None the wiser

8 min read

One of the greatest of all one-liners said to have been delivered by a central banker is often attributed to who else but former Fed Chairman Alan Greenspan, the master of opaque ambiguity.

He is alleged to have said “I know you think you understand what you thought I said but I’m not sure you realise that what you heard is not what I meant”. I have always taken Janet Yellen to be one of his most dedicated students when it comes to delivering ambiguous speeches that could, irrespective of the future outcome, be deemed to have been absolutely on the money.

I recently used the analogy of Doctor Dolittle’s mythical pushmi-pullyu so I was duly tickled this morning when I heard one TV journo use the same. In effect, Madame Yellen gave everybody just enough to reassure them that their view, hawkish or dovish, was catered for. There was no sign that with the economy in its current state of health the tightening cycle would be brought to a premature end. There were also enough ifs and buts included to please those who suspect that the cyclical recovery has already run the best part of its course.

Risk market bulls jumped on comments during her testimony to the Committee on Financial Services of the US House of Representatives. “It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years…. We’re watching this very closely and stand ready to adjust our policy if it appears the inflation undershoot will be persistent.” At the same time and quite in holding, the dollar sold off, albeit only mildly with it now trading back below ¥113.00 and once again, as though it were now doing it just for fun, the Dow set a new all-time closing high at 21,532.14 and the S&P closed just 10 points below its own record level. All the while, 10-year Treasuries were around 2.32%, their lowest yield in 10 days and at the time of writing the rally in the rates market continues.

The 2-year note, the canary in the Fed watchers’ coal mine, closed at 1.345%, well below the 1.412% it printed going into the July 4 holiday.

But is this “risk-on” trade pointing to a change in the way markets perceive Fed policy or is it just another bit of up-a-bit, down-a-bit against a confused and confusing back-drop? In all probability it is no more than that. Yellen has not really given us a script that any one of us could not have written for her. Inflation, or lack thereof, remains central to the Fed’s thinking but so it should. Yellen expects it to rise to 2% sometime during the next few years – how long is a piece of string? - but then again, so she tells us, it might not.

Equity markets have long been underpricing the risk of higher rates, largely on the expectation that they will not rise unless the economy is on fire, and yesterday Yellen did nothing to dispel that notion. Her testimony continues today although the die is cast and it’s unimaginable that she will be letting some unexpected cat out of the bag now.

The subject of balance sheet normalisation or whatever one might want to call it, she gave us the same soft soap. Although the original discussion of which we learnt in the March FOMC minutes were based upon an initial monthly reduction of US$6bn in Treasuries and US$4bn in mortgage bonds, gradually rising to US$30bn and US$20bn, respectively, these numbers do not constitute policy and are therefore as malleable as the FOMC might deem necessary. So we don’t know when and we don’t know by how much. Now take those two variables and stick them in your model. ‘Nough said.

Storming day

Meanwhile France is winding up to winding down for Le Quatorze Juillet, or Bastille Day holiday. The symbolism of the storming of the Bastille is much stronger than the result as only seven prisoners were found inside and I suspect that President Trump’s visit to Paris as guest of honour for tomorrow’s celebrations will also be much more symbolic than it will be practical.

Young Macron is working hard at pushing France back into the forefront of Europe. Long overshadowed by Germany, a phenomenon that became much more pronounced during what can only be termed the lost years of the Hollande presidency, Macron is using his powerful claim to legitimacy to put his country back on the map. He is doing this by both hugging and beating up the Boche.

He said yesterday that “Germany needs to revive public and private investment in Europe”. His view is that the strength of Germany was built on the travails of other members of the European Union and that it has a moral obligation to take a fraternal approach to its own success by pumping much of the wealth gained through the weak euro back into the collective.

Younger readers might welcome this innovative approach but those of us who have been around a bit longer will recognise the old Common Market and EEC pattern that saw France take the moral leadership and Germany asked to foot the bill.

More Brexit

Finally, here in the UK it’s all Brexit. Not that I would wish to turn this column into a public discussion forum but I received an interesting and rather revealing email from the COO of one the UK’s industry associations that I would like to share. “I spent an hour yesterday being interviewed for a European publication on the topic of Brexit,” he wrote. “Everything I know about it can easily be written in large letters on a packet of 10 Players No. 6 so heaven knows what I said. What is clear is that the increasingly possible outcome of a limping patchwork of bridging agreements and postponements which could go on for years will do the UK economy no favours. I survey my members’ opinions every month and while many have been bullish over the last year there is a strong sign that this confidence is waning very quickly now that there is no sign of any strength in our leadership.”

Brexit is not just about how we get to where we’re going – soft, hard, not at all – but about the path we take to get there. Sitting on a politician’s guaranteed salary and equally guaranteed pension makes it all feel much less immediate. The call for MPs to know more about how the real world works should be much clearer than they are. Of course there are calls for all ages to be represented evenly – 20% of MPs under 30? – but I’d like to propose that there be a minimum age of 45 for public office, which would at least guarantee that pre-elective experience will be more than just two or three years as a researcher in party head office. Maybe ancient Greek democracy was not as bad as some would have it.

Να έχεις καλή μέρα!