Monday, 24 September 2018

A bold move with an unpredictable outcome

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The past 24 hours have been incredibly interesting as pundits, superstars and mere mortals alike have all been having their say on the aggressive policy stance adopted by the Bank of Japan. Consensus seems to be that it is bold but that the outcome is, frankly, unpredictable.

Anthony Peters, SwissInvest Strategist

I appear to have caused some mirth yesterday with my own knee-jerk response to the news which was that it is not more of the same, just more of more of the same. I have never, as such, doubted the efficacy of quantitative easing but I have always wondered whether it could ever succeed in its principal objective, namely to prime a recessionary or even a sluggish economy for recovery. In other words, is QE the starter motor it purports to be or might it in the longer term prove to be nothing more than the motor itself?

Every day one can take one’s pick of commentators who either point out that piling more debt on existing debt and more stimulus on existing stimulus is no way forward or of those who are unerringly convinced that not enough has been done by everyone other than themselves to kick start activity.

It is now four and a half years since the fall of the house of Lehman and governments and central banks alike continue to fight against the self-levelling process which the Western economies need to go through in order for the foundations of a new economic paradigm to be laid.

HBOS reflection – has anything changed?

The UK government’s report on the responsibilities for and causes of the failure of HBOS calls for a moment of serious and honest reflection. Has anything really changed? Has the basic model of borrow to consume and of believing in some inalienable right to live beyond one’s means really been addressed?

There is no doubt that the disappointing performance of the economy is only disappointing if one sets one’s aims too high. Perhaps it is time to remind ourselves that disappointment is a relative value and one which is a simple and straightforward function of expectations.

It might be the most remarkable and over time be seen as the most disappointing (yes) fact that authorities have failed to focus on proper and realistic expectations management.

The leader of the UK’s Labour opposition, the Right Honourable Ed Milliboy, known as Red Ed, stood up a few years ago and launched an attack on the then new Conservative/Liberal coalition government to the effect that it would be wilfully causing the next generation to be the first one which would be enjoying a lower standard of living that the previous one.

Well, if one has lived beyond one’s means for long enough, that must be a natural consequence. But it is also one which politicians are very bad at articulating. Whenever any of the members of the present Cameron administration have tried to bring this simple issue into public debate, the uproar in the media has hit 9.8 on the hysteria scale and the ministers in question have very soon found themselves forced to back-track, then only to be castigated by the same press for having undertaken a U-turn. I digress.

The Japanese version of ‘whatever it takes’

Bank of Japan Governor Haruhiko Kuroda is being credited with the courage to bring out another one of those fabled Big Bazookas, of launching into the Japanese version of “…whatever it takes…”.

At this point we cannot predict whether it will or will not work, but markets are seemingly rewarding him richly for the effort. Nevertheless, the warning must remain present that we know how to get into QE but we still don’t know how to get out. Japan is merely demonstrating how we get deeper into it. All the while, the Nikkei rallied another 1-1/2% today while the Hang Seng shed 2.4%.

The weaker yen will naturally have boosted stocks but the currency now risks going into free-fall which is critical for an economy dependent on imports of most key commodities and almost all of its fossil fuels. Maybe that’s where Kuroda hopes to get his 2% inflation from…

US employment report

I wonder to what extent this particular policy debate will blunt the effect of today’s US employment report. The consensus forecast is for a non-farm payroll increase of around 200,000. We know that this is better than nothing but also that it is not enough to have a serious impact on the overall employment situation. At a time when the struggle is for the heart and soul of the economy, anything other than a significant outlier will most probably be met by markets with nothing more than a slack and rather bored looking yawn.

Meanwhile, the media will be filled with speculation as to whether Japan is about to exit its lost decade (and a half) and whether we should not be doing the same. Austerity doesn’t work, so we are told. QE doesn’t work, so we see. We might seriously be in need of a paradigm shift but please don’t ask me how it should be shifted and where to. If I knew, I’d not be sitting here typing and freezing my bits off.

Alas, it’s that time of the week again. All that remains is for me to wish you and yours a happy and peaceful weekend. Easter holidays are drawing to a close and exams are ahead – GCSE’s begin in just two weeks. May those among your young who have spent the holidays studying now relax a bit and those who relaxed during the holidays begin to study and may you, as parents, have the wisdom to accept that you will have influence on neither.   

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