Re: Macro/USD/Oil/Geopolitics - The Battle of the BADS.
A tour of the key Scylla/Charybdis Dilemmas facing major policymakers on the world stage. As you will see, the policy choices in most cases are between BAD and BADDER — a true BATTLE OF THE BADS.
Most of you know my “Is that BAD?” gallows humor quip that I use on the litany of doom-and-gloom posts I see all the time. The sad fact is that there are so many real-time Scylla/Charybdis Dilemmas facing policymakers where they are forced to choose between TWO BAD OUTCOMES.
In this post, I take you on a tour of the key Scylla/Charybdis Dilemmas facing major policymakers on the world stage. As you will see, the policy choices in most cases are between BAD and BADDER — a true BATTLE OF THE BADS.
In no particular order, I will identify each Contestant in this BATTLE OF THE BADS, identify the Scylla/Charybdis Dilemma between Bad Choices, and editorialize on the BAD Choice vs. the BADDER Choice. I will hew to a ceteris paribus analysis, but note some Caveats & Contingencies which can include path dependency of choices and how they can feedback into the calculus of other Contestants.
This post builds upon many of my past posts, which I include links to at the bottom of this post in chronological order for the benefit of subscribers who may not have read my previous work.
CONTESTANT 1: BOJ
Scylla/Charybdis Dilemma: Defend JGBs or Defend JPY?
The BOJ’s Dilemma is well-known and can be summarized by a simple meme from Jurassic Park, showing the Free Market Velociraptors probing for weaknesses in the JGB and JPY Electrified Fences. Assume that the BOJ only has enough power to defend one of them. Which one will it be?
Bad Choice 1: Defend JGBs
The BOJ has telegraphed repeatedly its intent to exit YCC (Yield Curve Control). The problem is HOW. The market does not believe that it can, and rightfully so given its history of crying wolf with no follow-through.
In truth, the BOJ (and every Central Bank) faces a Trilemma, not a Dilemma, but because Japan’s economy is predicated upon Open Capital Flows, I think it’s fairly safe to eliminate Capital Controls from the decision tree.
In my West Point Paper (link at end of post), I explain the Central Bank Trilemma (that faces ALL CBs but most acutely the BOJ right now):
Between the massive BOJ holdings of JGBs and decades of artificially suppressed yields that have given rise to the Yen Carry Trade (whose unwinding could have huge worldwide Risk-Off ramifications), it’s hard for me to envisage how the BOJ can follow this path.
The BOJ has repeatedly talked tough on its YCC Exit Strategy, but has either made absurd excuses or gone right back to buying JGBs at the first hint of trouble:
BADDER Choice 2: Defend JPY
If BOJ can’t let JGBs go, it must necessarily let JPY Devalue because no CB can escape the Trilemma indefinitely:
The problem for Japan is that it is a large Oil Net Importer, and Oil is USD-based. However, given that it’s also a significant Goods Net Exporter, Japan benefits from a weaker JPY as well. It just doesn’t want a Disorderly Devaluation, which could cause Runaway Inflation.
Thankfully for Japan, because it is a US Ally, it has FX Swap Lines with the Fed which can allow it to manage the Devaluation as a “Controlled Burn,” but it’s still just a Band-Aid:
In short, I see the Choice of Defending JPY as the BADDER Choice — especially given the potential Export Boost from a weaker JPY.
My Base Case is that JPY continues its Controlled Burn, and hopefully it doesn’t become Disorderly (although I think the recent spike in Gold is a sign of fear of exactly this scenario potentially leading to a Competitive Devaluations). More on this later.
As an interesting side note, I wrote a thread entitled “Re: Inflation/Geopolitics-Geopolitical Mosh Pits & Sovereign Debt Endgames” (link at end of post) that tangles with the sticky questions below:
Caveats & Contingencies
What Japan chooses will not only impact the world, but also have an immediate impact on China’s decision tree (see below). Competitive Devaluation is a real concern of mine, and my post “Re: Inflation/Macro-Asian Contagion 2.0?” (link at end) tells the story of the Asian Contagion 1.0 of 1997-1998.
CONTESTANT 2: PBOC
Scylla/Charybdis Dilemma: Devalue CNY or Face Japanification?
I wrote an extensive piece over a year ago entitled “Re: Geopolitics/Inflation/USD-Ball In A China Shop” (link at end), predicting that a CNY Devaluation could bring about a strong Deflationary Pulse to the world.
While I’ve been right on the trajectory of USDCNH (6.85 then, 7.25 now), there certainly has been no Deflationary Pulse…yet. I would argue, however, that the worst is yet to come on CNY Devaluation, so the jury is still out on its ultimate impact.
The PBOC’s Dilemma can be captured by a simple graphic and derives its logic similarly from what I presented above on Japan:
Bad Choice 1: Devalue CNY
Since my “Ball In A China Shop” post last March, the economic data coming out of China has not disappointed — in its disappointment!
Here are some choice tidbits from
in her “China Boss News” Substack on 4/5/24, entitled “Don't bank on China's headless economic recovery”:Given China’s divergent policies (both short-term and long-term), it’s no wonder that China is the only major country in the world contending with DEFLATION now, and a CNY Devaluation would be an equilibrating mechanism to EXPORT China’s Deflation to RoW and IMPORT Commodity Inflation into China, given its status as a large Commodity Net Importer. There is a natural Negative Feedback Loop here that I will touch upon later.
The PBOC is also trapped in the CB Trilemma, but its “advantage” is that it already has Capital Controls in place, so from that perspective it can exercise more direct control over its Monetary Policy and CNY Exchange Rate.
Unlike the BOJ or the ECB, the PBOC/China is deemed to be US Geopolitical Adversary #1 and does NOT have FX Swap Lines with the Fed, so it must intervene (and in so doing burn up its USD/UST reserves) to prevent Disorderly Devaluation on its own.
China also fancies the CNY as the linchpin behind a BRICS Alternative for GRC (Global Reserve Currency) status and has inked some splashy albeit largely symbolic headlines with Saudi Arabia in terms of settling some Oil trades in CNY. MbS is not stupid, however, and I resort to my “Amazon Credit” Mental Model for why CNY cannot be a serious GRC contender when it has a Closed Capital Account:
For a much more in-depth look at why the BRICS Alternative to the USD is destined to fail, see my post entitled “Re: Geopolitics/Oil/USD - BRICS-a-Brac?” (link at end of post). This pieces delves deeply into why the world organically chose to adopt the USD as the GRC. It is a point we drive home in our West Point Paper (link at end) as well, which I highly recommend if you have not already read it.
For CNY to have any shot at mass adoption (let alone GRC status), having an Open Capital Account is just a FIRST STEP, but with an Open Capital Account also comes massive CNY Devaluation given enormous Capital Flight Pressure:
As mentioned earlier, what happens with JPY will also impact CNY. My concern is that the BOJ’s inability to exit YCC is the domino that starts a chain of Competitive Devaluations, with CNY Devaluation being the most impactful to the world.
BADDER Choice 2: Face Japanification
Given China’s plethora of challenges (Demographic Decline, Decades of Malinvestment leading to a Real Estate Bust, Closed Capital Account, FDI Outflows, Geopolitical Reshoring away from China, potential New Tariffs/Sanctions/Export Restrictions especially under Trump, etc.), it’s not even clear to me that a CNY Devaluation can solve China’s ills, but what I know for certain is that an overly Strong CNY (even at 7.25) will not help!
That said, let’s assume the PBOC continues its interventions and also tries to avoid “Japanification” through stimulus measures to achieve its Top-Down GDP Targeting of 5% growth?
What are its viable policy levers?
Oh wait, the current Real Estate Bust is the result of decades of Top-Down GDP Targeting!
You can feel the cognitive dissonance at the PBOC, first with its Three Red Lines policies and all the jawboning about “houses are for living in and not speculation,” and now that both creditors and most of the population have gotten decimated in the aftermath of Evergrande and Country Garden, they’re resorting to half-hearted measures to stymie the hemorrhaging.
I joke about it being a “Non-TARP” because they need to unleash a Monetary/Fiscal Bazooka equivalent of “TARP on Steroids” for this to work. And what would such a Bazooka do to Interest Rate Differentials especially when the Fed is not done with its work? We go right back to CNY Devaluation pressure!
Can they get the GDP growth elsewhere without reflating its Real Estate sector, especially when 70% of Chinese household wealth is tied up in Real Estate and reviving consumer demand without it would be like flogging a dead horse?
Given the glut of 100 mm empty homes, what if China gives up on Real Estate anyway and targets another sector to channel its Top-Down GDP Targeting stimulus?
The Gretaverse — a term I coined for the economically unrealistic Energy Transition/Green Energy sector — appears to be that sector:
Referenced article is here:
"Why a small China-made EV has global auto execs and politicians on edge"
What’s the problem? It’s not nearly as relevant as the Real Estate sector to move the needle for China’s consumer confidence, and given the rising protectionist sentiments amongst other Net Exporters like Japan and Germany (not to mention US EV Exporters), China’s degrees of freedom become limited once again to — you guessed it — CNY Devaluation.
Targeting the Gretaverse is no longer just my theory either.
Guess what Yellen is in China discussing right now?
Caveats & Contingencies
The risk of analyzing China purely through the lens of Western Economic Rationality is high given Xi’s Maoist bent. I’ve even steel-manned this argument in a discussion with Andy Constan:
Mao had no qualms about putting the Chinese people through great hardship, and the fact that Xi is cut from the same cloth as Mao gives me pause in placing too much weight on Western Economic Rationality.
That said, I believe there are limits to what today’s CCP can do given its preoccupation with staying in power. Austerity works until you have massive social unrest, and here was a tell that even Xi has a breaking point:
Here is a great essay by Ray Dalio that sums up the evolution of China over the last century:
In China: The 100-Year Storm On The Horizon
Once again, I recommend my West Point Paper as a complement:
CONTESTANT 3: ECB
Scylla/Charybdis Dilemma: Follow the Fed or Out-Dove the Fed?
I’ve been predicting for over a year now that the RoW will not be able to Follow the Fed. It was already evident last March:
Given the EUR’s 60% weight in the DXY, I thought I would focus on the ECB’s particular Dilemma (even though it is shared largely by the UK and other non-EU European countries).
In my recent Show Notes from Interview: TastyLive "The Price of Truth" Show with Victor Jones (link at end), I outlined the set of circumstances that setup this Dilemma:
BADDER Choice 1: Follow the Fed
The ECB has been hoping upon hope to Follow the Fed in its policy moves, but the Economic Divergence as delineated above will make it very difficult for it to do so this time both in terms of timing and in terms of scope of Rate Cuts.
Economic Divergence between the US and EU gained momentum through the year:
Some fresh data points from Malmgren-Glinsman Partners on Friday corroborate continued weakness in Germany, Europe’s largest economy by far:
Economic Divergences aside, the ECB’s job is also structurally more difficult than the Fed’s because there is no full Monetary and Political Union like in the US, and it must worry about Intra-Regional Divergences in Sovereign Spreads as well:
The bottom line is that a Follow the Fed strategy in terms of potentially staying H4L on Monetary Policy would likely plunge Europe into deep Recession and represents the BADDER Choice, imho.
Bad Choice 2: Out-Dove the Fed
The EU is also a large Net Exporter and would benefit from a weaker EUR. As you can see from the chart below, this is a reason why China, Japan, and the EU are all likely to Devalue their currencies against an intransigent Fed and why it behooves the US to have a Strong USD despite the occasional bellyaching from certain US Exporters:
Currencies aside, as the picture of China’s knockoff Porsche Taycan shows, Europe is also feeling the sting of China’s targeting of the Gretaverse.
So what’s potentially BAD about Out-Doving the Fed and weakening EUR? Potentially IMPORTING Commodity Inflation (similar to China and Japan).
Europe could have been almost completely hedged on the Energy Security front were it not for some short-sighted decisions to decommission nuclear reactors even in the aftermath of the Russian invasion of Ukraine. Europe has been lucky so far from mild weather leading to a glut of Gas, not to mention LNG coming to the rescue.
Time will tell whether it will stay lucky, but for now, there seems to be relatively low downside for the ECB to Out-Dove the Fed. Given relatively low Gas prices (Oil is a different story), at least the prospect of importing Inflation through a weaker EUR is somewhat lessened.
Caveats & Contingencies
As mentioned in the BOJ and PBOC sections, Competitive Devaluation is a concern. I might not get the sequencing right in terms of JPY being the starting domino; it could just as easily be the EUR. Again, my biggest concern is what such a domino ultimately forces the PBOC to do with CNY.
CONTESTANT 4: FED
Scylla/Charybdis Dilemma: Fight Inflation or Prevent Recession?
Now we come to the Big Kahuna, and it’s interesting that the basic Dilemma still hasn’t changed from when I talked about it in 2022, despite how aggressively the Fed has hiked thus far:
I refer you to the Show Notes from my recent Interview: TastyLive "The Price of Truth" Show with Victor Jones (from 3/26/24), where I covered:
The terrible Risk/Reward of the December Rhetorical Pivot
My Machiavelli Powell Conspiracy Theory
The higher “Activation Energy” required to institute a Package of Cuts in the face of Resurgent Inflation
My biggest frustration with the December Rhetorical Pivot was the utter lack of tangible benefit:
Bad Choice 1: Fight Inflation with H4L
Despite the repeatedly Dovish tone of the Fed since December, there have since been overwhelmingly more Hot Economic Data Points (first Core PCE and ISM Manufacturing) as well as Hawkish Fed-Head Commentary from current and former FOMC members Mester, Daly, Bostic, Kashkari, Bowman, Harker, and even Goolsbee (!) all citing the “lack of urgency” to Cut.
Friday’s scorching Nonfarm Payrolls Number likely means NO CUTS FOR THE YEAR given my “June or Bust” argument that the Fed will either cut by June or not at all to avoid looking partisan in the leadup to Elections:
Nevertheless, Risk Assets shrugged this off, as if daring the Fed to fully retract its December Dots:
I see H4L as the LESS BAD Choice by far, especially when you consider the combination of: Resurgence of Risk Assets (and what it portends for the Wealth Effect), the Lack of Broad Credit Stress, and the Resurgence of Oil (even though I’m skeptical of the longevity of this Bull Run — more on this later).
Here is a striking chart of Loosening Financial Conditions from Lakshmi at Capital One:
Variant Perception also puts out a proprietary VP Leading Indicator of US economic conditions, and it is clearly inflecting HIGHER as well:
Finally, the Oil Spark lit the Structurally Inflationary Dry Tinder back in 2021 in my opinion, and it would be a mistake for the Fed to ignore its impact now:
BADDER Choice 2: Prevent Recession with Preemptive Cuts
To me, Preemptive Cuts potentially set us up for a SECOND ROUND OF HIKES IN 2025. I have been worried about this for a while, as you can see from my 2022 quoting of Bridgewater:
It’s no longer just me talking shit either. Witness Bowman’s comment on Friday — this is how the Overton Window begins to shift:
What about the Unsustainability of Government Interest Payments at current rates?
I think prolonging the Inflation Fight ends up costing the Economy more in the long run. There is no easy answer of course, but this recalls an interesting Thought Experiment debate I had with Mike Green back in 2022 regarding Austerity vs. Hyperinflation:
Meanwhile, both Long Bonds and Gold are both signaling NO CONFIDENCE in the Fed’s ability to stay the course:
The US-Centric view on Gold is that it is anticipating Lower Real Rates (chart below thanks to Nicholas Glinsman), and Lower Real Rates can come from either Lower Nominal Rates and/or Higher Inflation, both of which would happen if the Fed cut prematurely:
Gold’s continued ascent despite this past week’s litany of Hawkish Fed-Head Commentary suggests a NON US-Centric explanation:
RoW’s inability to Follow the Fed into H4L could lead to Competitive Devaluations and start (Eur)Asian Contagion 2.0:
But didn’t Gold go down during Asian Contagion 1.0?
Yes it did, and as an astute reader pointed out, the Steep Yield Curve may have something to do with Gold’s underperformance relative to Long Bonds then:
This obviously points to Higher Long Yields and bolsters my view that a Steepener is coming one way or another. If the Fed chooses H4L, we get a Bear Steepener, but if the Fed chooses Preemptive Cuts, we get even more severe Bull Steepener.
This is what I wrote in my “Dipping Dots” post:
While it’s somewhat perplexing that DXY backed off after the recent spike up, I think it could be due to Central Bank Interventions. I remain Bullish USD relative to most other crosses because of the Four Horsemen of US Economic Resilience (see post at end) relative to RoW, and I continue to believe that RoW will Out-Dove even a potentially Dovish Fed (albeit less so after this week) either in terms of duration or scope or both:
Caveats & Contingencies
Preemptive Cuts now would really crush the Working Class Have-Nots, as would moving the Inflation Target Goalposts.
There is a huge difference between Disinflation vs. Deflation. Not only is the Inflation Rate not yet where we need it to be (and actually inflecting HIGHER thanks to the December Rhetorical Pivot), we are a far cry from the Working Class being able to afford the absolute PRICE levels from years of Compound Inflation:
The whole world is watching the Fed and hoping for Cuts because it eases the Devaluation Pressure on their currencies against USD, but the feedback loop from Preemptive Cuts likely sets us up for Renewed USD Strength in 2025 from a Second Round of Fed HIKES as postulated earlier.
I am watching BOJ and PBOC closely, because what they do may actually determine Fed policy more than anything — especially if we see that Deflationary Pulse from a CNY Devaluation:
What about the hope of AI-inspired Deflation and Productivity?
While I believe that AI will provide Deflationary Tailwinds (which ironically calls into question some of the current AI valuations and TAM assumptions baked into the go-go AI Stocks) and will ultimately result in Productivity Boosts, I also think it will be counteracted by Structurally Inflationary Headwinds like the Reversal of China’s Demographic Dividend.
In the 90’s, we had both Internet-enabled Deflationary Tailwinds and Structurally Deflationary Tailwinds that allowed the Fed to dampen Business Cycles with Endless Liquidity Lottery without incurring Inflationary pressures; now, I think it’s a push at best.
Unless the AI-inspired Productivity Boost is an order of magnitude higher than the advent of the Internet itself, I think the bogey for Endless Liquidity Lottery is higher today because we now have a Structurally Inflationary Headwind versus the Structurally Deflationary Tailwind of the 90’s.
I wrote two past posts that deal with this Demographically Induced Structural Inflation theme in detail, with both links at the end:
Re: Inflation-Demographics & Secular Stagflation.
Re: Geopolitics/Demographics/Inflation - The Great Power Competition Between US & China.
CONTESTANT 5: OPEC+
Scylla/Charybdis Dilemma: Stay With Cuts or Regain Market Share?
I have been saying for over a year now that it was a mistake for OPEC+ to fight the Fed and cut prematurely (See “Re: Oil/Inflation/Geopolitics - Squid Game Tug-of-War” at end of post).
BADDER Choice 1: Stay With Cuts
In a nutshell, while it has created an artificially tight market, by fighting the Fed, OPEC+ is laying the groundwork for Demand Destruction even as higher Oil prices in the short-term keep the Fed perversely more vigilant on Inflation.
Despite heavy cheating by the likes of Russia and UAE, Saudi Arabia has borne these cuts unilaterally and now has 3+ mmbpd of Spare Capacity. Once you include Global Spare Capacity, we are talking about a cushion of 6-7 mmbpd, which will cap this Oil run, imho.
I penned a detailed piece last year, expressing skepticism over the sustainability of unilateral Saudi cuts, entitled “Re: Oil/Investing - Lessons From The Oil Patch / Will Atlas Shrug?” (link at end).
Despite recent strength (that I suspect has more to do with the broad-based Commodity Reflation Narrative compounded by Iran/Israel Escalation headlines), I am concerned about a simultaneous Weakening Global Demand + Geopolitical DOWNSIDE from an upside surprise in Supply.
If it took Saudi Arabia over a year bearing all of these unilateral cuts just to get Oil back to ~$90 (after treading water mostly in the $70s) , what is MbS’ Exit Strategy?
MbS is trapped in the same way BOJ is trapped:
The knee-jerk reaction to the Red Sea Disruptions was to price in Upside Geopolitical Risk, but note the high volume of Oil on the Water:
If you want to visualize how ugly it’s been for Saudi Arabia to bear these unilateral cuts, take a look at just this comparison:
For all of these reasons, I think for OPEC+, the BADDER Longer-Term Choice was Staying with the Cuts. They now no longer have bullets to deal with a Weakening Demand Scenario.
Bad Choice 2: Regain Market Share
The UPSIDE Geopolitical Risk to Oil is an anachronistic trope.
US Shale Production at 13+ mmbpd, a huge Global Spare Capacity Cushion, and the combined US and China Strategic Petroleum Reserve (SPR) all make today’s Oil Market vastly different from the Oil Market of 1973.
Given MbS’ inability to exit his unilateral cuts, the true Black Swan is DOWNSIDE Geopolitical Risk in my opinion, which is a very contrarian take:
If you read my “Lessons From The Oil Patch” piece, you will see that OPEC+ has historically not been afraid to sacrifice near-term gain if it makes strategic sense for it to do so. Furthermore, MbS is a wily political actor that despises the current Administration, and a potential Trump win in November could have serious ramifications for Oil:
Oil spiked on 4/4/24 supposedly due to Iran/Israel Escalation:
While I get the knee-jerk headline risk, there likely will be little to no actual impact to Oil Supply.
Again, this is NOT the Oil Market of 1973, and none of the recent Geopolitical Spikes in Oil have resulted in actual Supply Disruptions! Since the Russian invasion of Ukraine, actual Geopolitical Disruption to Oil Supply has been ZERO.
According to my favorite Oil analyst Lakshmi Sreekumar, the Iran/Israel Escalation is also likely to also result in zero actual disruptions. Contrary to the hyperbolic voices, she believes there is actually more alignment and stability between the Oil Producers in the region now, given the unpopularity of Israel’s continued offensive in Gaza in the Middle East.
Not only that, Iran is adding 19 new VLCCs to their fleet in May. Here is what she thinks Iranian Supply looks like for 2024:
What happens to Oil Demand in a real Kinetic Escalation? It goes DOWN.
Witness the stark underperformance of International Airlines on 4/4/24 as a knee-jerk tell:
Caveats & Contingencies
Geopolitics aside, Demand Weakening in RoW as Tight Monetary Policy expressed through the USD Wrecking Ball is what concerns me, especially when MbS still needs to recapture market share.
There are some complicated Feedback Loops at play here, but in the end, I don’t think RoW Out-Doving the Fed will be enough to sustain Oil without the Fed itself coming around:
According to Lakshmi, 45% of 2024 Demand Growth is expected to come from China! Things are holding up ok so far, but that’s a heavy burden to place on a country that’s saddled with Cyclical and Structural problems and likely to experience significant CNY Devaluation if the Fed stays H4L:
I’ve argued for over a year that OPEC+ would have been better served in the long-term if it preserved its bullets for when the Fed is action in sync with it.
The stars lined up in early 2021, and I got very Bullish in early 2021 because of the signal quality of the Contango-to-Backwardation Flip (see Re: Oil-The Significance of Backwardation at end of post), but note that there is no similar Holy Grail to warn you of an impending drop (see Re: Oil-Forward Curves & Holy Grails (or Lack Thereof) at end). By the time you see the Forward Curve drop into Contango, it is way too late.
The current dynamic of spiking Oil prices is not good for OPEC+ because it adds yet another arrow to the “No Cuts” quiver of the Fed even as it causes Demand Destruction longer-term; a move to regain Market Share relaxes the Fed on one front, but is more constructive longer-term as it prices out US Shale if Oil moves low enough.
I conclude this section with Lakshmi’s 4/5/24 Oil Note:
“And for oil, this is setting up for a higher supply and lower demand scenario not JUST from price elasticity, but also from a significant global MONETARY POLICY WHIPSAW. Global macro is setting up very much like Q2 2022 right now.”
I 100% agree.
There are two Non-Economic Contestants worth mentioning, albeit briefly.
CONTESTANT 6: NATO ex-US
Scylla/Charybdis Dilemma: Become Independent of US or Rely on US?
As Alex Stahel says, “EU defense stocks are to Europe what AI stocks are to the US stock market.”
Rightly or wrongly, the markets are pricing in a higher probability that Europe needs to bear a much higher share of its Defense Spending going forward.
Bad Choice 1: Become Independent of US
The only “Bad” thing about this choice is that the incremental Economic Burden for Europe is coming at a time when it is already being squeezed by the ECB’s bid to Follow the Fed.
Geostrategically, European NATO becoming more independent of the US makes all the sense in the world — with or without Trump.
Bad Choice 2: Rely on US
While Trump certainly was first to vocally “Make NATO Members Pay Their Fair Share,” as the US struggles itself with Fiscal Profligacy and Inflation amidst multiple Geopolitical Hot-Spots, it has become increasingly evident that the bogey to fund foreign entanglements is becoming higher and higher as a BIPARTISAN issue.
Nevertheless, as this chart from
shows, there is definitely less support for increased NATO commitments from Republicans, so perhaps the parabolic moves in EU Defense Stocks are also making a US Election forecast?Caveats & Contingencies
Judging by the parabolic moves in EU Defense Stocks, it seems like the EU has indeed “found religion,” and this additional Fiscal Expenditure may add more pressure for the ECB to Out-Dove the Fed.
Germany, the largest EU economy, stands out as a laggard in NATO Spending. The weakness of the Germany economy and the heavy Bundesbank representation on the ECB could further pressure the ECB to Out-Dove the Fed — especially if countries like Germany face pressure from a potential President Trump to catch up on NATO Spending.
CONTESTANT 7: US VOTER
Scylla/Charybdis Dilemma: Biden or Trump?
This is the ultimate Scylla/Charybdis nightmare and the last one I’m covering in this missive.
The fact that the best a nation of 350 mm people can do is to come up with two extremely flawed candidates born before the Industrial Revolution is beyond me, but here we are. Again.
It’s way beyond the scope of this post to delve into all the Policy Implications, but I’m going to point out several interesting exhibits.
Two charts from
in his 3/31/24 “Age of Disruption” Substack stand out:Malmgren-Glinsman Partners also had an interesting graphic from their 4/5/24 “Politics Take” newsletter:
Note in particular the BIPARTISAN ALIGNMENT AGAINST CHINA.
This is where I conclude my missive.
“Wait, you didn’t opine on who’s BAD and who’s BADDER!” you might be asking.
If you think I’m going to wade into that Political Mosh Pit, I have a great song from Judas Priest for you:
With that, grab a cup of coffee (before it too hyperinflates like cocoa) in your favorite "IS THAT BAD?" Coffee Mug and join me in querying “IS THAT BAD?” to all the choices faced by all the luckless policymakers of the world in this BATTLE OF THE BADS!
Referenced Previous Substacks:
(in chronological order)
Re: Oil/Inflation/Geopolitics - Squid Game Tug-of-War.:
Great post Michael. For readers, like eating and digesting a 7 course meal :).
A few of the Bad OR Badder choices could be Both, And…
Thinking about Capital Controls, consider also the lite versions of Coercions to do the patriotic thing, ie. Japan repatriation, and for US banks zero margin incentives to buy and hold more USTs, etc… country specific coercions.
As to “houses are for living in, not for speculation” that’s actually very good advice more Americans should seriously think about especially more so after Covid era Shelter Asset Mania so prominent in certain zip codes. Two 2 Sigma Events within 15 years (2007-2022) Price is what you pay, value is what you get. Financial markets suffer from chronic memory deficit disorder :).
Thanks for the excellent post. "You BAD."