Friday, 21 September 2018

On Gettysburg, the Fed and Waterloo

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  • Peters 475px June 2014

Anthony Peters sees a Fed commander who’s afraid to pull the trigger.

On Wednesday, I disguised myself as a gentleman in top hat and frock coat and joined English “society” for a day at the Royal Ascot horse races. I know nothing about horses (other, maybe, than how to cook them) but I had the odd, champagne-fuelled flutter and came out slightly ahead of the game.

The one thing I appreciate about betting on the nags – and I know less about that than I do about trading equities, which is saying something – is that when you lose money, you know why and when you win, you can punch the air and nobody thinks you’re a pompous Muppet.

While I was having fun, the high and mighty of the FOMC were having their June meeting and markets were braced, not for what they were going to do but for what they were going to say. What they did say, in the end, was predictable, flabby and of sod all use to man or beast.

The changes in the wording of the post-meeting statement were so minor as not warrant further consideration. It is probably sufficient to know that they replaced the bit about the slightly slower pace of growth at the beginning of the year – remember the cold and ice – with the observation that the economy was expanding moderately again.

On the back of that, Madame Yellen set out to assuage a sceptical IMF by assuring that even if the first rate move were to take place in September, nobody need fear that a tightening cycle would be launched which would see regular step-ups. The new key word is “trajectory”. That the Fed has decided to make its monetary policy data-dependent is not news and all we found yesterday was a new set of terms to formulate the same thing.

Yellen spoke of her desire to see more “decisive” evidence of a lasting turn-around. That’s all fine and dandy but we are, as noted frequently by some pretty smart people, coming towards the tail-end of a seven-year recovery and a cyclical downturn remains perfectly possible. Were this to happen – the Fed’s 2001 attempt to stem the tide of a natural economic cycle ended in the Global Financial Crisis – it would find the Fed with no ammunition.

I know today is the bi-centenary of the Battle of Waterloo – how could I forget – but the picture I have in my mind’s eye is of another battle and Colonel Edward Porter Alexander, commander of the CSA’s line of artillery at Gettysburg on the morning of July 3rd 1863.

Responding to a “Give them everything you’ve got” order from Robert E. Lee, Alexander launched a furious, no holds barred, barrage on the Union lines. The damaged was, in overall terms, minimal and when Major General George Picket led the Confederate army in the attack, Alexander had nothing more to offer. Amongst aficionados, Pickett’s Charge at Gettysburg is also known as Longstreet’s Assault. Generals Anderson and Pettigrew are often forgotten as it was Pickett who charged the “Bloody Angle” where the battle was won and lost. James “Old Pete” Longstreet was in overall command and famously, when asked to give the order to attack could not get himself to give it; he knew of its futility. In the end, he is reported to have simply and reluctantly nodded.

Commander Yellen

I think of the FOMC as being Alexander’s artillery and Janet Yellen as James Longstreet. In her defence, I must add that I can’t imagine her with a long beard but that’s a different matter entirely. Much has been said about the “japanification” of the world and the Fed must either boldly go where no man has gone before or it must risk becoming another Bank of Japan which is permanently limping along behind the curve.

Endless streams of cheap money have got Japan nowhere and – this is addressed at the enthusiastic European Left – limitless spending on infrastructure has done little good either. Every Japanese home now has its own bridge, high-speed train station, airport and motorway which has, apart from pushing government debt into the stratosphere, in terms of turning the economy around achieved precisely nothing.

I do hate this one as it is currently being wheeled out at every opportunity but insanity is doing the same thing over and over again and expecting different results. Yellen lacks the courage to try something innovative as she is progressively looking like nothing other than a slightly faded and dog-eared cardboard cut-out of her predecessors.

Her problem is that in an age of social media and instant news, her every word and every facial expression is being analysed and interpreted. There is no room to step back and to think of something totally new. The outside world simply expects her to recreate, as if by magic, the ’naughites era of profligacy and excess but without the blow-up at the end. And she, despite being President of the Federal Reserve System, either doesn’t know or doesn’t want to tell them out there that it can’t be done.

How, pray, are we supposed to trade that? I think I might revert to dealing with something more simple like Fermat’s last theorem.

From one battle to the next. Waterloo! Before my French friends get too hot under the collar, I’d like them to know that I have a very beautiful 1835 bronze of Napoleon standing in my drawing room and right behind me in my study I have an 1836 edition de Bourrienne’s Memoirs of Napoleon Bonaparte. The man was a genius but a flawed one (I know the feeling) and the final defeat was going to come. That it was at Waterloo on June 18, 1815 and not a few months later and elsewhere is more matter of luck or misfortune, depending what side of the battle one fought on.

Wellington, when asked how he intended to meet Napoleon, answered “They’ll come at us in the same old way and we’ll beat them back in the same old way”. Napoleon’s greatest failing was that he had devised a new way to organise armies and a new way of fighting battles. At Austerlitz he totally destroyed the enemy. From then on, he fought all of his battles along similar lines. Wellington clocked that as a weakness and thus, with an inexperienced and poorly trained army, still defeated the French.

Perhaps our economists, central bankers and treasury officials should read a bit more military history. There is a lot to learn.

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