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Saturday, 20 July 2019

Beware of the Ides of March

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Yesterday the Dow had yet another 1% move, this time to the downside.

That said, the index has traded within a range of around 1,200 points since the beginning of the month and by closing at 24,758.12, it is now as near as dammit right in the middle. Everybody into the pool and then everybody out the pool again? I don’t care what I read or hear, investors haven’t really got much of a clue what they ought to be doing.

 

The Kudlow Report

How should they? The appointment of Larry Kudlow as successor to Gary Cohn as chief economic adviser to President Donald Trump and head of the National Economic Council should have the tongues wagging. Kudlow, now best known as a TV pundit, is an ex-Bear Stearns executive and while Cohn’s alma mater, Goldman Sachs, is the perfect model of discipline and control, Kudlow comes from the Bear Stearns culture of swashbuckling piracy. Kudlow is a no-holds-barred tax-cutting free marketer, which sort of aligns with Trumpanomics, but he is also a fervent opponent of trade barriers and has loudly criticised the president’s tariff policy. How to square the circle now? As a hater of what he regards as systemically and systematically unfair Chinese trade practices from non-tariff barriers to the laughable defence of intellectual property rights I’m sure he will suddenly find himself convinced that the new boss has got it pretty much right.

Confused? Why not? The US 10-year note yield, not long ago a sure-fire bet to breach 3.00%, is suddenly back down at 2.80%. The interpretations of why the fall in yield are many and, to my mind, mostly fairly spurious. The best is surely that any impending trade war will slow economic activity and that the great recovery might be headed for the rocks. That said, a trade war, one which Trump sees as being easy to win, will inevitably lead to a kick in inflation. At the same time a decline in the Chinese trade surplus would quite naturally slow the China’s purchases of Treasuries and hence China’s role as principal funder of the US’s fiscal deficits. That in turn should steepen the yield curve and push longer yields higher. Or might it be that markets, given the uncertainties on the trade front, are becoming less convinced that the Fed is going to tighten next week despite the hawkish comments of Lael Brainard, the dove-in-chief among the voting members of the FOMC. 

There are more moving parts than most of us can follow and make sense of. The final great known-unknown is the ongoing expansion of credit or, to the sceptics like myself, the rapid approach of the limits of indebtedness by consumers. The rumblings in the student loan and auto loan market have been drowned out by the talk of an impending consumer boom funded by tax cuts. So far the delinquency rates have improved in neither and I am reminded of the period in 2007 when an inexorable rise in mortgage delinquencies was being ignored while the world was absorbed with watching Chuck Prince, then still Citibank supremo, dancing. There is so little sense in getting excited about growth figures if they are just a function of rising debt, of people buying stuff they don’t need with money they haven’t got. President Xi Jinping’s rearrangement of some of the ministries and regulators looks to be a gentle move in addressing the debt problem but the appointment of Kudlow clearly points the other way. Borrow and spend and spend some more is the American way, eh? Why not, it made the president rich.

 

Sent elsewhere 

Meanwhile, in Europe the move away from free money for all is creeping closer. Banque de France governor François Villeroy de Galhau made it quite clear in an interview that although the first rate move by the ECB is unlikely to happen much before the market consensus of H2 2019, the bond-buying programme is close to its swan song.

Investment bank research remains positive and highly excitable when it comes to global economic activity. It is said that economists have predicted eight out of the past three recessions. I would add that investment banks’ published research has predicted none of any of the past 20 market repricings. Why would they? 

Alas, for me it is once again already that time of the week as I shall be out tomorrow to visit my 96-year-old Dad. Let me to wish you and yours a happy and peaceful weekend ahead. I shall be missing the last weekend of the Six Nations – the Swiss aren’t too hot on the oval ball – and also the 76th Goodwood Members’ Meeting, which will possibly need to be raced on snow tyres this year. Spring is out there somewhere; I just don’t know where.

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