MacroVoices #505 Michael Every: Does Anyone Remember PMIs?

Key Concepts

• Economic Statecraft: The use of economic tools and policies as instruments of national power and foreign policy.
• Geopolitical Tensions: Conflicts and rivalries between nations arising from geographical factors and political interests.
• 2G World: A global order characterized by two distinct blocs, one US-centric and the other China-centric, rather than a single hegemonic power or a multipolar system.
• Ceasefire to Rearm: A temporary halt in conflict or tension, not for peace, but to allow parties to strengthen their military and economic capabilities.
• Capital Controls: Government restrictions on the movement of capital into or out of a country.
• Dollar Stablecoins: Digital currencies pegged to the value of the US dollar, potentially reshaping the global financial architecture.
• Secular Inflation: A prolonged period of rising prices across the economy.
• AI Memory Super Cycle: A period of high demand and growth for memory chips, crucial for artificial intelligence applications.
• Trade of the Week: A specific investment strategy or trade recommendation presented on the podcast.
• Relative Value Trade: An investment strategy that seeks to profit from the price difference between two related assets.

Geopolitical and Economic Statecraft: A World in Transition

Michael Every of Rabo Bank discusses the current global landscape, characterized by escalating geopolitical and economic statecraft, driven primarily by the US's efforts to redefine its global role, with China as the central focus. He highlights a series of "eyebrow-raising developments" that signal a significant shift in international relations and market dynamics.

Key Developments and Escalating Tensions

• China's Rare Earth Export Controls: China announced further export controls on rare earths, prohibiting their use in military supply chains outside of China or its allies. Every posits this is a "game-changer," potentially limiting the ability of other nations to build military equipment.
• Chip Supply Chain Disruptions: The Dutch government seized a Chinese-owned chipmaker, Neria, leading to China cutting off chip supplies to the EU in response.
• Mysterious Explosions and Sanctions: Three EU oil refineries processing Russian fuel experienced "mysterious explosions." The US also dangled and then rescinded military aid for Ukraine, subsequently sanctioning Russian oil companies like Rosneft and Lukoil, though physical enforcement is noted as crucial.
• Nuclear Posturing: Russia unveiled a new nuclear weapon, and the US has restarted nuclear tests, indicating a heightened level of military tension.
• US Interventionism: The US is openly discussing regime change in Venezuela, and former President Trump has suggested potential interventions in Nigeria and Mexico.
• European Policy Shifts: Former and current ECB heads have discussed majority voting in the EU's political system, a departure from traditional consensus. The European Commission President has outlined green tech policies implying non-tariff barriers, "made in Europe" public tenders (14% of GDP), capital controls for FDI screening, and tariffs/subsidies for key sectors. The EU also threatened to use its "anti-coercion instrument" against China and is rumored to be overhauling financial market regulations at the EU level.
• Trump's Asia Tour: Trump secured trade and FDI deals in Asia, focusing on rare earths and enlisting Japan and South Korea for shipbuilding support, forming a bloc against China.

The Trump-Xi Meeting: A Ceasefire, Not Peace

The meeting between Trump and Xi Jinping is characterized not as a "G2" working together, but as a "ceasefire to rearm." Every anticipates a long-term shift towards a "2G world" with distinct US-centric and China-centric blocs, with a potential year-long interregnum offering a relatively easier market ride.

Interpreting Economic Statecraft: A New Normal

Every argues that economic statecraft, once subtle, is now a primary driver. He disagrees with the view that current events are aberrations, asserting that "everything is always about power." The wobbling of the hegemon (the US) has initiated a global competition for leadership, a slow-burning process expected to last for the remainder of our lives. This dynamic is playing out across geographies, assets, and disciplines, making it difficult for many to connect the dots.

The Bifurcated Global Economy: A "Safari Park"

The discussion touches upon the potential for a bifurcated global economy, reminiscent of the Soviet era's East-West divide. Every believes an absolute worst-case scenario of complete separation is unlikely, but a bifurcation in "strategic sectors" with national security, industrial, energy, and military implications is already occurring. This includes differing technology sets and supply chains, extending upstream to raw materials like rare earths. The US is actively seeking alternative rare earth supplies, while China aims to catch up in high-end chips and software. This dynamic suggests a shift from free markets to a "safari park" model, where activity is permitted within defined boundaries, rather than a "jungle" of unfettered markets.

US vs. China: A Mexican Standoff

The US faces a challenge due to decades of offshoring productive capacity, leaving it reliant on China for critical goods like medications and rare earths. Every explains that Trump could not have "gone in there guns blazing" due to this vulnerability. However, the US still possesses significant strengths, including control of the financial economy, high-end software, top-end chips, and aircraft. China, while possessing manufacturing might and rearming rapidly, lacks global projection capabilities and relies on resource imports. The US can leverage its position to disrupt these flows, as seen in potential actions in Nigeria or disruptions to Russian oil.

The China-Russia Nexus: A Strategic Concern

The potential for a close China-Russia alliance is discussed. While Every doesn't place a high probability on nuclear war, he acknowledges that a combined China-Russia bloc presents a significant force. He notes that China is "completely untested" militarily, and Russia has struggled against Ukraine. However, the strategic mistake of accelerating the drift between these two nations is recognized. The US response is expected to involve building a US-umbrella bloc with allies to counter China.

Market Implications and Opportunities

• Capital Controls: The US is increasingly screening foreign investment and is likely to implement capital controls on outbound investments, directing allies to invest in specific sectors and countries to re-industrialize and bolster military-industrial supply chains.
• Dollar Stablecoins: These are seen as crucial for creating a new financial architecture that allows the US to re-industrialize and reassert dollar hegemony, potentially reversing the current "eurodollar" dynamic.
• Secular Inflation and AI: The AI surge is identified as inflationary due to increased power and resource demand. However, AI also has deflationary aspects, potentially leading to job displacement and a need for "universal basic capital."
• Market Bifurcation: The emergence of separate pricing benchmarks for commodities (e.g., Western vs. Eastern benchmarks for rare earths) is anticipated, creating arbitrage opportunities but also increasing complexity and the potential for illicit gray market activity.
• Investment Opportunities: Investors are advised to consider "Team US" or "Team China" strategies. Opportunities lie in understanding economic statecraft and grand macro strategy, particularly in areas like AI, where significant market capitalization growth is already evident. The key is to adopt a strategic lens to identify where money will be made and lost.

Trade of the Week: Fading the South Korean Tech Rally

Patrick Szna presents a pairs trade recommendation to fade the AI-driven South Korean technology stock rally.

Rationale for the Trade

• Narrow Rally: The Korean Cosby index's rally is driven almost entirely by memory chip manufacturers Samsung and SK Hynix, making it highly volatile and cyclical.
• Geopolitical Risk: South Korean chipmakers are caught in the US-China technology fracture, making them vulnerable to export policy changes.
• Diversification: The NASDAQ 100, while concentrated in the "MAG 7," is structurally more diversified than the Cosby.
• Valuation Discrepancy: The Cosby has outperformed the NASDAQ 100 significantly since April, suggesting the Korean rally may be stretched.

The Trade

• Long: US tech via the NASDAQ 100 (QQQ).
• Short: South Korea via the EWY ETF.

Sizing and Execution

• Dollar Neutral: Equal notional exposure on both sides is recommended, with a potential for volatility adjustment given the higher implied volatility in EWY.
• Convexity Option: Replacing the outright short in EWY with a deep in-the-money put option (e.g., December 115 put) can provide downside participation with defined risk and positive convexity.

Macroeconomic Outlook and Market Analysis

Equities

• Secular Inflation: Eric Townsend believes the market is in the early stages of secular inflation, which is initially beneficial for stocks before feedback loops kick in. He notes the market feels "bubbleicious" but expects it to move higher before facing headwinds.
• Market Breadth Concerns: Patrick Szna highlights poor market breadth, with 60% of stocks in a downtrend, and a reliance on the MAG 7 for continued gains. Financials are showing weakness.
• Nvidia's Earnings: Nvidia's upcoming earnings report is seen as a potential pivot point for the AI-driven rally.
• Technical Levels: Key support for the S&P 500 is at 6700, with a more critical level at 6600. Bulls need to maintain higher highs and higher lows.

US Dollar

• Consolidation and Breakout Potential: The US Dollar Index (DXY) is testing resistance at 100. A breakout could disrupt reflation trade assets that have benefited from a weak dollar.
• Structural Strength: The dollar shows structural strength against the pound, euro, and Canadian dollar, with USD/JPY making new highs. A potential short squeeze could push the dollar to 103-104.

Crude Oil

• Stabilization and Downside Potential: WTI crude oil is stabilizing around $60. Seasonality suggests bearishness until February, with potential for further downside before a significant upside move.
• Downtrend Intact: The primary downtrend of crude oil remains intact, with lower highs and lower lows.
• Upside Asymmetry: Despite short-term risks, the upside potential for crude oil is considered more compelling, with key resistance at $62.

Gold

• Technical Signals: Slow stochastics and RSI are showing strong buy signals, potentially indicating an earlier upside move than previously anticipated.
• Dollar Influence: The dollar's trajectory will be a key factor for gold's next move.
• Bullish Outlook: Gold and silver are viewed as structurally bullish, with the current pullback seen as a buying opportunity for a continuation pattern into 2026.

Uranium

• Consolidation: Uranium is consolidating after positive news flow, including US government subsidies for Westinghouse power plants.
• AI Sentiment Risk: A reversal of the AI trade could pose a systemic risk to uranium stocks, which have benefited from AI sentiment tailwinds.
• URRA ETF Heaviness: The URRA ETF has faded recent gains, showing some tiredness after a strong bull run, leading to a neutral stance with potential for deeper dips.

Treasury Yields

• Trading Range Expected: Due to the government shutdown and the Fed's hawkish stance, Treasury yields are expected to trade in a range through November, with a larger move anticipated around the December FOMC meeting.

Conclusion and Follow-up

Michael Every emphasizes that understanding economic statecraft and grand macro strategy is crucial for navigating current market dynamics. He advises investors to adopt a strategic lens to identify opportunities and avoid losses. Rabo Bank's research, Michael Every's LinkedIn profile, and his X account (@MichaelEvery) are recommended for further insights. Macrovoices listeners are encouraged to register at macrovoices.com for research roundups, discussion forums, and access to past episodes.