If markets hate uncertainty, how do they deal with the there being absolute certainty that the uncertainty is going to continue, with the predictability of unpredictability?
President Trump’s summary dismissal of acting Attorney General Sally Yates for questioning the legality of his executive order on travel restrictions has markets questioning which way to jump.
Trump has only been occupying the Oval Office for 10 days and we are already seeing an effect I had predicted, which is that he will ride rough-shod over those who oppose his opinions with the pretext that they are standing in the way of the will of the people. Disagreeing with the president – any president anywhere – is a matter of political opinion. But when it becomes a question not of what but of how, things become more complicated. I was yesterday exchanging notes with a very clear and unshakable, London-based Trump supporter in the immediate aftermath of the weekend’s imposition of the travel bans.
Having tried to avoid taking a position on either side, he eventually conceded “…well on the execution idea. I can agree. Handled poorly. Actually done like a liberal usually does it. Good intention, horrible outcome”. This was the first time that I had heard this individual question anything that Trump has said or done, be that as presidential hopeful, presidential candidate, president-elect or president. One of the most significant principals of democracy is the division of powers between the executive, the legislature and the judiciary.
The UK which prides itself of having, in Westminster, the mother of parliaments does not know the division between the executive and the legislature. On the contrary; one can’t be a member of the former without being a member of the latter. In the US, on the other hand, the division is absolute but, as opposed to the UK, for example, the legislature is wholly politicised. The blocking of former President Barak O’Bama’s attempt to appoint a ninth Supreme Court justice is a case in point. The rapid firing of Yates takes the politicisation of the justice system a step further. The White House justified the act by stating that Yates had “betrayed the Department of Justice by refusing to enforce a legal order designed to protect the citizens of the United States”. I understand that the reason she ordered subordinates not to defend the order was precisely because she questioned its legality and it cannot be for the White House to tell the DoJ what is legal or not.
Down Jones
Markets, already unhappy about the travel bans, will not like this at all. The Dow had already ploughed back down through the 20,000-point mark like a knife through soft butter to close 122.65 points lower at 19,971.13 and, at the time of writing, futures markets indicate that the pull-back isn’t over yet. How much of the sell-off is caused by the events and how much is being driven by a simple bout of profit taking after a long and hard rally is impossible to determine but, if you’re caught long at the top, who cares?
None will be helped by a report by HSBC which argues that, as opposed to the consensus view that 10-year Treasuries are headed for 3% or even 3.25%, the year-end benchmark yield will be at or close to 1.35%. That’s hard-core contrarian and bases its argument on all the weaknesses and frailties in economic releases. Although I understand where they are coming from, especially when looking at the unemployment and wage growth figures, I detect one particular weakness in their own line of thinking and that is not at all their fault. The very nature of employment in the knowledge economy or gig economy is very different to the labour environment when the algorithms for the labour statistics were drawn up and we now have something akin to trying to measure radiation with a set of scales. The work environment has moved on but the statistic hasn’t and it risks missing much of what is actually going on.
Years back I used to do a bit of teaching at City University Business School and I remember trying to knock into the heads of my students that statistical releases don’t move markets; they move people’s perceptions and it is those which move markets. The same goes for the economy. It’s not what Joe SixPack is told on the news that makes him consume but it is the way he feels and at the moment a broader based feel-good factor in the US is evident. That is not to say that it can’t evaporate again and political ructions in general and a 9/11-style attack in particular could disrupt what is still a tender resurgence of confidence in some of the more remote regions of the US.
Keep an eye open for the Case-Shiller house price indices for November, which are due out today at 9am EST. Although the 20-City composite is still in the 190s and well off the all-time high of 2006 before the crash in July 2006, the broader nationwide index reached an all-time high in September and continued to rise in October. Methinks the HSBC research guys might not have turned over quite as many rocks as they should have done.
Shadow boxing
Although all the focus is on the US at the moment and Europe is basking in the shade, its own warts should not be overlooked. The IMF has released a study which projects that Greece, at the rate at which it is going, will end up with a debt/GDP ratio of 275% by 2060 unless a serious revision is undertaken to its debt situation. The IMF basically laughs at the EU’s own projections – they would be particularly benign and optimistic, wouldn’t they? - and concludes that adult debt-relief is needed. Unfortunately, the €220bn directed towards Greece was given on the understanding that there would be no debt relief forthcoming for that would be tantamount to a default, which would in turn scupper the single currency project.
It is now going on eight years since it became clear that the Hellenic Republic’s finances were built on lies and deception – no sense mincing words here – but righting the statistics did not change the state of the underlying economy and changing the pump doesn’t fix the holes in the hull below the waterline. According to the IMF, at 275% of GDP, debt servicing costs would chew up around 62% of GDP. Whether it’s 62%, 52%, 42% or even 32%, Greece remains a fiscal disaster and the refusal by Brussels (and Paris and Berlin) to lance the boil will come back to haunt them, if as and when the markets begin to principally look at Europe again.
Meanwhile though, let’s continue to play pinning the tail on the donkey.