By Michael Every of Rabobank
Calls and Putz
The Biden-Xi call was made successfully, but seems to offer very few new ‘puts’, as in potential market downside protection. First, the readouts from the US and Chinese sides appear to be of two different conversations entirely: the US talked about “the rules of the road”; China talked, at four times the length, about cooperation and there being room for two in the global village; Biden spoke about protecting US workers and firms from China’s economic practices; Xi said not to politicize trade.
In terms of framing, Professor Mary-Anne Brady tweets Chinese state TV edited the footage so it looked like Xi was talking while Biden nodded and took notes: the person responsible for the US logistics did not realize that “old friend” smiles aside, this is how the game is played – which makes them look a putz. The US side is clearly toning down its rhetoric – “extreme competition” became “stiff competition” then just “competition”. Next up, participation trophies? However, actual actions are limited: US execs will get fast-track immigration support; Chinese and US journalists will get visas – and reams of truth will flow in both directions; and the US and China may, at Biden’s request, jointly release oil from strategic reserves to try to bring down energy prices – an odd power dynamic when one is a massive energy exporter, and the other a massive energy importer.
Potentially the most significant development, however, is new strategic arms talks. In terms of conventional forces, China lags the US globally but is approaching peer status in Asia according to at least some sources; is massively expanding its nuclear stockpile, where the US still vastly outnumbers it; and we had the recent “near Sputnik moment”, where it used 1960’s FOBS tech to show it can evade US missile defences. So, arms talks are a good idea. The key issue though is that the US enters from a position of massive strength on nukes, and relative decline in conventional forces near China: what does DC give up for Beijing not to proceed with a ramp up of its own nuke capabilities? If the answer is to reduce its larger nuke stockpile, then the US is unilaterally throwing away military escalatory advantage at a time when conventional regional tensions are still very high. If that is indeed the US geostrategic call, then I really want to buy puts.
The greater likelihood is that the Quad is still going to Quad, and AUKUS to AUKUS; the White House to act in the way it just blocked Intel from investing more in China, and ZTE and Huawei from doing business in the US; indeed, the Washington Post believes an administrative boycott of the Beijing Winter Olympics will be announced; and while some minor US tariffs might come off ahead, in the most important areas of the economy, the odds are still of higher, not lower ones ahead.
Equally, the message in the Chinese Party press was ‘good start – but stop pointing your finger at us and let us do our own thing as an equal’. Which isn’t going to happen, I suspect, and even if it does is unlikely to last: 2022 and 2024 are not that far away in global politics terms. Yesterday also saw the text of the historic party resolution passed at the CCP’s sixth plenum, which underlines the top priority is “the single-minded pursuit” of national security, that “The Central Committee considers it essential to follow the methodology of dialectical and historical materialism,” and that Xi Jinping’s thinking is “contemporary Chinese Marxism, 21st century Marxism, and the essence of Chinese culture and spirit.” I am sure every Wall Street analyst read it in detail.
Relatedly, as Bloomberg says, ‘China’s property crackdown is dragging the country’s economy to the lows of 1990’, it also notes that “Economists are coming to realize that the Communist Party’s Politburo, the top decision-making body, was serious when it vowed this year not to use the property sector to stimulate the economy as it did following past downturns. Officials say excess supply of housing is a threat to economic stability, and want investment to go to prioritized sectors like hi-tech manufacturing rather than more apartments. Chen Long, an economist at Beijing-based consultancy Plenum, said: “President Xi thinks the property sector is too big. He is personally involved in real estate policies, so ministries don’t dare to ease policies without his approval.”” Whocouldanooed? And who wants a call versus a put there?
So too asks former ‘Bond King’, and more recent star of billionaire ‘Love They Neighbor’, Bill Gross. He’s worried about investors sleepwalking into a “dangerous dreamland“. He stresses that the Fed needs to raise rates but can’t do so aggressively ‘because markets.’ And he concludes, “One of these days, one of these years, or one of these decades, the system will collapse, because capitalism depends on savers saving and investing.” Even as a big-picture/longer-term practitioner, I think that is a pretty loose market call for a portfolio manager to have to trade. However, Gross is absolutely right: and he is ironically underlining precisely why the Central Committee considers it essential to follow the methodology of dialectical and historical materialism.
One wonders what the next Fed Chair to be selected this week –where Brainard’s price in the thin online prediction market has swung, but now shows that, as I mumbled yesterday, she is in with a real shot– thinks about this all. We shall soon see.
Meanwhile, in Europe, Bloomberg notes that energy prices, aside from their recent spike, are around their highest-ever levels, and yesterday saw early drop-offs in Russian gas flow west, and then a gas-price spike after Germany delayed certification of Nord Stream 2. Berlin insists this was for purely technical, bureaucratic reasons rather than related to geopolitics. Given this is Germany, I believe them – which is why Europe is in this mess. Relatedly, Russia’s state media quotes Ukraine’s foreign minister warning the EU to prepare for war with Russia, urging “Please do the preparatory work now, because if the military scenario happens, there will simply be no time.” Coincidentally, from tomorrow to 3 December, half the French navy will carry out its largest-ever exercise, the UK just agreed to help upgrade the Ukrainian navy, and the US is to sell Kyiv new anti-ship missiles. Let’s hope we don’t need Putin Puts.
Finally, in the background, and despite CNY being as rock solid as Beijing’s performance on the Biden-Xi call, the broad US dollar index is rising again – despite all the structural problems it faces. What does that tell you about the global call going forward?
