By Michael Every of Rabobank

Pure Shakespeare

Stocks were down again as US yields and the dollar were up again. Not helping matters, the Fed’s Beige Book said, ‘mild stagflation’. Retail spending was flat to up slightly, but lower discretionary spending and heightened consumer price sensitivity; auto sales flat, with some incentives to spur sales; travel and tourism stronger, but with mixed outlooks; transportation mixed; manufacturing flat to up; housing up modestly; commercial real estate softer; energy stable; and agriculture mixed. The overall outlook was more pessimistic amid rising uncertainty and greater downside risks. Employment rose at a slight pace, with wage growth mostly moderate and several Districts reporting it at pre-pandemic historical averages or normalizing towards it. Prices increased at a modest pace as consumers pushed back, leading to smaller profit margins, and retail discounts were evident despite increases in input costs, particularly insurance, though with some falls in construction and raw materials costs. Price growth was expected to continue at a modest pace.

Elsewhere, things were more Shakespearean.

“Cry havoc, and let slip the dogs of war!” (Marc Anthony, Julius Caesar)

The Financial Times main headline is that ‘NATO has just 5% if air defences needed to protect eastern flank.’ No, NATO doesn’t have an eastern flank but an eastern FRONT: it faces east, so its vulnerable flanks are to the north and south. Regardless, it urgently needs to spend 20x more on air defence alone. Meanwhile, Poland is reinforcing its border with Belarus and Russia, as the former withdrew from the Conventional Armed Forces in Europe treaty, and the Baltics and Scandinavia plan a ‘drone wall’. Many EU countries will also now allow Ukraine to use their donated weapons to attack Russian forces inside Russia proper. Militarily, that’s the best strategy; geopolitically, it means the West escalating to deescalate – which Russia will only mirror. The UK Telegraph is running a series of articles starting today on the topic ‘What if Putin Wins?’ The first argues, “A Russian victory would unleash a cascade of events triggering irreversible changes, pushing the world to the brink of chaos.”

“The first thing we do, let’s kill all the lawyers.” (Dick the Butcher, Henry VI, Part 2)

We can also expect imminent market headlines from the Trump trial in New York, where the jury are still out. In every trial, there are always two opinions: the prosecution and the defense. In this trial there are three: anti-Trump, pro-Trump, and anti-Trump but concerned about the rule of law.

Alan Dershowitz, a Democrat, has been withering in his criticism of how this trial has been prosecuted. Legal expert Jonathan Turley notes it “has seemed otherworldly, a vaguely familiar proceeding where common elements of a trial seem to have been flipped,” listing the numerous ways normal practice has not been followed – which those pro-Trump naturally allege have occurred for nefarious political purposes. Given how the judge –‘The Merchan of Vengeance’– instructed the jury, experts think the most likely outcomes are a hung jury or a conviction.

If it’s the former, Trump will gain huge publicity, and cry he was wronged by Democrat ‘lawfare’; and if he’s convicted, that is arguably even more the case (even if the latter will prompt a rapid appeal, potentially all the way up to the Supreme Court, which many observers think will then see the verdict overturned). To presume, as White House strategists must do(?) that being able to call Trump a “convicted felon” on TV will necessarily dent his electoral prospects rather than boosting them may be to totally misread the current situation, as in 2016.

This matters for markets more than some reading the very Beige Book realize. Not only could this trial potentially increase the likelihood of Trump winning in 2024, which would already shift the US, the world, and world markets, but it might boost his odds of taking the Senate and the House too, ensuring that he could shift them all if he wants to. It might also convince him that he needs to (as the Wall Street Journal says Elon Musk might take an advisory role at the White House were Trump to win: what might that mean for US policy: Orange Cybertrucks? CyberTrump? Trumpcoin? Camp Trump on Mars?)

More broadly, it’s a further dent in the reputation of US law just as (contrived?) media controversy rages over a Supreme Court judge for flying a flag, again politicizing the highest echelons of the US justice system. Following previous controversial court cases involving Trump there, it doesn’t do New York many favors as an investment destination unless one’s business is in the anti-Trump camp. Yet that points to a polarization in the US mirroring past ones in emerging markets. Indeed, Dershowitz and Turley fear precisely the political rule BY law, not OF law if precedent is set: could future presidents find partisan judges and juries to rustle up court cases to take out potential opposition legally, as happens elsewhere? That still seems unlikely given the checks and balances in the US system, but for some this is all a worrying step in that direction. US businesses and markets players, even those anti-Trump, should be aware that those kinds of legal environments are partly why so much foreign capital ends up in the US in the first place.

Moreover, when The Economist is worrying about the collapse of global liberal institutions, and the International Criminal Court and the International Court of Justice have mired themselves in controversy, splitting the West internally and vs. the Global South in a new Cold War –as Mexico joins South Africa’s case vs. Israel at the ICJ, The Australian says “The ICC issuing warrants for the arrest of Netanyahu and his defence minister is grandstanding by this toothless, bloated court”– the last thing the West needs is for its rule of law to be brought into ill-repute. ‘Let’s kill all the lawyers’ is how you destabilise things in Shakespeare’s eyes: but so is letting all the lawyers kill us.

On that note, many other Henry VI, Part 2 quotes spring to mind, and should spring to yours:

“My troublous dreams this night doth make me sad.“ Duke of Gloucester (Act 1, Scene 2)

“How irksome is this music to my heart! When such strings jar, what hope of harmony?” King Henry VI (Act 2, Scene 1)

“The commons, like an angry hive of bees. That want their leader, scatter up and down. And care not who they sting in his revenge.” Warwick (Act 3, Scene 2)