We Are Supposed To Be In A “Restrictive Phase Of Monetary Policy” So What The Hell Is Going On

By Michael Every of Rabobank

Enjoy your cup of digital cocoa

For many in markets, today is all about US weekly initial jobless claims and the core personal consumption expenditure deflator, neither of which are likely to reassure that inflation is on track for a rapid, sustained return to 2%. After all, the former is expected at a low 210K, and the latter at 0.4% m-o-m, up from 0.2%, and 3.6% annualized, even if base effects mean the y-o-y rate would ease a tick from 2.9% to 2.8%. If only that was all that was going on though.

In geopolitics, what about Australia’s spy service revealing a plot by a retired politician to introduce a prime minister’s family to foreign spies? Or the leak of (old) Russian defence files showing when it would consider the use of tactical nukes, including an invasion by China? Or Germany’s navy shooting down two Houthi missiles, and missing a *US* drone? Or Germany and Italy shooting down an EU supply-chain law aimed at China? Or Transnistria, the breakaway region of Moldova, officially asking for Russian “protection”? Or Singapore’s Defence Minister stating, “I have reversed my assessment for today’s generation in Singapore and elsewhere. The risk of regional and even global conflict in the next decade has become non-zero. I do not make this assessment lightly”?

In geoeconomics, how about Russia, which said there wouldn’t be a common BRICS currency yet, proposing a financial system “independent of politics,” and, “an alternative banking structure to secure trade operations that are politically autonomous,” based on digital and blockchain principles – which sounds like a bifurcation of the global economy into Eurodollars and ‘BRICScoin’? (Two blocs, one of which doesn’t produce enough, but wants to, and one which doesn’t have balanced internal demand for what it makes: @Brad_Setser rightly points out an imbalance I was stressing in 2017’s ‘The Great Game of Global Trade’, as well as more recent pieces on ‘Why Bretton Woods 3 Won’t Work’.) Or a Taiwan lawmaker stirring the pot to argue Hong-Kong dollars should not be exchangeable for Taiwan dollars because the HKD might become worthless if the US were to withdraw HK’s special economic privileges?

In politics, how about Mitch McConnell stepping down as Republican Senate leader at 82 after several recent public freezes? Or US President Biden, 81, passing his annual physical without a cognitive test (because he “passes a cognitive test every day,” according to his press secretary) after special counsel Hur dropped charges of mishandling classified documents against him on account of his being an elderly man with “diminished capacities,” including memory loss?

Or the US Supreme Court, later than it could have done, placing a stay on former President Trump’s January 6 court case to hear “the arguments of whether and if so to what extent a former President enjoys presidential immunity from criminal prosecution for conduct alleged to involve acts during his tenure in office” on 22 April? Given the constitutional importance, a decision is likely to take months, so presuming the trial continues, fitting it in alongside that in Georgia (where D.A. Willis is in focus), and Florida (where Trump has his own contentious defense on handling classified documents) may prove difficult ahead of the US election. In short, Biden vs. Trump 2 looks more likely. Even so, Trump may be a lot poorer by then given a New York judge just refused his appeal to pay only part of the $453m fine imposed for him having exaggerated the value of a commercial property as part of a bank loan which the lender undertook their own valuation on was, where the loan was repaid in full, and with the lender willing to continue the banking relationship afterwards – which has worried some in the New York CRE industry.

But all of that is exceeded by what we see in markets. We are, after all, supposed to be in a restrictive phase of monetary policy, globally. We are at levels of nominal and real interest rates which were thought unthinkable a few years ago, and which many prefer not to think about now. (“Stay alive ‘till 25!” is still the mantra in some places.)

How, then, are we seeing Nvidia explode higher? Yes, the practical applications of AI are obvious – but so is the fact that AI is also a practical joke. (Which China has now reportedly joined: an AI there was said to have given a politically incorrect answer on the economic outlook, and was summarily shut down: in the West it’s the one asking the incorrect questions who is shut down.)

How, then, are we seeing Bitcoin at $61,000 when it was $51,000 weeks ago, and $25,000 months ago? Yes, we now have an approved Bitcoin ETF, so asset managers can make tiny portfolio allocations into it, pushing it higher. However, Bitcoin is now even less usable as alternative *money* given nobody will be able to transact when everyone is HODL-ing and a can of soda costs 0.00000984: put that on the shelves and watch US retail get (even more) post-Soviet. Indeed, linking back to Russia’s proposed ‘BRICScoin’ for practical upstream trade commodity financing within an impractical ‘bloc’, Bitcoin is trading like ‘digital cocoa’ that can’t be eaten: on which, this RaboResearch podcast covers the outlook for sugar, dairy, and cocoa, chocolate lovers. In short, Bitcoin is another asset showing there’s still silly liquidity available for silly things –just different silly things than before, like CRE– with an added ironic nanocoating of concern about inflation.

(And as an aside, it is somewhat entertaining to see some gold bugs so bugged by everyone suddenly shifting away from that metal into Bitcoin: “Can’t you see we are the real threat to the US system? You’re just splittist wannabes! You’ll be back when the bubble bursts!” It’s surprisingly Marxist in its internecine conflict.)

It’s true few in markets, and very few in central banks, are looking at all of the intersecting geopolitical, geoeconomic, and political factors above, or even any of them. Indeed, while the RBNZ held rates yesterday –showing there is a very high bar to anyone tightening policy further, even if cuts have been pushed back– it flagged inflation risks flowing from the Red Sea crisis would be resolved “in a calendar year”. That analysis does not seem to be based on Kiwi-specific geopolitical insider knowledge of the Middle East as much as simply possessing a calendar.  

By contrast, I suspect quite a few in markets, and many in central banks, are looking at AI stocks and Bitcoin as a (very) simple metric of the looseness or tightness of financial conditions, as one of the factors that lies behind inflation. And they might need a nice up of cocoa to help them sleep at night in either case.