Barely a whisper

7 min read

Monday came and went. In order to get the measure of the day, just digest the fact that, other than financials issuing in markets as they do, the sum total of issuance in US credit markets amounted to: US$1bn 10 years for Plains All American, US$400m five years for Xerox and US$300m for Ryder System … and that was it!

There was a bit of a flurry around the dismal Empire State Manufacturing Survey which stuck out at –14.92 versus the consensus forecast of +4.50 but this is a fearsomely unpredictable and volatile series.

Quickly there was a muttering that this might help decide the FOMC not to act in September but, truth be told, anybody who believes that the FOMC is skittish enough to let itself be influenced by the slings and arrows of minor, regional indices should go home and do some proper reflecting.

Although Madame Yellen keeps telling us that the Committee’s decisions will be data dependent, the issues at stake ahead of the first reversal of ZIRP are much too big to be hostages to the ups and downs of monthly local sentiment indices. Anyhow, an hour and a half after the Empire State, we got the National Association of House Builders’ Housing Market Index and at 61 there is absolutely no sign of insipid weakness.

I suspect the decision as to whether rates go up in September or not are already taken. Much has been made of the three devaluation moves in China – with, most probably, more to follow – but here too I think the FOMC might feel tempted to turn a blind eye for there will always be something, somewhere which might cause the Fed to be cautious.

Soft oil prices – WTI dropped another 10 cents yesterday to US$41.87, having traded to an intra-day low of US$41.64 – might be disinflationary or even deflationary but the Fed has to look at everything in a much more holistic manner as the objective is not to pre-empt inflation or slow an overheating economy but simply to re-establish a normal interest rate structure and one which might actually display positive real returns.

Since the Fed’s last rate move to the current target of 0bp–25bp on December 16 2008, CPI has averaged 1.5%. In September 2011 it even got as high as 3.9%. Forget for a moment inflation suppression and just think of real interest rates.

I have also repeatedly alluded to the problem of the Fed sitting with an empty arsenal should the US economy slip into a cyclical downturn. That said, the BOJ blew it in the early 1990s when it began to tighten too early in what seemed to be an attempt to make the world believe that the economy was growing more strongly than it was.

There followed what has become known as the “lost decade” but which has now been going on for the best part of a quarter of a century. Under Alan Greenspan the Fed produced a seminal study on the mistakes which had been made by the BOJ, which ended up pushing the economy into years of recession. I suspect it might have been key in helping the Fed formulate its monetary policy through the aftermath of the global financial crisis.

The point is that comparisons between Japan and the US have run out of fuel and now the Yanks have to move ahead and do their own thing.

I was talking to a hedge fund manager last week who agreed with me that Janet Yellen and her Merry Men missed an opportunity to tighten this time last year and that they are floundering in trying to justify why they might want to go now when they didn’t want to go then.

There’s nothing wrong with making a mistake once but there are few justifications for making it a second time. In front of me I have an image from the film Apollo 13 where, ahead of the lift-off from Cape Canaveral, there is a scene in the control room where one desk after the other declares “Go!”….and off they went. Forget what happened afterwards as the FOMC has no need to subsequently stir the oxygen tanks.

Back here in Europe, Wolfgang Schaeuble, the German Finance Minister and hawk-in-chief in all matters Greek, has quietly backed down and declared his support for the bailout package. To me that sounds like a fox lauding the benefits of a vegetarian life-style and I agree with some of the voices being heard in Berlin that suggest that this might be the overture to his swansong in the Finance Ministry.

He has played a tough hand and has, let’s face it, lost. Mutti Merkel can’t afford losers, even of the calibre (which some Germans question) and experience of Schaeuble. Anyhow, she has done her own volte face and Schaeuble might be the one with the rings on his back which destined him to be the fall guy. Never, ever underestimate Merkel’s ruthlessness; she didn’t get where she is today by being nice.

Whether Greece is back, cap in hand, next year or not is clearly now next year’s problem and nobody wants to be involved in worrying about that right now. Thus, if my soundings are so to speak sound, then no self-respecting real money account believes Greece to be a candidate to be included in the asset allocation again.

Financing Greece will be played out between Athens and the multitude of eurozone agencies which are already in it up to their necks. My guess is that the IMF stays out as the risks of being accused by Asian members of rewriting the rules in order for its European leadership to support a uniquely European political screw-up are too strong and too evident.

Hedgies might punt in and out but I think even most of those will avoid playing in a market which is controlled by a bunch of eurocrats who have no compunctions of blowing it up, at will, in their faces.

Apart from that, the weather is nice and on the whole I’d rather be out playing…

Anthony Peters