It was all about “jobs, jobs, jobs” on Friday and what a US payrolls beat (or miss) would mean for the Fed’s reaction function. We’re back to pondering whether good news is bad news again. And vice versa.
No single data point is going to sway the Fed, but the thing about that tired, old throwaway line is that you can only resort to it a handful of times. After all, “single” means one. So, once you have a handful of NFP reports and CPI prints to work with, you have to start asking yourself what the balance of the data means for the timeline on a taper announcement. And then what the implications of a taper might be, especially vis-à-vis the suppression of real rates and what higher (albeit still negative) reals may entail for inflated equity multiples.
The rhetoric from Fed officials has shifted. They’re “talking about talking about” tapering, to adopt Jerome Powell’s “Jimmy Two Times” quip.
(Amusingly, some members of the finance Twitterati aren’t familiar with the Powell “talking about talking about it” meme, so all allusions to it by other Fed officials are met with incredulity. Legions of day-traders who apparently don’t watch Powell’s post-meeting press conferences don’t know the reference, so they caption quotes from other Fed officials alluding to Powell’s quip with: “This is not parody.” But it is parody. It’s forward guidance, yes, but with a humorous spin. Fed officials are serious, but they’re also effectively poking fun at themselves. Finance Twitter, where everyone is a portfolio manager in their own minds, just doesn’t get the joke.)
Getting back to the data, the “concern” (if that’s the right word) was that evidence which suggests April’s big jobs miss was an anomaly would make the tapering discussion easier, if not accelerate it. There’s no “urgency,” per se, but it feels like the market is lining up around August/September for hints (and then an unveil) of the timeline on the Fed paring asset purchases. Then come compositional questions. What will they pare and in what quantities? And so on.
Of course, the silly part is that just as April’s scorching CPI print “offset” that month’s payrolls miss, it’s possible that a more tame CPI print in May might quell any fears of an accelerated taper timeline catalyzed by a jobs beat. I’d call it convoluted, but it’s actually not — convoluted, I mean. It’s just absurd.
Everything is contextualized by the read-through for Fed policy because ultimately, liquidity and the price of money are what matters for markets. Main Street can eat cake. Or maybe they can’t. It depends. To let some folks tell it, a slice of cake will be $50 on the dessert menu by July. At least that’s good for the waiters and waitresses. What’s 20% of $50? A nice tip, that’s what. If the same piece of cake is “only” $25 at the grocery store, and you served several pieces of cake on your shift, you’ve got yourself a piece of cake to eat!
Meanwhile, the media has (understandably) latched onto the latest twist in the corporate tax hike saga. At least it’s a story worthy of coverage as opposed to — oh, I don’t know — a theater chain milking a retail mania for every penny it’s worth. (As it turns out, it’s worth a helluva lot of pennies.)
As you’ve likely heard, Joe Biden is considering a 15% minimum corporate tax rate paired with enhanced IRS enforcement “as a way to fund a bipartisan infrastructure package,” as Bloomberg put it. Such a scheme would “set aside the Biden administration’s proposal to raise the headline corporate income rate to 28% from 21%” for now.
Regular readers know how I feel about this. Raising taxes merely for the sake of “paying for” something is nonsense. Literally. Not “nonsense” in the pseudo-normative way that supply-siders derisively talk about tax hikes. It’s actually nonsensical.
Maybe corporate taxes should be higher. Maybe they should be lower. I don’t know. Nobody does. “Should” and “ought” are subjective assessments. But what I do know is that if bridges need repairing and ports need improving and pipes need replacing and roads need building, nobody needs to worry about how to “fund” those initiatives in a developed economy that issues a reserve currency, let alone the reserve currency.
There are plenty of arguments for leveraging the tax code to bring about “better” (i.e., more equitable) outcomes for society, but when it comes to making sure a bridge doesn’t collapse, the discussion can’t hinge on whether Biden can herd enough cats in the Senate to squeeze money out of corporate America. That’s ridiculous. Corporate America isn’t the source of US dollars. Neither are billionaires. The US is the source of US dollars, by definition. We can just issue them and fix the bridge. If the world is going to lose faith in the greenback, restoring that faith isn’t a matter of seven percentage points one way or another on the headline corporate tax rate.
If you think I’m wrong about that (i.e., if you think the corporate tax rate and other “pay-fors” do matter when it comes to faith in the dollar, because that’s where the revenue comes from), then you might want to chat with VTB CEO Andrey Kostin, who told Bloomberg TV on Friday that Russia “unfortunately” has to reduce the use of the dollar in its economy because of US sanctions.
The interview came a day after news that Russia’s wealth fund is cutting its exposure to dollar assets to zero (you should read the linked article for the nuance because it’s not quite what it sounds, but that’s another discussion).
Russia, Kostin said, isn’t “anti-dollar or anti-American,” but the US is “using the dollar as a weapon against the Russian financial and industrial sectors.”
What was it I said years ago (and on countless occasions since)? Oh, that’s right, I said this:
The dollar’s status as the world’s premier reserve currency is threatened more by US foreign policy than it is by any deficit, no matter how large. For instance, the constant weaponization of the USD and the US financial system through draconian sanctions aimed at punishing perceived “foes” (sometimes for not very good reasons) along with the 2018 experience (when the rest of the world was again reminded that financial stability outside the US depends almost entirely on the Fed not erring by overtightening during a hiking cycle), are likely to be the key drivers of continued de-dollarization. Not deficits and not “money printing”.
Maybe Kostin mentioned America’s fiscal position in the interview. I don’t know. And I don’t care. Because I can assure you that any decisions by foreign nations to diversify their reserves away from US dollars will have almost nothing to do with US fiscal policy and almost everything to do with US foreign policy.
Commenting further, Kostin told Bloomberg that it’s “impossible to live without the dollar” globally. Bitcoin, he said, is akin to “fake money.”
What then is the way forward for the US government to adopt MMT. Feels like living in Maine – ‘can’t get there from here’.
I am not an expert but I have studied US foreign policy for decades in many venues over the years and I am convinced that this country has never had a decent foreign policy. Even with the richest intelligence sources in the world, dozens of smart presidents and foreign secretaries we have consistently backed the wrong governments, screwed our friends (or been screwed by them), armed our eventual enemies (recently, Sadam, the Taliban, the Contras), weaponized food aid, foreign aid, and beat all and sundry over the head with sanctions. We would do better with something like, OK take your first and best idea and then do just the opposite. We just don’t get foreign policy in the US, never have, and sadly thousands have died unnecessarily because of those failures.