The most important event last week and surely the one discussed least at dinner parties – or while binge-watching box-sets to take-away pizzas if that’s more your style – was the deeply disappointing quarterly report from Alcoa.
Twist it as you like, if corporate earnings are on the slide, and many think they may be, then we will sooner or later have to rerate equities. Add to the mix a normalisation of monetary policy and there could be some very troubled time ahead for all of us. That said, I still don’t think that the time has come to be dumping financial assets and to go and hide on a desert island…. at least not yet.
Interestingly, here in the UK some of the knee-jerks that followed the June 23 referendum are fading and, away from the lights and microphones, I’m hearing and taking part in some more grown-up conversations as to what should or might happen next. At the weekend I was out with a former captain of industry – now retired but still heavily involved in the British engineering space in a non-executive capacity. He loudly bemoaned the fall in sterling and cost increases it has imposed on imported components. I humbly pointed out that the imports might look expensive in sterling terms but that to his export customers they still cost the same. The value-added element that comes from this country is, however, 20% cheaper than it was so the effect on the export client is positive. I understand that no more than 40% of British manufactured goods contain imported components so although there is a pricing impact from the weaker pound, it continues to weigh more heavily on the positive side.
Whether open warfare has broken out between Downing Street and the Old Lady, or more accurately Governor Mark “The Magician” Carney, is open to debate. Whether we believe that his policy responses to the Brexit vote were right or wrong is for each of us to judge for ourselves. What we cannot dispute is his right and his duty to do what he thinks is right and it is not for the government to interfere. Nevertheless, one cannot deny the government the right to question his actions but one might quite rightly not be impressed when this is carried out in the public domain.
Funnily enough I heard Mark Carney’s predecessor, Mervyn King, inventor of the term the “NICE economy” (Non-Inflationary Consistently Expansionary) on the wireless over the weekend remarking that everyone is moaning about the fall of the pound, incipit inflation and a rebalancing of property prices. He went on to add that he couldn’t see the problem because that is what has been demanded for years from all sides and is supposedly what the Bank of England has, albeit unsuccessfully, been trying to engineer.
My engineering friend does have one very strong point and that is when he assures me that finding investment capital has become very hard. He is no doubt right and for capital-starved entrepreneurs the environment is not funny. That is all quite true but real money is made by taking risks in volatile times. The rewards for those who get it right will be significant. Even our own industry is beset with that. There was a reason why investments in hedge funds used to be locked in for three years. I have spoken to hedgies who are being driven crazy by their so-called “strategic investment partners” who call twice a day to see how things are going. If you don’t believe in your hedge fund manager and you can’t suffer the volatility, buy Bunds.
Catchphrase
My compliments to Janet Yellen, who has given us a new catchphrase that none of us know what it means. She spoke of the potential benefits of running what she termed a “high pressure economy”. Is that an overheating economy? Does she mean that it’s an economy in which inflation is allowed to take root and that it’s the Fed’s job to consciously position itself behind the curve? Are we to prepare ourselves for a “high pressure tantrum”? Or is the “high pressure economy” the Fed’s equivalent of the Emperor’s new clothes?
Let’s see what tomorrow brings with the September CPI figures. The forecast is for the annual ex-food and energy to be at 2.3%. With oil prices picking up after their long period of depression, the headline number might be moving about but it is the “ex” figure, core inflation, which we should be looking at. Core CPI at 2.3% and Fed Funds maybe at 0.75% come December. Is that what she means by high pressure economy? I’m buggered if I know.
The ECB meets on Thursday. Expect nothing other than an assertion that everything is going to plan. Apparently Italian PM Matteo Renzi has forecast a revised budget deficit for 2017 of 2.3% and Portugal expects one of 1.8% compared with 2.6% in 2016. I don’t know how they arrive at these figures but they all seem a bit creative. I suppose if one excludes the cost of recapitalising the banking system one might get there. Anyhow, keep an eye on corporate earnings this week. They will tell us more about the state of the world than a hundred central bankers and a thousand presidential hopefuls.
Have a good week.