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Rabo: The "Roaring 20s" Are Pushing Us Deeper Toward 1929

By Michael Every of Rabobank

The “Roaring 20s” continued to roar yesterday, pushing us deeper towards 1929 even if it is unclear exactly where we sit in the parallel to that unhappy decade. I have repeatedly said the 1920s are a ridiculous analogy for our 20s if that is meant as anything positive. We’ve all had fun dressing up as The Great Gatsby at an office party; and lots of people are having fun dressing up as The Great Gatsby in real life today; but very few dress up as hungry British workers during the General Strike (1926); or Soviet workers carrying out the first 5-year Plan (1928); or recall that The Great Gatsby was published in the same year as Mein Kampf (1925); or that Mussolini’s fascists had taken over Italy two years earlier (1923), and he won a thumping 2/3 general election victory in 1924. Kind of takes away the taste of the champagne a little, doesn’t it?

Regardless, up everything goes, including oil. The bitter freeze in Texas has seen several oil firms declare force majeure. And both freezing and exclamations towards the heavens are evident in the Middle East after a major diplomatic shift that sees the US “recalibrate” its relations with long-time ally Saudi Arabia through King Salman bin Abdulaziz rather than his powerful son, Crown Prince Mohammed bin Salman. The White House says it will maintain defence ties with Riyadh, "even as we make clear areas where we have disagreements and where we have concerns." As this happened, Iranian-backed Houthi rebels, now not terrorists in US eyes, made military gains in the north of Yemen and are close to seizing the oil-rich city of Marib. The White House wants to see an end to the destructive Yemen war the Saudis have been conducting: will it be one with pro-Iranian forces having a strong foothold closer to Saudi oil fields?

It’s no surprise that as oil prices surge, 10-year Treasury yields in the US jump higher in tandem. 10s were up 10bp yesterday to 1.31% and technically Piotr Matys argues that we are not far from a test back to 1.41%, which if we break through then opens a channel all the way back to 2%. On one level we can look at this and scream “Great Reflation!” Or we can look at a chart going back a year and realize that before Covid struck we were trading at nearly 2% - and that was a time when the market prevailing concerns were still about “secular stagnation” and the “new normal” and the lack of power of labor vs. capital. So even with an oil price squeeze and a sugar-high US fiscal stimulus of close to 10% of GDP, we are just getting back to where we were in the already-gloomy pre-virus norm.

Yes, general inflation almost certainly lies ahead of us now that commodities are the new dot com: but call me when general wage inflation is too. (I will be in my usual Gloomy Place.)

Yes, the political environment is changing rapidly too, as it did in the 1920s: but is it changing in a direction that markets will actually like? Do they seriously think any emergent populism is for *them*? If so, they greatly misunderstand political reality. The neoliberal status quo prevailing since the late 1970s has always been for markets: real populism of the fiscal-meets-monetary kind --if we ever get it-- will surely be for the many, not the many asset-holders. Indeed, Markets would arguably NOT want to see the kind of policies that could make The Great Gatsby into The Great Reflation.

For example, one thing that will flatten their champagne is the Democrats unveiling a bill to end the “carried interest loophole” tax break, forcing Wall Street titans to pay income tax and not capital gains tax on what they earn. The American Investment Council, which represents the private-equity industry, of course argues it would be bad for the economy to enact such a bill during a pandemic (or after a pandemic; or before any possible future pandemic - that’s politics, folks). They state: “As workers and local economies continue to struggle…, this would be the worst time for Washington to reverse this responsible policy and punish long term investment that creates jobs and builds businesses in communities across America.” Let’s see if the bill passes or not:

If it does, then politics really is changing in the 20s; theoretically if that tax provides the government with funds to channel money back to consumers most likely to spend or, better, to invest in productive R&D, or in jobs and infrastructure for the long term, then logically perhaps The Great Reflation has legs - though Wall Street will hate it;

If it doesn’t, then Wall Street will keep pretending to be Leonardo DiCaprio, while the sell-off in US Treasuries will ultimately have a ceiling where we were before Covid began, and once the sugar high of this US fiscal package is fully priced in, they will start to drift down again. (For this and other reasons.)

Meanwhile, for now politics is still the same in some key ways: in Myanmar, the financial press report “Myanmar coup removes central bank chief, alarming global financiers”; the same press lauds the installation of former central-bank chief Draghi as Prime Minister of Italy. (Yes, of course one move was illegal and the other both legal and under democratic norms – but you get the underlying point.)

Yet politics *is* changing: and again not necessarily in a 1920’s direction Wall Street will ultimately enjoy. The Political Action Committee “Save America” backed by former President Trump has just released a very Trumpian statement which savages Republican Senate Minority Leader McConnell, including that his: “dedication to business as usual, status quo policies, together with his lack of political insight, wisdom, skill, and personality, has rapidly driven him from Majority Leader to Minority Leader, and it will only get worse….We know our America First agenda is a winner, not McConnell’s Beltway First agenda or Biden’s America Last….Mitch is a dour, sullen, and unsmiling political hack, and if Republican Senators are going to stay with him, they will not win again….Where necessary and appropriate, I will back primary rivals who espouse Making America Great Again and our policy of America First.”

Begun, The Republican Civil Wars have.

More champagne, anyone?