Saturday, 22 September 2018

On inflation and 50 Shades of Beige

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  • Peters 475px June 2014

Anthony Peters sees more perplexity from central bankers.

Thank you all; I was yesterday flooded with responses to my nostalgic, albeit slightly rose-tinted, references to the barrow boys who not so long ago populated the trading floors of London and who, on a fraction of the salaries and with less than a fraction of the computing power did just as well or badly as our current crop of traders.

My apologies though to Alan, a trader very much in the old mould, who raised his hand and pleaded that not all physicists are bad types. Yes Alan, what was that about the exception proving the rule?

Yesterday, the collective brain power of Wall Street conspired to rally the Dow by 1.82%, the S&P by 1.83% and the Nasdaq by 2.46%. This has caused great relief amongst those commentators who borrow a goldfish if they need a long term memory bank. The S&P might have closed on Wednesday at 1,948.86 points, 35 points higher than the Tuesday close but that was still a little over 7½ points below Monday’s close and the fourth lowest close since October of last year, Monday included. Anyone who was confused by the erratic movements of markets on Tuesday will barely be any the wiser following yesterday’s session.

One of the few take-aways from Jackson Hole seems to have been the central bankers’ perplexity with respect to their inability to create the inflation they have promised us after having spent three decades from the mid-70s to the mid-00s combating it. The effects of QE, one of which was supposed to be driving inflation, remain uncertain, but as we lack the capacity to conduct a controlled experiment covering the emergence from a financial crisis without oodles of near free cash, we’ll never really know.

Having kept a low profile of late – I think the ECB tried to keep its hands as clean as it could when it came to shaping the messy Greek bail-out which will in the fullness of time surely prove to have been nothing other than one huge unauthorised bail-in – ECB President Mario Draghi will soon be centre stage again. “Where’s the inflation, St Mario?” “Can we have more QE please?” “We want it and we want it now!”

Faded tan

Europe is, in my opinion, doing just fine. Recovery is of course not going to be even and those parts of the continent – I’m thinking of Spain above all – which outgrew themselves on a speculative property bubble will need to wait quite a bit longer until growth pushes through on a broader basis. But let’s face it, even in the comparatively homogeneous Unites States, the regional economies of the likes of Tennessee and California will rarely, if ever, be in step, so whatever the Fed does do by way of monetary policy won’t be ideal in each and every region.

A propos, the regions; yesterday saw the publication of the Fed’s Beige Book – it used to be called the Tan Book but I suppose too many of those theoretical physicists didn’t know tan as a colour and spent days trying to work out what t, a and n could be an acronym for – which confirmed expansion in “most” regions and sectors. As would be expected, some regions are doing better than others but the aggregate is clearly positive.

The weakest reports seem to come from New York which tallies with the Empire State Manufacturing Survey which marked a sharp decline. One turkey a Christmas does not make but if there is anything which might cause the members of the FOMC to hold off from tightening monetary policy, it could be this assuming that New York is a leader and not a laggard in economic activity. On this point I have, frankly, no idea at all but I’m sure the FOMC does. I still think they go. We are now getting new surveys of economists’ opinions on the Fed more or less every day and, depending on whether they got up on the left or the right foot, they seem to swing from yes to no. Thank the Lord that none of them sit as voting members of the FOMC.

Central banks don’t have magical powers. Economic growth is driven by entrepreneurial risk takers. Behind these risk takers stood the commercial and investment banks and behind them stood the central bank. If anybody wants to find out where growth has gone, then maybe they’ll ask the regulators what they have done to risk taking by the banks which now look more like the civil service with its thousands of pen pushers than the civil service itself. The central banks are, or so it would appear, being asked to beat a drum without a skin and not even they seem to have worked that out yet.

Meanwhile, having hit US$38.00 pbb on August 24th, WTI traded to a high of US$49.33 – that’s a 30% increase - on August 31st. Now it is sitting at US$46.00. I thought, or so we were being told, that the world was about to come to and end and the black stuff was headed for US$10.00 pbb. Data overload or what?


Alas, for me it is again that time of the week as I shall be out and about tomorrow. Therefore, all that remains is for me to wish you and yours a happy and peaceful week-end. A little bit of Twenty20 cricket left and then the Aussies can fly home without the Ashes. Then bring on October 3rd when England meets Oz at Twickenham in the Rugby World Cup. What are we going to do in between? Simple! Pack the kids’ trunks, drive them back to school and have a quiet few days at home with the other half.

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