The crisis in the formation of a new German government rolls on with markets seemingly not giving a fig for the public manifestations by politicians of all hues.
Yesterday Mutti Merkel rolled from one TV news studio to the next repeating the mantra that she would prefer to face new elections than to attempt to proceed with a minority government. Well, she would say that, wouldn’t she? The recalcitrant Free Democrats – Liberals to you and me – can only lose in a rerun so Merkel is effectively telling them to get in line or face another electoral disaster. My money is still on President Steinmeier banging heads together and some form of coalition emerging from the mess.
Is Young Macron sitting there rubbing his hands at the prospect of a divided and therefore weakened Berlin leaving room for Paris to take the greater leadership of the European project? Although there was no mass exodus from German assets in general and the Bund market in particular, the 10 year Bund/OAT spread remains on contraction course and this morning it reads around 33bp. That said, it has been pretty volatile this year and, the fear of a Le Pen presidency aside, flopping around in the 35bp-45bp area. Political wobbles in markets always offered bold traders a great opportunity to make some cheap money for in the end the economic realities will take precedent and asset values will soon return to prices dictated by fundamentals.
Lucky dip
This wisdom appears to be more widely understood than it used to be and the quick profit on the back of nervous players has been arbed out. It’s not easy to buy the dips if there aren’t any. Talking of dips, early hours last Monday, November 12 one could have bought bitcoin at just above US$5,600 and yesterday it could have been knocked out again at just a hair’s breadth below US$8,300. There might be no volatility in mainstream asset markets but the crypto world certainly makes up for that.
There is a rather extraordinary public debate being conducted with the great and the good opining on whether cryptocurrencies are a good or a bad thing. Jamie Dimon’s words are still ringing in our ears although very gradually the tone is changing and it is becoming more acceptable for even top players to quietly acknowledge that cryptos are here to stay. That does not mean that there isn’t a bitcoin bubble that might blow up any minute but the huge piles of speculative money that was burnt in the 19th century railway boom didn’t make trains suddenly disappear from the landscape. Sure, cryptocurrencies live in a virtual landscape but just because we cannot see or touch it doesn’t make it any less real.
I once again heard this morning that bitcoin is the currency of choice for criminals. Really? What about Uncle Sam’s very own US$100 bills in which the vast majority of the world’s drug trafficking takes place? Every trade in a cryptocurrency leaves behind a clear and visible audit trail that the authorities can follow at will, something that can’t be said for stacks of paper greenbacks. Catching criminals through their cyberspace footprints doesn’t make for the same sort of television that frog-marching people of out of warehouses in handcuffs does but, trust me, it is just as effective.
At the moment there seem to be believers and non-believers but a great lack of informed debate. Before the week is out I shall be formally linking up with BlockEx, the digital asset exchange platform. Through this relationship I expect to gain a worm’s-eye view of developments in distributive ledger technology, more commonly known as blockchain, and to be present during the process of blockchain being integrated into the greater world of global finance. BlockEx is also launching its own ICO, which will be another learning process for me and one that I shall be sharing.
Board rigid
Back in the old world, Janet Yellen has formally tendered her resignation from the board of the Federal Reserve to coincide with her vacating the chair for President Trump’s nominee Jay Powell. With the vice chairmanship open after Stan Fischer’s health-related departure, the resignation of Bill Dudley of the New York Fed also pending as well as Fed Governor Dan Tarullo stepping down, the Fed will seem like a very different place.
The challenges will be huge. For most of the 20th century it was the central banks’ role to smooth the economic cycles. The 21st century looks to have different demands, the principal one of which is that monetary authorities are expected not only to facilitate the economy’s path through periods of growth and contraction but to banish the ups and downs and to guarantee a recession-free future. That is a dangerous misuse of monetary policy tools and a practice that risks bringing on the next financial crisis. In the current cycle, however, it will not be the bankers but the central bankers in the centre of the storm who will be judge, jury and executioner. And we will be facing this with a Fed under new management. The outcome might be brilliant but it might also be disastrous. Whether anything can be read into Madame Yellen’s decision not to retain her role as a member of the board and to pull the parachute instead is yet to be seen.
Prime Minister Theresa May and her merry men are working up to a divorce settlement on the courthouse steps. I never had any doubt that this would be achieved and having offered to pay €20bn in the settlement and with the jilted wife asking for €60bn, the talk is now of an offer of €40bn being laid on the table in exchange for an immediate commencement of trade talks. Anybody who has conducted negotiations for a divorce settlement will recognise the process. Anybody who hasn’t suffered those particular slings and arrows would do well to learn from it. One day, God forbid, that knowledge might come in handy.