Rabo: Markets Waiting For Next Five Year Plan To Transform Rotten 20s Into Roaring 20s
By Michael Every of Rabobank
My key theme so far in 2021 –now that “Covid is behind us”: the latest headline is US President Biden promises everyone will be vaccinated by the end of May, suggesting we can trade that recovery meme all over again today for the nth time– is that this is not going to be The Roaring 20s in any *good* sense; indeed, they were the Rotten 20s for many. Yet that doesn’t mean there aren’t worrying historical parallels, because there are:
A killer virus; unpayable debt can-kicking; betrayal of promises to look after the working class who had fought the war; massive inequality; political polarization; cancel culture; risks of both hyperinflation via currency collapse and biting deflation; the foundations of liberal democratic capitalism rotting; other ways of running the economy being cheer-led; technological advances (TV, trans-Atlantic flight and phone calls, quantum theory); new global institutions; and asset bubbles, to name a few. The 20s also saw the first ever Five-Year Plan in the USSR in 1928, just before the Wall Street Crash in 1929. How appropriate that seems today.
A century later, and as Bloomberg tells it “Chinese Investors Await Policy Signals to Boost Faltering Stocks”. Those stocks are faltering because markets were shaken by Guo Shuqing, head of the China Banking and Insurance Regulatory Commission (CBIRC), the country’s top regulator, stating: “Financial markets are trading at high levels in Europe, the US, and other developed countries, which runs counter to the real economy.” Guo added asset-price gains have been a direct result of virus-related measures from central banks and governments over the last year, and he warned corrections may come “sooner or later.” He also warned about “dangerous” property speculation in China, and was concerned that foreign capital could flow in too quickly and create further instability: the CBIRC is apparently looking at ways to control those inflows.
This was notable in two respects. First, property (and high prices thereof) is a far larger driver of the Chinese economy than outsiders see: fine-tuning such bubbles is never easy. Second, where is the Western central banker willing to speak the same truths?
Anyway, back to the Bloomberg article. Chinese investors are apparently waiting for signals from the nation’s top political meeting, the National People’s Congress, which starts Friday. In short, they need to be told which areas of the economy are going to receive government backing in the next Five-Year Plan. Strong speculation is the three main beneficiaries are going to be renewable energy, defence, and semiconductors, as Beijing tries to cut its dependence on imports from the West. This sounds a fairly safe bet, sectorally. Not only are those areas regularly mentioned in official speeches, but all of them are seen as existential in some form.
However, it doesn’t take much forward-looking equity “research” to see this. Any real look at history would have suggested that if we are relying solely on asset bubbles for support, it’s not a sign of a healthy global system – it’s the sign of underlying decay in one, like the 1920s. As such, the smart money would also be in rearmament and decoupling plays: indeed, this daily predicted exactly that outcome a long while ago – and not just for China, but for everyone.
Even the ‘benign’ green angle is part of this picture. The European Commission’s trade plans for “Open Strategic Autonomy” said the EU is considering plans to introduce a border carbon tax to effectively block ‘dirty’ imports, and even offer export credits for green EU tech in third markets: now the Biden administration is considering exactly the same thing. This could potentially be far more disruptive than any Trump tariffs – and they already saw significant redirection of global trade flows. (Recall conversations back in early 2017 about how iPhones ‘had to be made in China’? Well now it’s Vietnam and India too.) Just imagine if the EU and US decide Chinese products are not green enough and raise tariffs.
Of course, the optimistic view is China will therefore also go green, and we get a huge investment surge globally – welcome to Financial Journalism 101 (No history books required). However, the EU and US —and China– are abundantly clear this green tech push is not just about the planet: it’s about people, or rather good jobs for people. For their people.
Even if all three economic giants benchmark green standards higher (and leave behind a swathe of smaller economies and SMEs), are any of them going to be content to *import* all the green tech from the others and miss out on the employment opportunities of that new production? No! The US —and EU– are already pushing ahead with plans to maintain (or develop) their own semiconductor supremacy; in the US case this involves deeper economic ties with Taiwan.
And if they won’t import, then how do they export? Perhaps to the rest of the world ‘to help them ‘go green’? Sure: but whose green tech, to where? And how do we allocate the key green inputs, like lithium, which few of these giants have domestically, at a time when their prices will be soaring and everyone wants them? And in which currency will they be bought: USD, EUR, CNY? If only we had a League of Nations to decide all this for us….
Moreover, if green goods can’t be exported, then local supply has to be in line with local demand. That means internal rebalancing alongside global. It will mean stimulus in some places (note the UK is about to extend its furlough scheme to September even though it is far ahead of the EU and US in terms of virus vaccination). Yet ultimately said stimulus would need to circulate domestically, not flow out for goods produced elsewhere, or as destabilising hot money into other markets (as the Chinese regulator just alluded to). That means much more regulation and deglobalisation – as we eventually got after the 1920s ended badly.
I keep repeating this strategic theme, based on both logical outcomes and clearly identifiable historical patterns (it’s not dialectical materialism, but it’s better than nothing): and markets of course care not a jot. They will, quite rationally, wait to be told which sectors governments are going to make winners in states with Five-Year Plans – which may be more of us sooner rather than later. With all the flow-on consequences. At least one could argue this is an improvement over the Western Five-Year Plan deployed since the GFC so far: “Go long stonks and houziz”.
On which note, Kiwi house prices rose 14.5% y/y in February – so what is the RBNZ going to do about it? It’s part of your official mandate now guys, and prices are going up many times faster than wages. IT’s talking about doing more QE, to effectively lower rates….which makes mortgages cheaper. So macroprudential regulations for housing then, please, chop-chop? (And then let’s see how the rest of the economy copes given how much houziz iz where it’s all at nowadays).
Aussie Q4 GDP was likewise 3.1% q/q vs. 2.5% expected, and with revisions was -1.1% y/y vs. -1.9% consensus: so what are the RBA going to do after having just acted exactly as flagged in yesterday’s Daily – saying “sorta kinda whatever it takes”, disappointing the markets, and watching key bond yields push higher again?
It may seem unrelated, but all of this should feed into your view of what things will look like five years from now, globally. Plan accordingly.