Submitted by Michael Every of Rabobank

With so much liquidity being thrown into so many markets by so many so fast, it is perhaps understandable that some are wondering when we get inflation, hyper-inflation, and/or currency collapse. However, given we are riddled with World War Two analogies at the moment, allow me to do two Churchill impressions: “Never was so much owed by so many to so few” - and “Never was so much owned by so few.” (Yes, one does not need to read Piketty to know that wealth and income inequality under the Pharaohs was even more unfair than it has been trending under every US President since Nixon, but you hopefully get the point.)

In short, global debt levels are at records and rising – which is where some see the inflation coming from; and yet wealth and income inequality are also at staggering levels - and rising as mind-blowing liquidity flows not into many pockets but into relatively few.

For all of the staggering scale of fiscal stimulus packages--20% of GDP in Japan, 15% and rising in the UK, and who even knows in the US?--ask yourself this: is the ordinary working family feeling better or worse off right now? Unemployment is soaring but you are lucky enough to get furloughed with 80% pay – isn’t that a 20% pay cut? And is a pay-rise now waiting for you in 2021? And good luck if you own a small business as most of most of the fiscal packages we see are going out in loan support to larger firms. Yet if you give USD1m to a private firm whose revenue has collapsed by USD1m, is this actually stimulus at all? It leaves you at an expensive stand-still – and also means more debt to carry post virus, dragging growth lower.

If that kind of “too much to too few” stimulus worked properly then QE would have worked and we would already be in wonderful hyperinflation: is there really *more* money flowing around than before in *real* economy?

Yes, as we have stressed before, the world is changing very rapidly from the pre-COVID status quo. Taboos against state spending and state aid are collapsing the same way Churchill’s public support did when he won World War Two but then lost in a landslide election favouring socialism, free healthcare, and nationalised industry. Yet the economic damage being wrought by this virus still lies ahead of us long before we suddenly arrive in a promised land of recovery, inflation, and bolshie workers. We are, at worst, at the Dunkirk stage of the war against COVID-19, where a lucky escape means the hard fighting is still ahead of us; or, more optimistically, we are just after the Battle of Stalingrad, where the war’s momentum has decisively shifted but massive pain still lies ahead.

A report in the South China Morning Post today quotes Chinese scientists as saying that they believe the virus has mutated rapidly, and that this explains the apparent discrepancy in the severity of the symptoms and the mortality rates being seen around the world: in short, the European and New York versions may be a different, more lethal strain than those on the US West Coast and in some other countries. If so, what does that imply for lockdown lifting - or for a workable vaccine?

Meanwhile the UK government, for just one example, still can’t give find it within its collective intelligence to tell people to wear masks, despite clear evidence that if both sides in an interaction wear a mask, the potential infection rate plummets; and the same government still can’t manage to source enough masks (or gowns) from anywhere in the world for key health workers – the Health Secretary last night revealing the brilliant innovation of now “talking to manufacturers directly and not middle-men”.

Let’s actually look at “markets”, parts of which can still send signals worth listening to. What is oil saying about where we are along the World-War-Two-to-post-World-War-Two-social-nirvana spectrum? As I type, Brent Crude for June delivery was trading down 16% on the day at a 21-year low while the June WTI contract was -9% after losing half its value on Tuesday – but at least it isn’t massively negative yet. This is even despite President Trump tweeting: “We will never let the great U.S. Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!” All very Churchillian – but in a 1942 not a 1945 kind of way.

Likewise, 10-year US Treasuries, which until we get full Fed yield curve control are still a valuable indicator, are trading at 0.55%, down 2bp, and hovering around record lows. They don’t smell socialism in the air.

Yet as for emerging markets, even despite low US bond yields all we see is more pain. Mexico surprised with an emergency 50bp cut yesterday taking rates down to 6% and has promised additional liquidity measures. Only another 575bp to go to catch up to where economic reality is for the US, one might say. Indeed, many EM appear to be happily cutting away as inflation disappears – which obviously means much, much more downside for their currencies, even from depleted levels. Turkey is the next to do so today, most likely, where the consensus is a 50bp cut to 9.25%. So only 900bp left to go to catch up to the US, one might say. In turn, this naturally means an even stronger USD – and so lower commodity prices, and weaker EM economies, which are already running to the IMF in record numbers, and lower global growth, and lower global inflation.

Yes, folks, at some point we will all be celebrating in Times Square. It will happen. At some point afterwards the many will then be wanting to ensure that capital does not only flow to the too few – and the reckoning will be awesome for markets to behold.

But for now at least all oil and Treasuries can offer us is blood, sweat, and tears – and not enough protective equipment to deal with them.