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Monday, 23 October 2017

Greenspan stats, markets lacking conviction; and the smashing of the US banking system

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Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

It’s Friday, it’s US Labor Department day and we are all supposed to be sitting with baited breath waiting to see what the most important of all the monthly economic indicators will bring. Consensus forecasts are for pretty weak numbers with an increase in the non-farm payroll of a mere 68k, unchanged manufacturing employment and the unemployment rate stubbornly stable at 9.1%. But will we be sitting at 07:30EST with sharpened pencils and fingers on the buttons when that whole raft of statistics lights up our screens? Probably not.

The ISM Manufacturing report of yesterday was already weaker than expected at 48.5, duly taking this diffusion index below the key 50 mark and thus indicating contraction. Sentiment, therefore, is not great and even a better than forecast labour report will be met with quite some scepticism as to its sustainability. There had been much excitement over the sharp rally in equities since Friday but wags were already warning that the massive volatility throughout August had had many index investors needing to make significant portfolio adjustments to their underweights and there followed a huge short squeeze into month-end. With that month-end pressure off, a technical retracement in equity markets looked inevitable.

For most of the years I’ve been in this business, the criticism has been that markets trade from one set of economic statistics to the next in what we used to call “number hopping”. Now they could be accused of precisely the opposite as overarching fear and scepticism push individual releases into the corner. Markets have a habit of focusing on statistics which validate the direction in which they are moving, thus disregarding anything which points in another direction and dismissing it as an aberration or by declaring that it is a volatile series which can’t really be taken seriously.

Alan Greenspan had the annoying habit of discovering all manner of minor reports by obscure academics at even more obscure colleges to underpin his views. If he’d have found two middle-aged spinsters in New Hampshire who cast runes, read tea leaves and observed flocks of birds to then declare that non-inflationary growth were to continue “for the foreseeable future”, he’d probably have rolled them out too. Now, with the market lacking conviction in any particular direction, it can either look at all releases with equanimity or it can disregard the whole schmear. That seems to be what we’re doing now.

Alan Greenspan had the annoying habit of discovering all manner of minor reports by obscure academics at even more obscure colleges to underpin his views

Meanwhile, I understand that the US Federal Housing Finance Agency is talking of suing more than a dozen major American banks for having sold mortgage-backed securities containing mortgages upon which they had either not carried out due diligence or of which they should have known that they were bound to fail. Top of the list will be Countrywide which now proudly flies the Bank of America flag over its head-office but JP Morgan, Citi, Deutsche, Wells Fargo and so on are also all in the line of fire.

I was reminded of “Swissli”, an architect friend of mine from Lucerne in Switzerland who had studied in the US and who always caused great entertainment when someone bumped into him in the street by crying out “Sue the b’stard!”. I am not quite sure what the FHFA aims to achieve by smashing the American banking system. Perhaps the banks could countersue the government for having deregulated the business and thus causing them to set up lending operations without the depth of trained staff required to run the business? Maybe they could sue their shareholders for a return of dividends which they should never have paid out? Give me strength! I suspect that this issue will not be eaten as hot as it has been cooked and the timing of the announcement, unfortunate as it is, is determined by the fact that we are approaching the third anniversary of the nationalisation, oops, sorry, taking into conservatorship, of Fannie Mae and Freddie Mac after which legal action would be time barred. “We didn’t kick ’im when he was down. Honest. We waited until ’e was getting up.”

Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful weekend. May the only suit you face be the one you wear to church on Sunday – or to a wedding on Saturday, whatever the case may be. Incidentally, I am running a charity bookstall at the Chadlington Village Fayre in Oxfordshire on Sunday. If you happen to be in the area, please feel free to come by and support the cause. 

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