By Michael Every of Rabobank
Socialism for the rich / Socialism for the poor
US President Biden just spoke at the UN General Assembly, promised no Cold War, and offered nothing but international cooperation: French President Macron deliberately wasn’t there to hear it. China’s Xi Jinping stated all disputes should be handled with “dialogue and cooperation”, and pledged to stop funding offshore coal projects. That’s as nuclear subs and threatened nuclear strikes are the week’s other global stories. When do shoes get bashed on desks, and by whom?
This is all as the Wall Street Journal’s Lingling Wei argues “Xi Jinping aims to rein in Chinese capitalism, hew to Mao’s socialist vision”, echoing what I have been argued –again– in “Profound or profund revolution?”, which explains the ideological roots of the new policy of ‘common prosperity’. Except Lingling has key quotes from people ‘in the room’, where all the elephants are for markets. Here are just some of the highlights:
“The Chinese President is not just trying to rein in a few big tech and other companies and show who is boss in China. He is trying to roll back China’s decades-long evolution toward Western-style capitalism and put the country on a different path entirely, a close examination of Mr. Xi’s writings and his discussions with party officials, and interviews with people involved in policy making, show.
In Mr. Xi’s opinion, private capital now has been allowed to run amok, menacing the party’s legitimacy, officials familiar with his priorities say. The Wall Street Journal examination shows he is trying forcefully to get China back to the vision of Mao Zedong, who saw capitalism as a transitory phase on the road to socialism.
Mr. Xi isn’t planning to eradicate market forces, the Journal examination indicates. But he appears to want a state in which the party does more to steer flows of money, sets tighter parameters for entrepreneurs and investors and their ability to make profits, and exercises even more control over the economy than now. In essence, this suggests that he aims to rewrite the rules of business in what could someday be the world’s biggest economy….the government would have a level of control that would allow it to steer the economy and industry along a path of its choosing, and channel private resources into strengthening state power….”Supervision over foreign capital will be strengthened,” said a person familiar with the thinking at China’s top markets regulator.””
Yet I doubt even *that* is clear enough for The Street to understand. Portfolio managers who have been confronted with the above evidence are saying: “I missed the chance to sell last week but we are lower now, so I will stay long.”; “This is a buying opportunity.”; and “It’s behind us, time to buy.”
None have read a word of Marx, even after being shown it provides a guide to what happens next, and they don’t plan to. All they need do is not underperform the market and fail conventionally, “because whocouldanooed?” We will no doubt also have US-based billionaires and funds, like a hypothetical ‘Day Rallio’ or ‘Whitepebble’, telling us to go longer Chinese assets, or extolling the virtues of this system. And there are things to extoll: socialism for the poor at least aims to help those who are left behind, and recognizes unregulated markets end up in monopoly or oligopoly and exploitation. Yet that is not what they are selling, but high returns, when China is making clear returns will be low, and only in some sectors at all.
If you want a *logical* argument to go long Chinese assets, surely first one needs to have a view on the efficacy of a state-controlled economic model, in the same way one should believe in the tech of a start-up bringing an app to market? Then one needs to accept that it means the equivalent of the low-return-but-safe equivalent of what used to be government bond yields before the failure of free-market capitalism meant we have to pay governments to let us hold their debt. Even that overlooks the longer-run FX down-side risks and the whole Cold War backdrop.
Meanwhile, the great joke is that this debate –where there is any– is taking place against the backdrop of the upcoming Fed policy decision. Markets are on tenterhooks to find out if the FOMC will flag a timetable for the partial removal of the $120bn in QE liquidity it provides to the markets every month, while talking about inequality. In other words, socialism for the rich. The removal of that would be truly revolutionary in the eyes of many, as we are about to undergo another dot-plot Rorschach test. .
Meanwhile, economist Ann Pettifor on central banks points out what will happen when the internal contradictions of our system finally become too great for it to bear:
“Fifty years ago, a US president closed the gold window, ended capital controls, and launched a new era of globalized finance. The “Nixon Shock” reshaped the international monetary system overnight, and then gradually changed the status of central bankers. Instead of acting as servants of the domestic economy, monetary policymakers have become masters of the globalized and financialized world economy…Central bankers’ status and constitutional role is therefore primarily a democratic question, not an economic or technical one.”
Does this point to higher yields or lower yields ahead?
The apparatchiks are already in place in places (and winter palaces), it seems, as “SEC’s Gensler likens stablecoins to ‘poker chips’ amid call for tougher crypto regulation”. Gensler is quoted as saying: “History tells us that private forms of money don’t last long,” noting the US experimented with private money in the “wildcat banking era” from the 1830s to the 1860s, which “all had a lot of cost, a lot of problems.” Perhaps time to check if you are holding any NFTs of kulaks?
(And meanwhile, Zoom’s $15bn bid for Five9 is under review; the US says it is likely to keep Huawei on its blacklist; and the State Department is reported to be massively expanding its footprint on China, with dozens of new officers in DC and at global embassies to monitor it at all times. No Cold War. All cooperation.)
More and more, I am told that what I am talking of here is ‘too much’ for individual market participants to take in or deal with. They want to look at lines on screens; chase spot and ticks; play ‘The Price is Right’, and clock off at 5pm; do the same old deals; or put up stickers saying: “Workers of the world, unite!” or “Don’t tread on me”. We all like to look at the smallest changes in 10-year US bond yields all the time – yet heaven forfend if we have to think about what the world will look like in 10 years’ time!
Regardless, socialism for the rich and –or vs– socialism for the poor is the underlying reality for us and for markets. It may be awkward, or complicated, or involve more thinking than usual about how to trade it properly, but it remains true. On which note, allow me to conclude with an old joke about clashing political ideologies:
“Under capitalism, man exploits his fellow man. Under communism, everything is reversed!”