By Michael Every of Rabobank
Reality has more than a little of Kafka about it at the moment in many regards, except in one key respect: the achievements. When you read Kafka, nobody ever achieves anything. In ‘The Castle’, for example, the protagonist struggles to even schlep up the hill to get into the building he was hired to enter. Today there is no such schlepping – instead everything is kvelling. Stocks are up, “because reflation”; and government bond yields are rising, “because reflation”; as US junk bond yields are coming down…“because reflation” – which of those two trends is going to break first, or do we see junk bonds cheaper than government borrowing ahead?; and commodities are up, especially energy, “because reflation”, even as there is no sign of global travel getting back to where it was imminently: the UK just warned people not to think about summer holidays, for example.
Oh, and Bitcoin, of course. Despite having recently been called a “funny business” by the ECB; in the process of being banned in India; Treasury Secretary Yellen thinking cryptocurrencies are mainly used for illicit financing; and central banks planning their own national digital coins that will, if history is any guide, then preclude being “funny” with your own made-at-home business –in the same way you can print anything you like at home except banknotes– Tesla just announced it has bought USD1.5bn of Bitcoin, and is now going to allow people to pay for its cars in it. Talk about things that make you go vrmmmm!
As the Wall Street Journal notes, that is equivalent to a year’s R&D budget for the firm, so this is hardly a small investment. Yet the official Tesla notice is that it “may acquire and hold digital assets from time to time or long term”; that it expects you can pay with Bitcoin in “the near future”; and “subject to applicable laws”; and “initially on a limited basis”; and “they may or may not liquidate” the crypto on receipt; and may invest a portion in other crypto, or gold, or gold ETFs.
In short, one car might be available at some point, and then the Bitcoin received (*TWO* at the present exchange rate and US sales price, showing how ridiculously unwieldy it is: “How much is the milk?” “Either a dollar or 1/44,000 Bitcoin” – stick that on a supermarket shelf label!) will be sold and put in a gold ETF, to the tooth-gnashing of purists. The future is here! And conveniently, the other story that broke on Tesla around an hour beforehand isn’t: that Chinese regulators and four other departments had called the firm in to urge it “comply with Chinese law”, and to criticize it for various failings over quality and safety, suggesting that relationship might be turning sour.
How long until all other firms decide to buy Bitcoin too (and most so whenever the news direction needs to be changed)? One hedge fund may be interested; and tech titans are considering it too, goes the rumor. Yet do they really want to annoy the politicians more than they already have? China has just acted very firmly on its tech monopolies, telling them what they can and cannot do.
In short, we have all of the bizarre, surreal, and incomprehensible predicaments, and all the obvious socio-bureaucratic powers, alienation, existential anxiety, guilt, and absurdity of Kafka. We have ‘The Metamorphosis’ – it’s happening all around us. We have ‘The Castle’- it is the central banks above us. We just also have it all in a swipe-right, order-at-a-click, get-a-bundle, all- assets-must-rise bubble package. Of course, we also have ‘The Trial’.
Although there is a pressing need for US fiscal stimulus, and courts across the US are reportedly clogged up with people being evicted, President Trump’s impeachment trial begins today in the US Senate, and will derail all further stimulus progress until it is concluded. Perhaps Yellen could use the time to think about the obvious multi-asset bubble that is being blown, and what will happen if it bursts – and what will happen if it doesn’t. Let’s just say neither is helpful for sustainably getting back to ‘full employment’.
This latest legal process is almost certain to prove as bitterly polarizing as the former president himself: indeed, top lawyers are still split over whether the process is even constitutional given he has already left office, and the action is effectively aimed at preventing him from running again. Regardless, the trial proceeds – and against a backdrop where an opinion poll shows that should Trump form his own party, he would take the majority of Republican voters with him (indeed, a majority of GOP voters want him to). This makes a conviction unlikely in a 50-50 Senate, but further polarization far more than a 50-50 bet.
Allow me to conclude with some quotes from Kafka’s ‘The Trial’ as commentary on the general market situation:
The right understanding of any matter and a misunderstanding of the same matter do not wholly exclude each other.
“But I’m not guilty,” said K. “there’s been a mistake. How is it even possible for someone to be guilty? We’re all human beings here, one like the other.” “That is true” said the priest “but that is how the guilty speak”.
It’s only because of their stupidity that they are able to be so sure of themselves.
One must lie low, no matter how much it went against the grain, and try to understand that this great organization remained, so to speak, in a state of delicate balance, and that if someone took it upon himself to alter the dispositions of things around him, he ran the risk of losing his footing and falling to destruction, while the organization would simply right itself by some compensating reaction in another part of its machinery – since everything interlocked – and remain unchanged, unless, indeed, which was very probable, it became still more rigid, more vigilant, severer, and more ruthless