I’m not sure which is the more important of today’s key events, the FOMC announcement or the Chancellor’s budget speech in the UK. “No question!” you might cry, but I’m not so sure.
George Osborne’s performance this afternoon could have significant bearing on the outcome of the Britain’s general election which comes up in five weeks’ time and hence on the probability of an in/out referendum on this country’s membership of the EU – therefore on the future of the entire European socio-economic edifice.
Of course, the FOMC’s pronouncement will have a far more immediate impact on life, the universe and everything but Osborne might one day find that he today lit the blue touch paper which one day ended in a seismic reshaping of the Grand European Project.
That said, I can’t see Britain exiting from the EU, referendum or no referendum, but if you’ve sat through a hurricane in Florida which occurred simply because a butterfly had flapped its wings in the Amazon basin, you’d have to agree that nothing is impossible and that anything can happen.
Her Grey Eminence
Meanwhile, back in Washington, the FOMC will also be contemplating flapping its wings. Markets are abnormally nervous, the responsibility for which I, to some extent, lay at the door of Janet Yellen. The mid-1980s saw the rise of a satirical puppet show here in England called Spitting Image. It brilliantly took the Mickey out of all and sundry in public life and not having a puppet made of oneself meant, in certain circles, that one had not made an impact.
The puppet for the then Prime Minister and successor to Margaret Thatcher, John Major, was of a grey man with a grey face, grey hair, grey suit and over all grey demeanour. If the modelling team had to make a puppet for Doctor Yellen, it might be created along similar lines.
As Chair of the Fed, she has made little impact. She has not grabbed the markets by the soft bits and shaken them until they understood what she was trying to say. Thus, instead of hanging on her every word, they try to pre-empt or second guess her. That trillions of investment dollars should be dancing on a pinhead the size of an eight letter word, patience, sort of worries me.
I must add, though, in defence of the Yellen and her Merry Men, that they find themselves in an invidious position. They are paid by the US taxpayer in order to guard the USA and its economy by balancing growth and inflation. They are not paid by the EU or China or Latin America or OPEC or anybody else who thinks they know what the Fed should be doing. In other words, the FOMC must choose today between pursuing its domestic interests or keeping its eye on the rest of the world.
The domestic picture is pretty clear. Growth is good and accelerating, unemployment is close to the sustainable target of 5.5% and the time has come to unwind one of Ben Bernanke’s last “unconventional measures”, that being ZIRP (zero interest rate policy).
Time has surely come to begin to normalise the interest rate structure. The flip side to this remains an ever stronger dollar which will attract foreign investment – how else could US equities be so close to all-time highs? – which will continue to starve struggling economies, especially those in Europe but also some in Asia, of desperately needed investment capital.
The lack of inflation might beg for a postponement of monetary tightening but the strong dollar and low prices of hydrocarbons, especially the latter, are cyclical and cannot and should not be used to determine strategic decisions. Tactical ones, yes, but not strategic ones and what the FOMC has to deal with now is strategic.
Thus it must try to subtly indicate to the domestic audience that it wants to see the new normal as the old normal and the old normal reinstated as the new normal again. At the same time it will need to reassure the rest of the world that it is sensitive to others’ needs. If it wants to remain moral leader amongst the industrialised nations forget the GDP race with China – it is prepared to act in the best interest of all.
All the while, it is surrounded by a bevy of trigger-happy traders and money managers who tend to panic when Janet Yellen says “Good Morning”. Does she mean really good or just relatively good and does she mean morning in Washington or in San Francisco? Maybe she really does just mean Good Morning and nothing else.
Cheap and plentiful liquidity has pushed stocks to juicy levels – even tracking the index with a long-term parabolic curve, I can’t see how the Dow gets much above 15,000 points (it closed at 17,500 points last night) and although all equity people will deny that values at stretched – they always do, don’t they – there has to be a risks of a significant correction once the Fed begins to tighten.
More doves…
According to the FT, Ray Dalio of the US$165bn Bridgewater hedge fund has warned the Fed to draw lessons from 1937 and 1938 when the Dow fell from 189 points in August 1937 to 99 points in March 1938 on the back of a reversal of post-1929 accommodation. In the same piece it has Christine Lagarde, Managing Director of the IMF, appealing to the Fed to think of the others too, not least of the Emerging Markets.
Damned if they do, damned if they don’t. And all that over whether the published statement will contain the word “patience” or not. At some time, the bullet will have to be bitten and rates will have to begin to rise. I still doubt it will be as early as June. Removing “patience” is tantamount to taking the brakes off and not necessarily to starting the engine.
Will the Taper Tantrum be repeated by way of a Patience Panic? No reason not to. The one-day downside risk looks more powerful than the upside risk so, on balance, one would probably have to go into the day sporting a small short.
And yes, George Osborne will rise at 12:30 GMT in the House of Commons with an un-callable election on the horizon but what he says will barely be heard much beyond these shores.
