Thursday, 19 July 2018

A floundering Fed

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Anthony Peters on confusion in the States, obfuscation in Greece and those taking a punt on China.

Am I surprised or disappointed that the minutes of the last FOMC meeting revealed nothing we did not already know? Of course I’m not, but what we do learn is that the intellectual differences between the Street and the FOMC have never been smaller.

By declaring that they “did not rule out this possibility” of a first step in the tightening cycle in June, the committee was doing nothing other than taking on and positioning the free option but options free of cost are also frequently free of value.

That data through the present period would be, given the freakish first quarter, “unlikely to provide sufficient confirmation” of a story of persistent and sustainable growth is both telling us nothing new and stating the bleedin’ obvious. Thus, we can only conclude, the members of the FOMC continue to flounder as much as we do when it comes to trying to work out whether the economy is just about to change up a gear or down.

Both principal US equity indices ended the day sharply unchanged to insignificantly lower but any assertion by the media that markets had been buoyed by the prospect of no imminent tightening can only be put down to either a lack of understanding that sometimes it’s better to say nothing than to talk rubbish. Next!

Greek farce

I was struck yesterday by my friend and fellow scribbler, Bill Blain, who proudly noted that he had gone for two days without mentioning Greece. On one hand it is hard not to but on the other it is, as noted above, better to say nothing than to talk rubbish. Fact is that none of us have a clue what is going to happen next. Markets are, in their own unique way, sanguine with respect to a Grexit as they blithely assume that some solution will be found which will give the can another jolly good kick down the road. The principal parties are beginning to run out of reasons to postpone decisions while “awaiting further developments” or whatever their latest rhetorical double rittberger with a triple toe-loop might be. So Athens is contemplating a rise in VAT. Big deal when the economy already runs on cash and in the firm knowledge that it VAT were to rise, the cash nexus would only be driven further.

Perhaps the most important item of news comes from the musings of the German Minister of Finance, Wolfgang Schaeuble, who for the first time has stepped away from his assertion that Greece will survive, one way or the other. Yesterday, in noting that far too little progress is being made, he added that he “would spend a long time thinking before repeating that Greece will not go bankrupt”. It was, after all, revealed that of 2,092 cases of suspected tax evasion which are on the so called “Lagarde List”, only 49 have so far been processed.

Meanwhile, Greek Finance Minister Yanis Varoufakis continues to remind the creditor nations that unless they lend him more money to pay back what he owes, he won’t do it. He has made it quite clear that if faced with the dilemma of whether to pay pensions and public sector wages or creditors, he sees no dilemma.

I suppose we could possibly find a way of amending Greek government debt documentation to add a bailing-in option and then bail everybody in until the debt is written down to nothing without a default being triggered. If bailing in were distinguished from a hair-cut being taken… I don’t know.

Fact is that Greece is broke, has been for years and will, unless all rules are breached, remain so in perpetuity. There are many ways of resolving the crisis which, at the end of the day, are going to place the main cost not on Stavros and Helena SixPack (for whom it is already expensive and painful enough) but on the rest of the eurozone population. We can but sit and wait.

China chancers

Meanwhile, this morning brought China’s Manufacturing PMI for May which at 49.1 again missed forecast but which was, nevertheless, a small improvement on the April number of 48.9. This diffusion index has spent the last two years fluctuating on either side of 50 although, with one exception, it has not been above 51 since March 2013.

Markets took it to indicate that the PBOC will have to ease again soon and stocks rallied further. The Shenzhen Composite is now up by over 91%, year to date and over 123% over 12 months. At the moment the index is running up at an annualised rate of 450%.

The last time I experienced this kind of blind rally was when the Nikkei hit 39,000 at the year end of 1998. Then, 16 years on, it is finally back at 20,000, having been as low as 7,000 in 2009.

History might never repeat itself but that does not prevent it from trying.

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