Blain’s Morning Porridge April 22^nd, 2024: Markets, the Dollar, US Politics and China as the loser.

“Governments need enemies, if they do not have one they will invent one to mobilise us.”

Markets should be relieved at the US reaching a bipartisan deal on Ukraine and Israel, but will likely be fixated on the current stock market wobble – which could turn sour. The real issue is how the weekend US deal clearly focuses the US vs China, and that has massive market and economic implications.

Harry Hindsight is the greatest trader I ever met. This is going to be a fascinating week – what will stock markets do next? We have a very earnings-hefty few days in prospect. Will something happen or be said that resets the narrative? Will we go up… or down…? This is heaven, this is hell, anyone for the last few choc ices? as someone brighter than I once said..

Over my brief nearly 40 years (!) in markets I’ve noticed how we often miss the immediate significance of the “events” that trigger major market shifts; Harry Hindsight saw how a series of bad US deficit numbers led to a sudden rush to the exits triggering Black Monday in 1987, how a Thai currency wobble metastasized into the Asian crisis in 1987, and how the run on Northern Rock in 2007 and gating a few Bear Stearns ABS funds led to the long rumbling crisis that culminated in the collapse of Lehman Brothers in 2008.  Equally, a single action by central banks, for instance the ECB announcing unlimited secured lending to wobbling banks triggered the start of the longest, strongest European bond rally. (Actually, I called that one – live on Bloomberg as they said it many, many years ago.)

I am wondering if the current stock market ructions will be hindsight acknowledged to be a factor of Central Banks increasingly making clear we are in an era of “normalised” interest rates – that 4-5% rates will be the norm, rather than the 2% equity markets have been pricing themselves off. (Of course its never that simple – equity prices are likely to remain high, because 15 years of cheap money financing private equity and stock buybacks, and fewer IPOs of new companies coming to market means there are simply less equities in the market..)

Or will the market take strong earnings this week as a signal to rally, or weak earnings as a signal to dump. Or will a single worse than expected number from a market darling derail hopes and expectations across the whole market…? Who knows.. Let’s wait and see.

One of my many market mantras is: “the surprising thing about the dollar is the number of people who don’t believe in it.” Many market participants in Europe (but also some in the US) believe this November’s US election will fatally weaken global confidence in the greenback as American politics are likely to degenerate into further polarisation, authoritarianism, or even conflict.

While US rates remain elevated, the dollar’s remorseless strength will continue. Although it will mean higher debt service costs across Government and the economy, it also means the US insatiable hunger for debt can be funded… unless of course the market lost confidence in the USA’s Virtuous Sovereign Trinity of a stable currency, a sustainable bond market and political competency.

Political competency is a critical issue – especially given fractured and dysfunctional US politics we see today.

On Saturday the USA put a degree of political competency back on the table – approving the critical monies to fund the defence of Ukraine, Israel, Taiwan and its own youth by voting through the TikTok ban/sale legislation.

It wasn’t a perfect deal by any measure, but congratulations to Speaker Mike Johnson – the comparatively unknown Republican now being hailed as “Churchill” by at least one US paper. He will likely be defenestrated (served a motion to vacate, rather than thrown out a window) by his own party for cobbling together the right answer to all these problems by committing the cardinal sin of being bi-partisan in the service of his country. The Republicans may all be about the Art of the Deal, but dealing with Democrats is unforgivable to the MAGA Right.

Ukraine was the critical issue. The question is why has it taken so long?

The answer is simple – Donald Trump’s political calculus already showed a win. He achieved what he wanted – flexing his control over the party to create the funding standoff, while demonstrating to the American People it’s his loyal party that was holding President Biden “accountable”. Now that has been done, he’s on to the next thing – which won’t just be his multiple court cases, but the actual business of winning the election.

Trump will be claiming credit for the weekend’s deal as proof only he can make polarised USA work. (Nothing works politically as well for the Republicans as fuelling a constant stream of crises for the current administration which Trump can play from the grandstand.) Already the narrative is being shifted from why the minority of Russian-favouring Republicans held back aid, to blaming the dangerous leftist Progressives for wrecking his nation through their commie sympathies and destructive wokery!

Let us not forget 112 House republicans voted against Aid to Ukraine – yet, the first comment I got from one republican chum was about the treachery of the 37 Democrats who opposed further aid to Israel (as did 21 Republicans).

Speaker Johnson has done the “courageous” thing: the right thing but at the risk of apparent political suicide. In an America which would rather be voting for anyone else but Trump or Biden, isn’t it a shame that good men and true aren’t the ones who will be standing in November? Some think Johnson made a pawn sacrifice, but in the game of chess that is politics maybe that pawn is promoted to Queen – becoming the party’s kingmaker… (bit of a mixed metaphor as a pawn becomes a kingmaking queen – but you get the drift..)

The weekend’s vote in support of Ukraine does not mean the USA is fixed – but that it is pragmatically fixable – and that’s the key takeaway for the markets. It hints how things under Trump Mark 2 may not be nearly as bad as we fear.

US politics will remain dysfunctional and highly polarised because that’s what happens when populists, like Trump, make it so and have captured the party. But Trump will not last forever. While some commentators say the Republicans who voted in favour of the bipartisan deal were brave and fearless, I reckon they did so because there are unlikely to be Trump recriminations to follow. Another way to look at the vote is how Johnson was effectively chosen by Trump, yet has chosen to the right thing – that’s a hopeful signal about how a second, more pragmatic, Trump administration could function.

However… choose your enemies carefully…

Ultimately, the weekend votes were less about the importance of supporting Ukraine and Israel, but the signal they sent to China. The Pacific aspects of the funding deal got most votes, demonstrating the House is united in its support for Taiwan, and by ramping up production of new US attack submarines to patrol the Taiwan straights they made a clear don’t mess statement. The threat to TikTok confirms the US agrees on one thing – China is the real enemy.

And that’s the real issue – in its struggle to find some kind of political unity, the US has effectively declared an economic cold war and re-armament race against China. That will have serious and massive economic, supply-chain and cost implications which will impact against the West.

The US has the advantage of a robust, internalised and self-sufficient economy – yet it still needs access to critical resources and technologies. Conceivably it could do without external alliances – but these are critical markets for US goods and services. These are the same markets China – with its greater need of external resources – is looking to service.

Here in Europe we’ve been shocked and feel threatened by Trump. He’s successfully awoken Europe to its need to defend itself (a good thing), but raised increasing distrust of America and the need for Europe to choose a new route. Will Europe slavishly follow the US lead on China? Now that is going to be interesting – China is something we need to think about more… I’m not convinced it’s not a threat, but it’s certainly a massive opportunity at a time when Europe and the US are likely to diverge.

More on China soon…. Will be keeping a close eye on markets this week… this might just get fruity…

Out of time and off to the day job…

Bill Blain

Author of the Morning Porridge

Wind Shift Capital

www.windshift.capital