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By Michael Every of Rabobank

A Long-expected Party

US stocks closed H1 with a continuation of the recent bullish trend. You can’t stop the party: not even if the Bank of America and Mohammad El-Erian both join Larry Summers as splittists and no longer see inflation as “transitory”; nor as Ford reduces output in the US due to a lack of parts; nor as US retailers realise they won’t have stock for Xmas. (“It’s going to be a major, major mess,” says one executive; “I’ve told our investors, and my internal team, something will be out of stock – there will be an issue. I don’t know when and I don’t know what it will be, but it’s certainly going to happen,” says another; “It’s too late for Christmas,” concludes a third.)

Over in China, everything has ground to a halt for The Communist Party – a celebration of the CCP’s 100th anniversary. Today’s local headlines: “Global minds interpret essence of CPC’s vigor and vitality” (Global Times); “Celebrating the success story of CPC” (China Daily); and “UNDERSTAND CHINA: The CPC is the ‘holistic interest party’ of the people” (People’s Daily).

Two days earlier, Foreign Policy’s The Emerging Biden Doctrine argued: “…what is driving the US’ relations with its principal rivals and what is at stake…links great-power competition to the revitalization of American democracy and the fight against transnational scourges, such as corruption and COVID-19. And it focuses the US on a truly grand strategy of fortifying the democratic world against the most serious set of threats it has confronted in generations.”

Set that against a Foreign Policy article in 2012 on ‘The Biden Doctrine’ as Vice President, where he stated: “I think that our administration has a more realistic view of what we are capable of determining or dictating in terms of the behavior, the internal functioning, of other states.”

Meanwhile, the Financial Times headline today is: “The United States and Japan conduct war games amid rising China – Taiwan tension”; and The Wall Street Journal’s op-ed “100 Years of Chinese Communism” argues “The Party’s reliance on fervent nationalism is a danger to global freedom and democracy.” Are bullish markets overlooking potential *fat* tail risks from geopolitics: the answer seems self-evident to many outside markets.  

As the two sides square up ideologically at least, if one needs an accurate critique of capitalism, look to Marxists to deliver it. Today we also see a Global Times op-ed (“Sticking strong to industrialization, China will win competition with US”) argue:

“The values of top five US companies – Apple, Amazon, Alphabet, Microsoft and Facebook – have increased $1.28 trillion since the beginning of the year. Analysts believe the year of 2021 is likely to be the same as last year – another year of carnival of US high tech giants. But behind this carnival is the deepening of virtualization of the US economy. This will make the Biden administration’s goal of boosting US infrastructure and reviving its manufacturing sector ever more distant. This has nothing to do with money. It is a question of whether the US economic structure can sustain the operations of a “major empire.”….Sticking to industrialization, offering more support to the real economy and pursuing to realize high-tech industries on the solid foundation of industrialization, all these policies have been inked in China’s 14th Five-Year Plan (2021-25).”

Consider that as markets only focus on the Capitalist Party. For two examples, the global minimum tax rate of 15% flagged by President Biden and the G7 won’t apply to Western banks, which logically will do nothing to reverse the process of polarizing, erosive financialisation that has plagued the West for decades. (And which Marx was already critiquing as “fictional capital” in the 19th century UK.) Likewise, following Facebook’s antitrust court win this week, Amazon is lobbying to have the head of the FTC recused from ruling on its proposed takeover of MGM because she had previously argued against Amazon’s market power. Having a strong opinion on matters related to one’s purview, if not favorable to Big Tech, is now a conflict of interest, apparently. What is it that dies in darkness? One forgets.

Here’s a question for you: Marxist doctrine aside, when exactly did capitalism go so wrong?

There are strong arguments that the end of the last Cold War allowed neocon, neoliberal hubris to lead to its own nemesis. On a smaller scale, some point the finger at that the 1998 emergency rate cuts from Fed Chair Greenspan to save US financial markets from the spectacularly-leveraged, spectacularly-wrong LTCM hedge fund collapse. This is seen as the foundation stone for the moral hazard on which all subsequent asset rallies are based: the belief that the Fed will always be there to cut rates (and do QE, or give swap lines) when things go wrong. Even from people who dislike regulations, ‘big government’, and paying taxes.

Back to today, and the irony is that Russia, in defaulting on its debts and so triggering the LTCM collapse, threatened the US financial system far more than it ever had as the Soviet Union. Nobody in power in the US seemed to take that ‘grey zone’ geostrategic lesson to heart: yet the same principle is at the heart of matters today – and of why markets refuse to seriously discuss it.

It’s far easier to do what the 91-year old BIS did this week, and give a rallying speech arguing for near-term monetary and fiscal support – and yet medium term fiscal consolidation, and rebuilding monetary buffers, while keeping central bank independence; and for higher investment without higher public debt; and for more spending on education and health, which don’t deliver short-term growth returns, even if they are a public good; and that green technology is the key to higher, non-inflationary, debt-reducing growth —“We’ll keep the green flag flying here”– despite the implied neo-mercantilism required. (On which note, India just argued proposed EU and US carbon border taxes are unacceptable to it and other emerging markets.)

It seems the virtualization of the economy is perhaps spreading up into the realms of economic theory. As any good Hegelian Marxist would tell you, as the world gets more realpolitik, the obvious dialectic temptation is for some to retreat into surrealpolitik. Until the point of praxis is reached.   

So please take today’s historic milestone to do something capitalism no longer seems capable of: look beyond the next quarter, and ask yourself where you think the world, and world markets, will be, not in 100 years, but in 10. And position accordingly.