By Michael Every of Rabobank

"Pass"/"Over"

There is so much for markets to try to pass over right over: and they are certainly doing so.

Niall Ferguson warns us again about an escalating global Cold War 2 using Tolkien as an analogy – real Tolkien, not the insult that was The Rings of Power season 1. Markets gave that talk of a bifurcating, antagonistic, inflationary world a pass - like everyone did with The Rings of Power.

The Financial Times admits a new CRINK (China - Russia - Iran - North Korea) “axis” at war with the West and its allies on two fronts already; markets are apparently over that revelation, and its implications, despite continuous ‘surprises’ like the TikTok divestment/ban law now likely to pass in the US appearing one after the other.

SIPRI says defence spending is $2.4 trillion globally, a new nominal high. Yet that buys far less than a few years ago and is set to soar further if we are to get back to the percentage of GDP that defence took up during the Cold War, which many agree we have to: where will those trillions come from? But markets pass over that question, it seems; SIPRI is an acronym too far for those interested in monetary wonkery.

The Polish president says he’s happy to host US nuclear weapons, if needed; Russia says it will respond in kind, if necessary. Nothing to see here and ‘get over it’ for markets, apparently.

Mohamed El-Erian underlines a markets/NatSec disconnect over Mid-East events. Markets say “de-escalation”, because the oil price has gone down. National security figures worry; and those saying recent attacks were telegraphed might note reports of White House panic when Iran launched missiles, and Israel planning a larger military strike at first. We have calm now, but neither side will pass on the opportunity to weaken the other; the enmity is not over.

Ukraine keeps attacking Russian refineries; and Russia is attacking Ukraine’s grains. As Carlos Mera points out, wheat was just up 4% as the market suddenly noticed the war isn’t over. Indeed, the looming $61bn US military aid package will see fighting escalate.

There are proposals for the EU to finally sanction Russian LNG, which it is still apparently OK to buy vs. piped gas: but let’s see how that moral stance holds up against the need to fight a war as painlessly as possible for the EU economy.

Copper needed for both green *and khaki* transitions is just shy of $10,000 (+14.8% year-to-date); aluminium, also need for both, is +12.8% y-t-d; cocoa, needed to not think about expensive transitions, is around the same price (+183.4% y-t-d); coffee, for those who don’t drink cocoa, is +35.5% y-t-d. And yet markets are focused on the over / under of when we get rate cuts.

Three Germans were just arrested for allegedly working for China (not the last three Chancellors!); markets pass that news off as BAU now.

The EU needs to forge strategic autonomy partly via remilitarisation says Mario Draghi (something we flagged in December): that could impact every aspect of the EU economy and markets. “Hard pass,” say markets who are only interested in when we get that first rate cut.

Yanis Varoufakis (‘A European War Union?’) also screams ‘PASS!’ in arguing “the main difference of opinion between pro-EU political forces concerned whether Europe’s continental consolidation ought to proceed by Hamiltonian means (debt mutualization precipitating the emergence of a proper federation) or in the original intergovernmental way (gradual market integration)” - but now it’s to be “unproductive” war. Yet Hamilton’s economic strategy was to build a US navy, and: “So vital were supplies to national security that Hamilton did not rule out government-owned arms factories. The godfather of American industrial policy realized that market forces, while they could bring many benefits, could not be relied upon for all of the country’s needs. Knowing that international trade was vital to the early republic, Hamilton advocated for a strong navy to protect American shipping when writing: “The want of a Navy to protect our external commerce, as long as it shall Continue, must render it a peculiarly precarious reliance, for the supply of essential articles, and must serve to strengthen prodigiously the arguments in favour of manufactures.””

Relatedly, the shortlist for Trump’s National Security Advisor is down to Grenell and Colby. In either case, that’s ‘Si Vis Pacem, Para Bellum’ on steroids; and an immediate shift in US arms away from Europe towards Asia. That smells like over a trillion in new annual western defence spending could come to pass, even if markets don’t have the nose for it.

Meanwhile, Columbia University sees either 1938 or 1968 style scenes, showing political polarization and volatility are domestic as well as international, and the two are linked.

All of this would have been enough for one Global Daily, but I was inspired by John Authors’ Passover-themed article yesterday to ask just one, not four questions: why is this global market cycle unlike all other global market cycles?

Let’s answer Seder style, to four different children: the wise, the wicked, the simple, and the one who doesn’t know how to ask:

• The wise child asks: "What are the testimonies, statues, and laws of global market cycles laid down by history and different disciplinary approaches?” You can talk to them about long-run cycles, peace and war phases, and huge fiscal deficits centrality in all of this.
• The wicked child asks: "What does this all mean to you?" Because they are too busy shilling ridiculously large Fed cut forecasts, and/or low bond yields, and/or high equities.
• The simple child asks: "What does this mean?” To which a simple summary is: “Free markets brought us out from the bondage of authoritarianism and war; and then led us back there."
• The child who does not know how to ask is to be told adults need to ask difficult questions about this cycle "because of what markets did for us in the West when they were free to be efficient *and* boost Western national security".

You can opt to let all this pass over you if you want. But don’t be surprised if you then look rather ‘unleavened’ compared to others who are prepared to ask, and honestly answer, difficult questions about our very troubling, far-from-BAU backdrop.