Another day, another Fed official on the tapes, another turn-around in sentiment with respect to the timing of the next US rate increase.
This time it’s John Williams again, the one from San Francisco and the one who wrote an academic paper calling for a new and different approach to monetary policy. Williams, regarded as a sort of middle-of-the-road guy, neither hawk nor dove, “definitely” thinks a September increase in the Fed funds target range should be in play “given where the economy is”. It would make sense, according to him, to get back to a steady pace of gradual rate increases “preferably sooner rather than later”. Bring on September 21.
Historically, the Fed has tried to keep its head down in the run-up to presidential elections, but this time, as with the conduct of the presidential campaign itself, things seem to be different.
Despite all the doves, it appears to me that the majority of the FOMC members aren’t entirely comfortable with rates where they are and are quite aware that both November 2 and December 14 are not good dates to change the policy stance as one is six days before the election and the other is between the election of a new president and his or her inauguration. Hence I remain convinced that the markets are still underestimating the probability of an early move.
This to-ing and fro-ing isn’t doing anybody any good. I had been under the impression that Madame Yellen had reined in her merry men and that there was some sort of a move afoot to have the FOMC members’ speeches more closely aligned. But that seems to be out of the door again.
Could it be that Yellen is struggling to keep the troops in line? Or could it be that there simply is no line? One way or the other, investors are struggling to work out which way to jump.
Top investors, such as the indomitable Carl Icahn, who see the market as hugely overvalued and who have been running strategic shorts have had their and their clients’ rear ends handed to them on a plate by the resilience of risk asset prices.
They see many similarities to 2007/2008. That is of course true, but the big difference is that the 2016 asset price bubble has largely been created by the one-trick pony central banks with their “ease, baby, ease!” approach and we must accept that they will do whatever is in their power to keep the train running.
It has been many years since I first drew on the analogy of a patient on life support. Breathing and heart rate are normal, but is that because of – or despite – the machine? If the machine is removed, does he continue to breathe and recover or does he turn up his toes and die? In the case of Uncle Sam, the doctors are confidently discussing when to remove the machines, while markets seem to believe that life support should continue in perpetuity. Everyone is talking of “risk on this” and “risk off that” but few seem prepared to risk finding out what that risk actually is.
Oil, meanwhile, remains a conundrum wrapped in a mystery. A bear market is defined as one where the price of an asset or index has fallen by 20% from its last high and a bull market is where the rise is 20% from the last low. In the seven weeks since the June 29, West Texas Intermediate has been in both a bear and a bull market. Falling from US$49.88 pbb on June 29 to US$39.51 on August 2 and rebounding to US$48.22 by close of business last night means that it has fulfilled both conditions. What’s the old John Maynard Keynes bon mot about markets being able to remain irrational for longer than we can remain solvent?
News from Spain! Having been without a government since December, and with two inconclusive elections to deal with, word is that Mariano Rajoy has finally backed down and accepted Ciudadanos’ conditions which would bring them on side in support of his forming a new government.
On his road to Canossa, Rajoy has agreed to lift many of the parliamentary privileges which have protected MPs from charges of corruption and misappropriation. There is a warehouse full of financial scandals waiting to be unlocked and it would be fatuous to underestimate what might come out once Pandora’s Spanish box is opened. Although I remain a huge fan of Spain and its potential to be an economic powerhouse, I’d advise caution in the shorter term. There might be some seismic activity in Madrid and I can’t imagine that Barcelona is whiter than white either.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. Yesterday saw the release in the UK of exam results and it appears that the youth of today continues to be brighter and academically more adept than we ever were. The fact that most of them couldn’t tell you what the capital of Finland is or which century Lord Nelson lived in is neither here nor there; who needs to know if there’s Wikipedia? I suppose our parents’ generation thought that we were brainless nincompoops too so I shall shut up and humbly congratulate all who put in the work and who got the results. For the rest, Winston Churchill failed most of his exams, Richard Branson didn’t go to university either and my headmaster repeatedly suggested I quit school and learn to be a bricklayer. On reflection maybe he wasn’t all that wrong.
PS: Holidays beckon here too; I shall be away for most of the next two weeks on road trip through parts of Western Europe. I shall keep my eyes and ears open and will report back in early September.