By Michael Every of Rabobank
The US ADP employment report, the week’s second second-tier labour data ahead of initial claims today and payrolls tomorrow, came in weaker than expected at 103K vs. 130K, with slight downwards revisions to back data. Anyone would have thought a giant red LED sign saying ‘DEFLATION!’ had appeared over the economy, because that’s how it was taken by some. Indeed, taking the ADP the other way, Treasury Secretary Janet ‘Magic Mushroom’ Yellen just stated: “Economists who’ve said it’s going to require very high unemployment to get this done [meaning lowering inflation] are eating their words… It doesn’t seem at all like it’s requiring higher unemployment.” You thought we had tensions between a tight Fed and a loose Treasury before? Even Nick Timiraos at the WSJ notes Yellen was throwing shade. Given her Burns-like confidence, she will probably soon be throwing money too: 11 months until the 2024 election, after all.
Oil prices also went to a six-month low –which Yellen will try to claim as a win for her failed policies targeting Russian energy price caps– after another US inventory-build according to the EIA. I repeat, if this is holds, it’s a win for the Fed and what they have been doing, not Yellen and what she has been.
In the Red Sea there was a possible new attack on a merchant ship, and Houthis in Yemen fired a cruise missile at the Israeli port city of Eilat, which was shot down. True, the US may force Israel to end its war with Gaza in weeks (as the UN Secretary General triggers Article 99 of the UN Charter for the first time since 1989 to call for a Security Council debate). However, there is more than one front involved.
Defence Minister Gallant stated Israel will act against Hezbollah in Lebanon if a diplomatic push for the UN to enforce the resolution demanding it retreat back over the Litani river 30km from the Lebanon-Israel border fails. That would be the second of three dominos we flagged after 10/7 which lead to a regional escalation involving energy and Suez, a scenario the market discounts because it prefers its navel to anything naval.
While Russia’s President Putin was in Saudi and the UAE, all smiles and handshakes, the US Congress rejected Ukraine and Israel military aid bills. As the Saudis and UAE look for a defence umbrella they can rely on, the US is not only still trying to reach out to an Iran the Sunni Arab world mostly doesn’t trust, but is now even tentative about reacting to Houthi attacks, because it knows where the chain of command leads: Tehran.
Now a military helicopter belonging to Guyana is missing in its oil-rich territory which Venezuela just claimed as its own – right after the US offered to roll back sanctions on it. Caracas has already ordered state-owned company oil drilling in the territory: expect this issue to arrive at the UN’s door within days too. There are few military forces on the ground: but US troops have been present in Guyana since 2019, and the Brazilian army is reinforcing its northern cities of Pacaraima and Boa Vista. Give Russia and Iran breathing room, and higher oil prices, and see what happens next to help take the US eye off other geopolitical balls. And remember the recent call for the US to relaunch The Munroe Doctrine.
Yet where Russia geopolitically escalates to deescalate, the US keeps deescalating to inadvertently escalate.
Also recall the US is struggling to produce enough weapons: the WSJ notes, ‘The US Can Afford a Bigger Military. We Just Can’t Build It.’ Recall the recently used 1942 quote from Keynes: “Anything we can do, we can afford”? As the Financial Times points out, the Chinese economy is larger than the US in PPP terms, and the PLA is funded in CNY not USD, at far lower cost per unit. True, their property prices have collapsed – but they were never going to be much use militarily. Indeed, Russia, China, and even Iran, are becoming the ‘arsenals of autocracy’… with the help of Western firms, as noted by US Commerce Secretary Raimondo, who just stressed: “Newsflash: democracy is good for your business. Rule of law, here and around the world, is good for your businesses. It might make for a tough quarterly shareholder call, but in the long run, it’s worth you working for us to defend our national security.” But given the ‘War Without Gun Smoke’ report argues Lenin was apocryphally right that ‘The capitalists will sell us the rope we will use to hang them’, the US will have to act, not talk.
Meanwhile, hedge fund manager Bill Ackman tweeted again, but not about US Treasuries (which, by the way, see the 10-year at 4.12% this morning, so more easing of financial conditions). Instead, he eviscerated the presidents of Harvard, MIT, and Penn for telling a Congressional hearing on antisemitism that campus calls for the genocide of Jews only constitute bullying or harassment “depending on the context”, and if “the speech then turns into conduct.” He notes: “This could be the most extraordinary testimony ever elicited in the Congress,” and adds, “The presidents’ answers reflect the profound educational, moral and ethical failures that pervade certain of our elite educational institutions due in large part to their failed leadership. Don’t take my word for it. You must watch the following three minutes. By the end, you will be where I am.”
This matters for markets. You might think this doesn’t apply to you because you aren’t Jewish, American, or a student. Yet canaries in mines speak to the state of the mine, not the canaries. The university presidents shamed this week are evidence that post-modern Western intellectuals now act on the quote chiselled into Marx’s gravestone: “The philosophers have only interpreted the world, in various ways. The point, however, is to change it.” Doing so has seen the adoption of an identity politics taxonomy of ‘oppressed vs. oppressor’ or ‘colonized vs. colonizer’, and Fanon’s view that extreme violence is justified for the latter – as we see with Hamas. Yet aside from the Middle East issue, the list of “colonizers” to be violently resisted covers everyone in markets, every Western institution, and then capitalism, liberalism, and the West itself. Tell me what term premia should be on bonds, or where stocks will trade, or fair value for any FX cross is, if so.
This matters for markets. The success of the West lies not just in its liberalism, now unravelling, or its rule of law, which business evidently could care less about, or its military, which is going to be eclipsed on the current trend, but on its science and technology that powers that military. That’s why allowing top universities to turn into what @EricRWeinstein calls “Revolutionary Marxist justice fingerpainting day-care for sociopaths” is not a good idea. How many econometric papers talk about human capital, R&D, technological progress, etc., without looking at what the universities are actually doing? Economically, this can point to lower productivity and so stagflation. Geopolitically, Russia and China are throwing money at science in a Cold War manner, but it doesn’t even enter markets’ minds that this a talent contest the West could lose.
This matters for markets. Western institution after institution is being proved unfit for purpose. Congress, already held in contempt, is now finally seeing that academia is just as morally and intellectually corrupted, if not worse. A successful society might be able to get by for a while with one of those two not functioning, but surely not both. So, alongside the minutiae of data points and reading geopolitical runes, we also need to see if these university presidents step down, are fired, or U-turn towards substantive policy changes that can turn the ship around – and then look ahead to 2024 elections. So far, we have a series of official mea culpa tweets and promises of action. Then again, we heard a lot of “build back better” and “transitory” in recent years.
