffs on US imports – faster and higher than vs. China. Yet in a three-way Mexican stand-off between the US, EU, and China, a two-gunned EU is pointing one pistol at the US, and the other at its own head: The Good, The Bad, and the Smugly. As Michael Pettis notes, the EU trade surplus with the US is structural, so more US lobsters means fewer other imports as demand is fixed. Moreover, the US exports commodities to Europe –is the EU going to tariff LNG?!– while Europe exports luxuries, and autos and pharma that can be Made in America. Europe could shift to military Keynesianism and import US weapons to re-arm – but oddly won’t; yet Trump also decides whether to back NATO or leave a defenseless Europe to fend for itself. Does one need special training as a trade negotiator not to see these obvious facts, or their massive tail risk downsides to Europe’s economy?

In the US, President Biden has floated radical changes to the Supreme Court. On one level, all presidents appointing a new Supreme Court justice every two years (with an 18-year term) rather than for life reduces the current winner-takes-all approach. However, that would mean a court that was always changing, and whoever wins the presidency gets to ‘flip’ it quicker, raising the political stakes there. It also implies an independent judiciary is fine with Democrats as long as it produces outcomes they agree with. Republicans say that due to institutional bias, they need parallel universities, media, and businesses, and even the supposedly apolitical federal bureaucracy: but can a stable economy have a parallel legal system too? This proposal won’t pass as it requires a constitutional amendment, but it opens further avenues for structural polarisation in a country that has already seen incredible political drama in the past month.  

On which, US intelligence is reporting Iran is interfering in the US election to stop Trump; Russia may want to help him; and China is perhaps more focused down ballot. Beijing may be waiting for follow-up on Matt Stoller’s suggestion that Harris might be Hillary 2.0 and shift policy to back crypto while dumping anti-trust Lina Khan at the FTC and Bidenomics tariffs.

In the Middle East, we are still waiting for the Israeli response to the recent Hezbollah attack which killed 12 Israeli Druze children. This might be due to the head of the Israel Defence Forces warning that the country is “bordering on anarchy” after recent far-right protests that broke into military bases; but more likely this has not already happened because it is going to be significant, aiming to reset the regional deterrence equation. The market assumption is that this won’t trigger a regional war, but when munitions are flying, tiny margins can make a huge difference – as Trump’s slight head movement recently underlined. Hezbollah and Iran have both warned they will escalate if the blow is hard (as has Turkey); yet a perceived weak Israeli response, as pushed by the West, would in the eyes of many regional strategists ironically encourage more attacks on Israel: Vegetius might never have seen one, but he understood banana skins.

In Latin America, President Maduro claimed victory in oil-rich Venezuela’s election despite “109%” proof of shenanigans and malarkey. Several Latin American countries have refused to accept the result, and major anti-government protests are breaking out, which makes the deal Biden national security advisor Sullivan struck with Maduro — lift oil sanctions for a free election — look like it was drawn up by EU trade negotiators. What happens next is unclear. Maduro might muscle this out with the help of Cuba, Russia, and Iran – but the West will find it harder to smile at his oil exports; and Maduro might then be goaded into moving on neighboring Guyana’s off-shore oil, as he has threatened, creating a Latin America crisis to take the US eye off Ukraine and Asia. Alternatively, he might be toppled, implying a huge pro-Western shift in the region – and the oil picture would move in the other direction. Or Venezuela might be in chaos, again suggesting a potential impact on energy supply. Traditionally, one knew what the US would do here (*cough* CIA *cough*), yet as an ‘X’ quip says that whatever the US policy is here, it shouldn’t include a floating pier, I think of Woody Allen’s ‘Bananas’:

US soldier: Any word on where we are heading for?

Officer: I hear it’s San Marco.

US soldier: We fighting for or against the government?

Officer. The CIA isn’t taking any chances this time. Some of us are for, and some of us are going to be against them.

US soldier: Oh.

In Africa, Ethiopia allowed its currency to float vs. the dollar, and it collapsed 30%: all in all, it’s just another BRICS in a fall. Like I said, if you think the Fed/BOJ/BOE confluence makes for volatility, and it does, you are still missing the scale of things already happening round the world. While Ethiopia might not be a large economy, it still has a population of 123m, not much less than nearby BRICS member Egypt – which has also seen its currency collapse. So 250m odd people struggling to get by not far from Europe, on vital trade routes already plagued with attacks on commercial shipping.

Again, nothing a 25bp rate cut in a developed economy won’t paper over, thinks the part of the market happily consuming bananas it can’t grow, so has to import, while scattering the skins around it on the floor.

I sometimes feel like I am living in the scene in ‘Bananas’ where Woody, now president of San Marco wearing a shabby army uniform and cap and a fake Castro beard, arrives in the US to ask for aid. As he disembarks from the plane on the runway, he speaks English as if to foreigners to a US diplomat speaking normal English back to him, with their conversation officially interpreted by a man who speaks English with a very strong Latin American Spanish accent… until two orderlies from a psychiatric institute run in and try to catch him in a giant butterfly net. I’m not sure if I’m Woody, the diplomat, the interpreter, or the orderly: but I do know bananas when I see them.