I switched on my screens this morning to find the two headlines next to one another.
“Gold trades near lowest in five weeks as investors weigh outlook for interest rates, inflation and dollar” was the first and “Gold edges up on falling equities, easing dollar” was the second.
This reflects pretty much everything that is going on in markets at the moment and utterances by Robert Kaplan, president of the Dallas Fed don’t help.
Kaplan, usually rated as a fully paid-up hawk, has tried to create some clarity of thinking by observing that continuing fall in the price of oil – WTI hit a six-month low at US$42.75 per barrel in intraday trading yesterday – and the flattening of the yield curve from both ends as a possible indicator that markets actually do know what they are doing and that the best of the recovery is over.
On the other hand he admits that he too can only speculate why markets are doing things that don’t really add up. At the same time, of course, Kaplan is subliminally abrogating any central bank responsibility for yield curves that don’t make sense but which systematic sceptics like myself still prefer to blame on stimulus addiction.
More Fed
The key debate is whether the Fed can and will tighten one more time in 2017 with the focus on the December 13 FOMC meeting. The two sides of the argument remain: whether the economy is strong enough and inflation is enough of a risk to prompt further tightening or whether former Fed official Bob Heller has a better argument by pointing out that with the economy looking as it does, equilibrium rates should be closer to 3.5% and that the FOMC has no reason not to continue the process of post-QE and post-ZIRP normalisation. It is speculating whether taking the patient off life support will see him continuing to recover or whether he will simply turn up his toes and die. At the moment the machine remains switched on.
There is of course the idiosyncratic argument that the price of oil has nothing to do with the state of the US economy, that it is simply the result of a breakdown in loudly hailed Opec production caps and that the problem remains more on the supply than the demand side. As far as Kaplan’s assessment of the rally in the long end of the yield curve is concerned, one might suggest that it has nothing to do with one of those classic pre-recession flattening moves – I wonder where he took that fiction from – but acknowledges that the proposed Fed balance sheet reduction is not going to happen in any meaningful fashion and that earlier fears of the market being swamped with paper is fading.
It seems to me that Kaplan, with all due respect, is heavily talking the Fed’s book.
Saving graces
The FT picked up on the Barclays case and wrote: “The Serious Fraud Office case against John Varley marks the first time that the head of a global bank has faced criminal charges for activities during that period, when big lenders across the UK, US and Europe were being rescued by taxpayers”. I thought said taxpayers were clamouring for charges to be brought against bankers who brought their houses down, not ones that rescued theirs. The real world of business often requires a bit of fancy footwork and I do not get the feeling that promising extraordinary returns for providing extraordinary services is so criminal.
The SFO has a long history of failed prosecutions and I see another coming. Its biggest problem is not of its own making. Proper crooks don’t have the courtesy of documenting all their misdeeds and keeping proper files and taped conversations. The fact that “evidence” is all there sort of implicitly proves that there was no criminal intent, maybe just a conscious stretching of ethics. One reader wondered yesterday how it could be that Varley might end up behind bars and not find Bob Diamond already there?
In 1978 the UK was gripped by the trial of British Leyland executives in the context of what become known as the “slush fund”, a pot of money to be used to help grease the wheels of business in lesser developed economies. My father, after a lifetime in the business of exporting British machinery, just laughed and told stories of how meetings began with haggling over which model of Mercedes would be delivered to the director’s wife before the pricing negotiations even began. Sure, that was 40 years ago and the world has moved on. That said, I’m sure the Qatari money that went into Barclays didn’t happen simply because the rescue party liked the coffee served in the offices at North Colonnade.
Whipping boy
A propos Qatar, isn’t it strange that the book seems to be being thrown especially hard at anybody with Qatari investment money on their balance sheet? Why Volkswagen and not all the other emission cheats? Why Deutsche Bank? Why now Barclays? It might be entirely coincidental and I’ve never been one for conspiracy theories but it does seem a bit strange that tiny little gas-rich Qatar has become the whipping boy of the world. Can it really be that all the evils of Middle East oil wealth are concentrated in one little country and that the UAE, Saudi Arabia and the other regional powers are all clean as whistles? I also wonder whether King Salman of Saudi Arabia removing Mohammed bin Nayef as crown prince and replacing him with his son Prince Mohammed bin Salman might be part of a greater play, the meaning of which we have yet to understand.
Meanwhile there is a seismic shift in the investment universe with China A-shares finally and at the sixth time of asking being included in the MSCI index. About US$1.6trn of investment dollars track the MSCI, the leading emerging market index, and many of these will be obliged to buy into China. Foreign investors are hugely underrepresented in China – as little as 2% of the total market cap - but if the only reason is because the shares weren’t in the index, then there has to be something severely wrong with the process by which our money is being invested. The Chinese stock market is either worth investing in or it is not and to blindly start pumping money into it simply because it’s part of a third-party index has to be wrong. Until now, no risk in China meant no investment. Then, suddenly, no risk becomes index neutral and no investment is a high risk strategy. Can that be right?