I’m not quite sure where the inflection point was or when it emerged but markets seem a very different place now than they were just a few weeks ago.
Wasn’t the global economy just about to fall down a dark hole like Alice in Wonderland? Were interest rates not going to remain at zero until the end of time and was inflation not a word slated to be removed from the dictionary?
Sure, there are more than just a few flies in the ointment but who seems to care? The failure of the Wallonian parliament to ratify the CETA – it, incidentally, has been followed by two other regional parliaments – would not so long ago have led to Europanic, to the single currency being sold down in size and to pronouncements of the end of the world as we know it. In the event markets don’t seem to give a toss. Whether that is because they assume the deal will be done with or without the Walloons or because they have copped that all the many statistics which extol the benefits to growth generated by trade deals are spurious at best is a different matter entirely.
The argument proffered by the “anti” lobby is that open borders don’t generate more wealth, they just depress prices down to the lowest common denominator. If places like Canada, where the underlying price of real estate gives manufacturers a head start against their European counterparts for whom up-front costs are higher, have free market access then local producers will be forced out of the market not because they are inefficient but because they are fighting with one hand tied behind their backs. How, so the argument goes, can Europeans, hamstrung by regulation and social costs, be asked by those who regulate them to compete with companies that are not subject to the same high standards? It’s hard to disagree. To dismiss the holdouts as a bunch of blind, parochial, anti-establishment idiots is not good.
Carry on Brussels
The British referendum has opened a can of worms in as much as it has encouraged all manner of people to no longer accept that simply because the ‘blue and gold’ Brussels says it is good that it is good. Incidentally, one of the two regional parliaments that has followed Wallonia is, funnily enough, that of the ‘black, yellow and red’ Brussels. It now looks as though the blue and gold version is going to ride rough-shod over the black, yellow and red one and sign the CETA accord, safe in the knowledge that the utter confusion and uncertainty that the Brexit hiatus is causing should suffice to whip recalcitrant locals back into line. If the UK is looking for some quick and easy export opportunities, how about mugs, key rings and tea-towels with the “Keep Calm and Carry On” slogan on a blue and gold background?
That aside, yesterday’s PMIs were amazingly strong and those who are expecting the economy to fall off a cliff can wait. German manufacturing PMI, forecast at 54.4, came in at 55.1, the services PMI wasn’t 51.5 but 54.1 and the composite beat expectations by reading 55.1 instead of the anticipated 53.3. That’s Germany but what about the rest? The same indices for the entire eurozone reported manufacturing at 53.3 (vs forecast of 52.7), services 53.5 (52.4) and composite at 53.7 (52.8). Those are strong numbers in anyone’s book and St. Mario can look down on them with satisfaction. Whether they are the result of a dead cat bounce, a cyclical recovery or the ECB’s aggressive monetary policy will remain open to debate unless there is a significant reversal within the next couple of months. Could this in fact be no more than part of the same post-Brexit referendum bounce that the UK has experienced? I think not.
Profit
Meanwhile, Twitter is back in the news as it begins to implode. Like this daily column, Twitter is hugely popular as long as it costs nothing. As popular as Twitter might be, it struggles to find a sensible way of monetising its popularity and that, ultimately, will bring about its demise. Well, maybe not its total demise but it should trigger a significant repricing. I already recently pointed to Netflix which trades on a P/E ratio of 344 times and yesterday announced that it wants to come to the bond market to raise another US$800m to fund content. The media world seems to be afflicted with the sort of dreams which stalked the dotcom bubble in the closing years of the last century when we were repeatedly told that profit doesn’t matter anymore. As cub salesmen we were trained to grasp that “turnover is vanity, profit is sanity”. On March 10 2000, the Nasdaq peaked at 5,048.62. On October 9 2002 it cratered at 1,114.11. Need I say more?
Finally, enough bondholders of Venezuelan national oil company PDVSA have entered into the company’s exchange offer to give it enough breathing space to not be at risk of formal default when bonds begin to mature at the end of this week. The company is bust, the country is bust and, following the treatment of the recall initiative, it would appear that negotiating with Cristina Fernandez de Kirchner’s Argentina was a walk in the park compared to trying to do so with Nicolas Maduro’s Venezuela. If you’re managing your own money, steer clear. If you’re managing that of other people, steer even clearer.