By Michael Every of Rabobank
US President Biden just gave a press conference to mark the end of his first year in office. Despite a long line of opinion polls all showing extremely low favourable/unfavourable ratings that, unlike former President Trump, even cover the base that voted for him in 2020, Biden gave himself high marks for the last 12 months, stating “I didn’t overpromise. I have probably outperformed.”
That does not seem a particularly objective assessment of 2021, which most neutral US political writers --all three of them-- would probably summarize as “All The President’s Meh”. Of course, the real test will be how the Democrats perform in 2022, as some pundits talk about a ‘once in a century’ shift to the Republicans. (Who, it must be stressed, are basically doing nothing in Congress, while presumed presidential candidate Trump is riffing on the same old November 2020 memes.) Indeed, with suggestions Democrats will primary Senators Manchin and Sinema over their refusal to remove the filibuster, might another two senate seats get dragged into the mix?
For markets, the key takeaway on the fiscal front was that Build Back Better won’t pass in its current form, but the president suggested parts of it could move separately – which is arguably a more effective political strategy - albeit against what looks like a ticking electoral clock, and as a fiscal cliff looms too. Regarding the Fed, the president underlined it was appropriate they “recalibrate”, but there wasn’t much talk about supply-side/chain inflation as stores start to see bare shelves.
To be fair, nobody is talking about supply chains, except in platitudes. (“Things will resolve themselves in H2, etc.”) As I have said before, market economists and politicians are like interior designers planning new bathroom layouts to zhuzh up an old house while having no idea of how plumbing works. Smelly things ‘just disappear’ and lovely perfumed things ‘appear’ – until their zhuzhing blocks the drains and toilet, which is where we are now.
The far more significant points raised by President Biden, however, were arguably over Russia-Ukraine. This did not even get an initial headline from Bloomberg – but, trust me, many headlines are likely to follow if one follows what was and wasn’t said, including that:
- “My guess is he will move in. He has to do something,” for those thinking this was all a bluff.
- Russia has “overwhelming military superiority,” for those thinking the Ukrainian army might put up a fight with the aid being delivered by the UK (not Germany; and as bureaucracy slows up the Baltic states’ request to ship some of their stock of US arms to Kyiv).
- NATO is not yet aligned in terms of its response to a Russian invasion.
- There won’t be a military response. US Secretary of State Blinken yesterday warned Ukraine of difficult days ahead, but that it “stands with them”. He didn’t add “Just much further away.”
- If Russia invades, its banks will not be allowed to use US dollars – so SWIFT sanctions. However, such enormous “short-term market destabilisation” is reportedly not agreed to by the EU. Could Russian energy, food, and metals be exempt, or EU-Russia trade switch to EUR, and China-Russia trade to CNY? Again, hardly the stick it seems without full global agreement.
- “It’s one thing if it’s a minor incursion and we end up fighting about what to do and not do. If they actually do what they’re capable of doing…it’s going to be a disaster for Russia.” President Biden has infamously misspoken before: he immediately clarified he was talking about the difference between a cyberattack or grey-zone attack and a military move.
Such poor communication from central banks rightly roils markets: from presidents talking about war and SWIFT, this should be even more the case – if only the financial press could understand the gravity of what is implied. Or just pay attention to it. Indeed, in a much sharper comment Biden added if Russia invades Ukraine, it will be “the most consequential thing that has happened in the world, in terms of war and peace, since WW2.” (Unless he really did mean they can invade parts of it, and the West just argues for a few weeks then moves on, which some in Ukraine are apparently interpreting Biden to have meant, despite White House press office denials.) Might that warrant a financial press headline over talk of a Fed need to “recalibrate”? Bloomberg was *still* running with “CHOPPY: Stocks Drop; Selloff Puts Nasdaq into Correction” at time of writing.
Crucially, ominous threats without equally-ominous deterrence, and flubs and/or potential nudge-nudge-wink-winks, must be seen from the eyes of Putin when coming from an administration that: started super-tough on China, but shifted to trying to rebuild bridges when things got heated; pressurizes allies like Saudi Arabia while looking the other way on Iran, even as the UAE is attacked by Houthi drones; withdrew from Afghanistan in a humiliating manner; and is ignoring North Korea, which today stated it will restart nuclear and ICBM tests to develop the power “to fight the US”. As seasoned China-watcher Bill Bishop just tweeted: ‘Is there a “Minsky Moment” concept for geopolitics? Feels like much of DC in deep denial.’
In short, there are many things for the US hegemon to deal with and, relatively, too few resources, as Foreign Policy magazine underlines in ‘The Overstretched Superpower’. Worse, trying to ignore one threat to focus on the major one (which the US sees as China) merely exacerbates the first problem. As we argued in ‘The World in 2030: Fragments of the Imagination’, this is ultimately likely to prompt a set of US --and allied-- policy responses that the Davos crowd won’t like, and which will roil markets in ways we have had hints of recently: supply-chains shortages/inflation; the swings in short-end bond yields; the collapse of some Chinese assets under Common Prosperity; and the Turkish currency.
Meanwhile, the UK yesterday saw “All the Prime Minister’s Meh”, as under-fire BYO faced a very feisty PMQs, his usual combination of waffle and piffle being pitted against digs about The Conservative Party; a rare defection from them to Labour (prompting left-wingers to complain the new guy was too right-wing for them, showing neither party has a stable coalition behind it); and an ex-minister more or less saying “Let’s Go Boris”. However, it seems that for now the “Pork Pie Plot” to force a leadership challenge is not fully-baked. This still leaves GDP looking at politics too.
Australia, in pre-election mode, is wrapped up in “All the Prime Minister’s and the Opposition’s Meh”. And the RBA’s given today’s jobs number, where another 64.8K were added, 41.5K full-time, and the unemployment rate fell to 4.2% from 4.5%, while labor force participation is not far off pre-pandemic levels.
In China, property developers will now be allowed to tap into escrow accounts holding deposits from home buyers. That frees up liquidity, but raises risks for consumers if the firms then fail, implying bailouts, which is probably where a lot of the pick-up in credit growth will be going, rather than new growth: and this all just ends up on the central-bank balance sheet at the end of the day. So does all the new debt from a further expansion of loss-making high-speed trains, also floated today as a possible policy response to an economy weighed down by too many indebted loss-making high-speed trains. China also lowered banks’ 1-year loan prime rate 10bp to 3.70% today, but this again seems to put the “meh” in “Common Prosperity” (it works with my accent) rather than being a radical new solution to existing problems.
