Market Thinking

making sense of the narrative

The non-Zero risks of Zero Risk policies

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The Short Term Uncertainties for markets remain about Covid, sometimes, as this week, a ‘panic’ about the virus itself, but mainly about the economy-damaging Zero Covid policies being pursued in ‘the Rest of the West’ (i.e Europe, UK, Canada, Australia and New Zealand). Medium term risks meanwhile remain focussed on reflation and the prospect of policy-driven inflation to follow as Zero Interest Rates combine with excessive fiscal stimulus. Core commodity markets like oil and copper are currently giving more accurate signals than the (Zero Interest Rate distorted) bond markets here. Finally the long term trends are increasingly dominated by which direction the ROW chooses to go in this new Cold War; following the State-Owned-Enterprise model of China, or the Enterprise-Owned-State model of the US. On the one hand they could take the best of both systems, but the risk is that through embracing Zero Carbon Policies in addition to Zero Covid and Zero Interest Rates, they end up embracing the worst.

As markets settle into their summer recess, it is common for the noise-traders in the FX and Commodity markets to set the tone for equities and bonds and last week we saw them seemingly fixate upon ‘The Delta’ variant (of Covid) as their justification for ‘risk off’. In this they were helped by ‘the world-beating’ British government, with its self-declared world-beating test and trace system completely undermining its (again self-declared) world-beating vaccine roll out, to leave the economy notionally unlocked and yet with its service sector in arguably an even worse position. No surprise then that the business surveys pointed to a collapse in business confidence and that the macro pundits who follow this sort of high frequency data took it as a signal to sell. However, the reality is that much of this is political maneuvering by the zero Covid faction and the so called ‘pingdemic’ will be self correcting for anyone that actually wants to work – the isolation is not compulsory and the App will be deleted.

This gloom was nevertheless enhanced by a lot of buying of put protection in the commodity space underlying the reflation trade, leading to some further sector rotation. This rotation to mega-cap tech meant however that the headline market bounced sharply back, which was painful for many traders, but throws up some opportunities to buy back on dips the cyclical story – which hasn’t gone away. Indeed, the bounce in the Copper and Oil markets at the end of last week took a lot of wind out of the ‘deflationist’ sails and to our mind are much more reliable indicators of reflation risks than the bond markets, distorted as the are by central banks.

Zero Interest Rates, Zero Covid and Zero Carbon. An extremely dangerous Policy Trinity for markets

As we noted a couple of weeks ago, (a small prediction) the Zero Covid team were always going to throw everything at trying to thwart the UK’s “Freedom Day”, much as the die-hard Remainers tried to thwart Brexit, and the announcement that (new) Health Secretary Sajid Javid had tested positive for the latest variant of Covid, despite being double vaccinated, certainly helped their agenda. The UK press, heavily dependent on government advertising spend (controlled by, Zero Covidists) have dutifully whipped up a panic about a ‘pingdemic’ as the number of people being told to isolate jumped to 1.7m, leading to the inevitable concerns about shortages, cancellations and so on – a self inflicted and deliberately staged crisis that the markets took (excess) heed of. The fact that before Parliament (which has barely been active) went into recess the Government made an announcement about Vaccine Passports is the real story here however. To the extent that markets are worried about short term impacts, they are missing the real point, which is that once the principle of requiring government permission to do something is established, then the wisdom of crowds is removed. Market signals no longer function and economic efficiency collapses.

How long before the Freedom Pass becomes linked to your Personal Carbon Footprint?

The Vaccine passport or Freedom Pass, as promoted by the World Economic Forum and Tony Blair (among others) is an idea that refuses to go away and we note that the technocratic government in Italy is introducing a ‘Green pass’ while President Macron of France is similarly trying to limit access to restaurants, museums etc as well as international travel for the unvaccinated. In contrast to the pingdemic, this is not a problem that will necessarily self delete, since for many it’s a feature not a bug for the new system, a variation of the Chinese Social Credit System being pushed through on the back of the pandemic. This is obviously putting further pressure on an already weakened service sector, while at the same time increasingly emboldened and authoritarian Politicians in ROW are aiming to raise the cost of energy under a different type of ‘Green Pass’. This is the first time in history that we are intentionally trying to make our energy system less efficient and more expensive and from the G7 to the COP21 and every pronouncement in between from the Carbon Capture, Carbon Credit, Carbon Tax and Carbon Trading industries this economically damaging policy is being relentlessly imposed. It doesn’t take a great leap of imagination to see that the ‘permission culture’ becomes extended to included a Carbon Footprint element to the Green Pass. “Sorry, Sir/Madam, you have used up all your Green Travel Credits for the year.” First they came for the nightclubs.

Perhaps no surprise then that the $ /Euro rate looks to be the weakest of the major crosses.

This then is one of the key long term trends we need to monitor, the path that ‘the rest of the west’ chooses to take in the New Cold War. The United States is presenting it as a clear Blue Team v Red Team choice, but the natural resistance in ROW to the Enterprise Owned State approach has not been diminished by the rise of China. If anything, the growing dominance of Wall Street and Silicon Valley and their associated billionaire class has been driving ROW towards the State Owned Enterprise Model of China, less Crony Capitalism and more Capitalism with Chinese Characteristics. The good side of this would be to copy the One Belt One Road approach to provision of ‘Public Goods’ especially infrastructure such as high speed rail, 5G telecoms and smart grids. Moreover, a realistic approach to energy with a focus on low cost and efficiency rather than creative accounting to support the Green Industrial Complex would be of great benefit to the underlying economies. What would be less good would be to embrace the authoritarian aspects of the Chinese model, in particular the surveillance and big data driven Social Credit Score system, where compliance with the State defined behaviour is required in order to access aspects of ‘normal’ daily life. The real problem here is that a system, any system, once established, will always at some point be abused by bad actors.

On the other side of the coin, we have the positive aspects of the US system, individual freedoms supported by a state structure restricting the Federal level impositions, markets enabling price discovery, property rights, the rule of law and in particular the common law approach that everything is allowed unless it is banned, as opposed to the Napoleonic/Justinian law approach that everything is forbidden unless it is allowed. The negative aspects to avoid are the financialisation and leveraging of everything, the monopolistic tendencies and the crony capitalism embedded in the political system that leads to corporate lobbyists setting government policy to suit the giant multinational corporations.

The ROW thus has the opportunity to blend both systems, taking the best aspects of the two competing Super-power approaches and avoiding the worst. Unfortunately at the moment, as the Zero-ists embrace state control of everything it looks like they are doing the exact opposite.

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