Friday, 18 January 2019

L'Ultima Cena

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On Wednesday Janet Yellen chairs her last FOMC meeting before stepping down as head of the Federal Reserve System and handing the reins of power to Jerome Powell. 

I have a sense that even the most ardent of Fed watchers haven’t made up their minds as to what they expect from the new broom and how to plot the direction that the Fed might take.


Cheese bored 

Before consigning the 2018 World Economic Forum to the same wasted time and wasted money bin as its predecessors, it would be fatuous not to add that all the “do-gooding”, which is what Davos is about, was swamped by the presence of President Donald Trump. For all his many faults, he hit the nail on the head in his speech by appealing to the audience to bury their prejudices towards him and work with what he is actually saying rather than with what those prejudices tell them he is about to say. This is not intended to be a defence of his anti-globalisation, isolationist economic stance but an appeal, one year after his inauguration, to grow up and to learn to live with the probability that he will be here for the next three years and not to exclude the possibility of another four years after that. 

Gaetano Mosca, Vilfredo Pareto and James Burnham have been overtaken by a time that is sweeping away many of the basic tenets of classical elite theory, the most central of which is the monopoly of and control over information. As we have seen, and with social media running riot, democracy is consistently failing to deliver the outcomes that leaders want and over many generations have learnt to expect. George Soros is the latest to suggest perfectly explicitly that liberal democracy is at risk of foundering. The next test awaits us on March 4 in the form of the Italian parliamentary elections, the nominations for which close today.



So far the yield spread between Italian 10-year and German 10-year is not reflecting the heightened political risk in Italy. As at this morning it reads at 135.5bp, 3.5bp wider than the recent tight of 132bp it printed on Wednesday. This might still be quite a bit away from the 88bp spread of March 2015 although since the Greek crisis - when correctly priced default risk was blown away by the eurozone flouting all its own rules - it has become increasingly difficult to pin a realistic tail on the European sovereign default risk donkey. Christian Morgenstern’s Palmström strikes again. 

The polls demonstrate the dog’s breakfast of Italian politics with 5 Star polling strongest with knocking on 30% support, followed by the centre-left PD on 25.3% and Silvio Berlusconi’s Forza Italia on 15.9%. But looking at the landscape from a coalition-building perspective, the mix of centre-right parties looks to be the one with the greatest chance of being given first dibs at forming a government. In other words, Italy will remain as ungovernable as it always has done. Other than France, which blundered into the presidency of Young Macron, Europe is just getting messier and messier. But how are investors supposed to price this situation? It would appear that so far the money is following the rout of a Brussels land-grab that assumes that the less able constituent nation states are to govern themselves, the more the centralist machinery of Brussels will try to fill the vacuum. 

Joint and several European risk looks more and more attractive in this environment. A number of years ago I suggested that a central funding agency modelled on Eurofima, the pan-European railway rolling stock financing collective, would be a good model for centralising eurozone sovereign borrowing but as yet nobody seems to have taken up the idea.



Back to Wednesday’s FOMC meeting. Opinions are divided as to whether this will be a valedictory coffee morning,,when Janet Yellen will be presented with a set of Mont Blanc pens from her erstwhile colleagues, or whether it is time for the committee to come off the fence and to set the scene for the rest of this year and into next. Goldman Sachs, for one, is predicting a pretty hawkish statement – no press conference this time – which would put the fear of God up risk asset prices.

The Dow put on another 223.92 points on Friday, which takes us into the last week of January with the index sporting a year- to-date gain of 7.68%. What might end up as the best January for US equities since 1987 has also, curiously enough, developed into the worst January for the dollar since 1987. One must also bear in mind the US equity markets, though hugely important and headline grabbing, do not speak for the whole world. The FTSE 100 is struggling to move into positive territory, the price it is paying for being dominated by non-British but London-listed dollar-earning companies. In a way this actually makes the index pretty irrelevant and also begs the question: who really wants the Aramco behemoth listed on their exchange? It might bring lots of income to the exchange’s shareholders but it will, even if listed in New York, skew index readings. The DJIA might be the only index that could support Aramco as it is the only one not to weight constituents by either total market cap or, more subtly, the market cap of the free float but on a “one man, one vote” basis. 

The week will finish on the US non-farm payrolls report. Behind closed doors the value of this metric is also increasingly being questioned. The gig economy has many individuals who in the past would have been rated as unemployed as being in work. The very definition of what being in work constitutes is another one that is in serious need of an overhaul. The world is changing faster than the statisticians can keep up with. Only long data series have value, which explains why updates to stats are so rare and so disruptive. But does analysing irrelevant data down to six decimal places do any more good either? Answers on a postcard - or should than now be on a hashtag?


End bit 

Finally, Japanese digital exchange and depositary Coincheck has been hacked and apparently a half a billion dollars of crypto has been lifted. Shock horror! We told you that this crypto is rubbish! Hang on. The newswires report this morning that NCR and Nixdorf, the two largest manufacturers of ATMs, or cash machines to European readers, are warning of the growing risk from hackers. The US Secret Service has warned of a practice known as “jackpotting” in which the hackers manipulate stand-alone machines to spit out large sums of money. As one would expect, the size and frequency of the thefts has not been revealed but the problem is apparently big enough for the makers to put out a red alert. 

Overall, the hacking of banks’ computer systems is nothing new, nor the knowledge that the annual losses run into many billions. Fact is that more often than not news of such hacks is suppressed. I just wonder how much money which will never be retrieved was stolen from the mainstream banks last night alone. Worth a thought. 

Have a good and safe week. 

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