Friday, 20 July 2018

A confusion of stats

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Anthony Peters says data are not pointing in any particular direction, and the latest suggestion is to spend spend spend.

Anthony Peters

Anthony Peters, SwissInvest strategist

Here’s the quiz question: Do we focus on the S&P having yesterday suffered its third consecutive down day or on its closing at the sixth-highest level in its long and distinguished history?

Likewise, do we focus on 10-year treasuries having risen from 2.50% at the end of October to close at 2.80% yesterday or do we marvel at their sustained ability not revisiting 3% which looked such an easy level to penetrate in the summer?

I suppose the key is in the interpretation of what the stats are telling us or, at least, what we think they might be telling us which is, to be honest, not a lot. We seem to hop from one release to the next in the vain hope that some consistent picture will emerge which recently hasn’t really happened.

Meanwhile, Larry Summers who was passed over for the chair of the Federal Reserve has been airing some of his opinions on life, the universe and everything and which even had me scared and thanking the stars for him having taking himself out of the running. At a WSJ-sponsored conference he suggested what he termed “secular stagnation” is “..a much greater risk to American interests than any emergence of hyperinflation coming from monetary policy…”.

Summers went on to postulate that the only way to gain economic unstick speed would be for the government to enter into a significant borrow-to-spend programme. He expressed the opinion that the only way for the debt and deficit to be addressed was for the government to end its focus on reducing spending and to stimulate, stimulate, stimulate.

In other words, he is calling for the US to adopt the Abenomics blueprint and to borrow until the pips squeak. He conceded that the “Three Arrow” approach was still in early stages and that it will take some time for the outcome of the experiment to become clear. He did, however, appear to be convinced that this was the way to go. The linchpin in his thinking is that the risks posed by secular stagnation are greater than those of an emergence of hyperinflation generated by even looser monetary policy.

Each to his own

I’m surprised by Summers, a former Treasury Secretary and current Harvard economics professor, for evidently missing the key point, namely that borrowing like crazy when rates are as low as they are is fine and dandy but that if, as and when they begin to rise, the debt servicing cost can cripple a nation. I appreciate that he assumes the natural interest rate to be negative but most of the hole we find ourselves in was dug by locking into future commitments based on current conditions.

Thus the potential offered by periods of growth which both Moses and Keynes assumed would be used to build and replenish the reserves invested in smoothing the curve during downturns, cyclical or biblical were wasted. Does he truly believe that it is right to aspire to emulate Japan with its debt at 250% of GDP?

Building an aggressive domestic growth strategy or race to expansion on the back of the well documented excess in global savings is a dangerous game. Shinzo Abe has a huge pool of domestic savings to play with, the US does not. The US is already becoming a hostage to fortune and until it is fully supplanted by China as the world’s leading economy it can risk doing so. However, where would that leave it once it loses the role of home of the sole reserve currency?

Summers would appear not to have heard of Winston Churchill’s analogy of spending one’s way out of debt being a bit like trying to stand in a bucket and lift oneself up by its handle. The Greeks must be laughing their heads off while thumbing their nose at the Troika.

In theory, Greece is at risk of not receiving the next tranche of the bail-out package but I think we all know that to be an unlikely outcome. The Troika which finishes its most recent review today will focus on what has been achieved and not what hasn’t and so Athens’ failure to meet objectives and conditions set will go down as a heroic failure, a sort of Thermopylae with Prime Minister Samaras dressed up as Leonidas with the Troika in the role of the Persians.

I guess it doesn’t matter what the temperature is, so long as you’re well acclimatised.               

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