The Most Important Takeaways From A Bad News Week

The bad news is… everything, really.

It’s not so much that there’s a “bull market” in doom and gloom. Well, there is. But that’s always the case. The problem currently is that there’s no good news to be had. It’s all bad news. Literally. From the macro to the geopolitical to domestic politics to markets, there are scant few rays of sunshine.

Rabobank’s Michael Every underscored as much on Wednesday in a characteristically rollicking daily called, appropriately, “more bad news.” It was chock-full of — you guessed it — bad news.

But the worst news in a world full of bad news is that there are no good policy options left. Every underscored as much. The “truly bad news,” he said, is “so bad, in fact, that few grasp it.” He was referring to the UK, and specifically to the implications of the market revolt against Liz Truss’s growth plan. The debacle in sterling and gilts “is a warning that there are now no good policy options,” Every said, before elaborating as follows:

Rate hikes are a disaster. Rate cuts are a joke. Fiscal tightening is frightening. Fiscal loosening is loser-ing. Looser fiscal policy and tighter monetary policy is madness. Tighter fiscal policy and looser monetary policy is Einstein’s definition of insanity. Tighter fiscal and monetary policy repeats Brüning from Weimar Germany. Looser fiscal and monetary policy repeats Venezuela. As I have written many times, logically the only thing that might have worked was tighter monetary policy and looser fiscal policy into the supply side via MMT. But now it seems even the UK can’t be trusted by markets to do it; at least not unless it runs a trade surplus to prop up its currency, and perhaps sees capital controls. Yet the UK is not set up to export, but import, and the one thriving part of its economy is based on channelling and churning global capital flows — just not into its own industrial base.

The emphasis in the excerpt is mine. Over the past several days, I’ve repeatedly suggested that most market participants don’t appreciate the gravity of what’s just happened to the UK.

I tried to spell it out Tuesday, on social media, which I’m admittedly not very adept at using. I everywhere and always eschew brevity in favor of verbosity, and I despise petty bickering. As such, a social media platform that facilitates petulant sniping in 140-character bursts is positively abhorrent to me. I did try, though:

It also plainly suggests that the US is the only locale that can operate within that framework with impunity. There's only one reserve currency. Everything else is just kindling for campfires.

— Heisenberg Report (@heisenbergrpt) September 27, 2022

There was only one reply because I don’t allow replies on my tweets, with one exception: Replies I write to myself. I continued, noting that the situation in the UK “should be a red flag for Japan, the EU and really, for the entire G-10.”

When push comes to shove, everything but the dollar is vulnerable to runs. As it turns out, I remarked, “economic orthodoxy isn’t totally useless.”

In his Wednesday missive, Every made some of the same points. “If the MMT route is not something markets will now swallow then only a tiny number of countries can hope to follow such a policy path: Those with large trade surpluses and not overly-large fiscal deficits, and the US, because of the global role of the (soaring) dollar,” he said.

This isn’t the best news for the “New World Monetary Order.” What we’re seeing, Every went on to write, is that “the US can still print money into the supply side, not demand side, and boom, while everyone else crashes.” If US rates rise in the process, all the better, as that just feeds dollar strength and capital flows.

As the rest of the world humbles itself in the presence of king dollar, the US “then gets to pick who they save with Fed swap lines,” Every said. That, in turn, allows Washington to “create new US-centered supply chains to cement their role even more deeply.”