Are central bankers really supposed to make policy based on the vagaries of stock markets, especially if they are driven by the secondary effects of a collapsing bubble on the other side of the planet?
Bill Dudley, president of the New York Fed, never quite said that they are, but the markets interpreted it that way when he was read by observers as having pointed in a generally more dovish direction in stating: “From my perspective, at this moment, the decision to begin the normalisation process at the September FOMC meeting seems less compelling to me than it was a few weeks ago…”
He did clarify it when he followed up with: “Normalisation could become more compelling by the time of the meeting as we get additional information on how the US economy is performing, and more information on international and financial market developments,” but by then it was too late. “Eats shoots and leaves….”.
Anyone who believes or even hopes that the Jackson Hole off-site which gets into its stride today is going to focus on using monetary policy to prop up markets will most probably have another thing coming.
Whether or not Dudley already had access to or had taken account of the July Durable Goods Orders is a moot point but, when revealed at the open, they firmly knocked the cover off the ball with the headline figure, forecast to be –0.4% for the month, romping in at +2.0%. The Non-Defence component was expected to be +0.3% and reported at +2.2%. Worried about the health of the US economy?
One way or the other, stocks went on a mission with the three key indices, the Dow, the S&P and the Nasdaq closing up 3.95%, 3.90% and 4.24% respectively. Dudley-induced? I doubt it.
I think it was just a look at the figures followed by the realisation by Wall Street that leaping off the cliff with all those panicking and over-leveraged Chinese retail investors just like a bunch of lemmings is rather unbecoming of the CFA, PhD and MBA letters on the business cards. Mind you, if clutching onto the words of Dudley is what they did, then that would surely be an equally modest showing.
Actually, had stock prices around the globe not been totally divorced from economic realities – some might argue that they have been for years – then they probably should have gone down. That Durable Goods release not only demonstrates – unless it is believed to be an outlier – that the US economy is alive and kicking but that there appears to be an increase in business investment.
The lack of investment in capital goods is what has been troubling economists for a while – wisdom has been that much of the money which should have been funnelled into new plant and equipment has been frittered away on stock buyback programmes which do little other than make senior executives whose bonuses are tied to the share price rich today, while impoverishing long-term shareholders tomorrow. This pick-up in capital goods orders, unless a one-off, looks hugely encouraging. But would that not, of itself, take some of the fizz out of the equity market?
The FOMC might feel that it should let capital investment gain a little more momentum before it moves but, then again, it might not. If it wants to be perceived to be ahead of the curve, it surely won’t. I therefore stick with my call for a September tightening and would treat Dudley’s comments as misinterpreted by the Street rather than having been aimed at offering guidance towards a delayed move.
A propos senior executives.
Syngenta & Monsanto
I was encouraged to see that Syngenta has finally rejected the last US$46.2bn bid by Monsanto. Syngenta shares dropped 18% from SFr 378.80 to SFr 309.90 and Monsanto’s leapt by 8.6%. Apart from the monopoly issues which would most probably have led to many of the Syngenta assets to be sold off, the final loss of the once proud firms of Ciba-Geigy and Sandoz would have been pretty painful. My point is, however, that such takeovers normally make the senior management of the target rich overnight while the jury remains out on where shareholder value is ever to be found.
Evidence, albeit it hard to really verify, would appear to indicate that large takeovers more often than not ultimately destroy shareholder value to the benefit of M&A bankers, M&A lawyers and of course company executives. The numbers are hard to prove in the fog of war with all the restructuring, disposals and what-not. Turning down a take-over offer, especially one as generous as that offered by Monsanto, takes guts. Watching one’s share price drop 18% is not easy and it will take a lot of hard work for the board to demonstrate that it will have been worth it. On that basis – and please don’t regard this as a stock-tip; I don’t do them and I’m not qualified to do them – Syngenta should be a buy.
Gratigue?
Meanwhile, back in Europe, things remain calm. Greece might be in political purgatory with Alexis Tsipras making all kinds of noises as to what he might or might not do after the elections but with the immediate risk of sovereign default off the table, nobody west of Evzonoi seems to give a toss. Could it be said that we’re now suffering from “Gratigue”? The formal declaration that coalition talks have failed is pending after which President Prokopis Pavlopoulos can dissolve parliament and fix the date for the elections. September 20 looks to be the most likely date.
Just looked at the weather report – wet, wet, wet. Makes me think there might be a Bank Holiday in the offing. I wonder why.
