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Tuesday, 17 October 2017

On the Fed, the BoE and adjusting to new rates cycles in 2013

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Having been in Zurich for the day yesterday – I do work for SwissInvest – I ran into a chum on the street who works for one of the large US firms. We exchanged the usual seasonal niceties, marvelled at how this year has been so much better than all of us had feared and the laughed at the equally seasonal “Next year is going to be really tough….” I’m not sure it’s going to be such a joke.

Anthony Peters, SwissInvest Strategist

Please don’t get me wrong; I’m not suggesting that the end of the world is nigh and awaiting us in 2013 but there were plenty of uncertainties in 2012 which will not be taxing the mind in the same way.

Still, I see other ones ahead which might prove to be just as tricky and which might cause significant volatility. Let’s begin in Washington – and I’m not talking about the fiscal cliff either. The FOMC certainly pitched something of a curve ball by switching its focus from growth to unemployment. The binning of the probable time frame for the near zero interest rate policy and its replacement by a single target, namely 6.5% unemployment, should have set the cat amongst the pigeons.

I struggle to see how the “Old Greys” on the boards of insurance companies and who act as trustees for pension funds will be able to shift their investment strategies in time to deal with the end of the rate cycle, both in their fixed income and in their equity books.

Since peaking at 10% in October 2009, it has been on a fairy steady decline. In the twelve months from November 2011 to November 2012 it fell from 8.7% to 7.7% and should confidence begin to rise and the recovery not stall, then that 6.5% rate might quite conceivably be achieved before the end of 2013. What then?

In 1994 markets manifestly failed to price the imminent tightening by the Fed and I fear that the same fate might befall us again as portfolio managers prefer to get wiped out in the bunch than risk exiting the market on their own early, only then to have to watch on while the others’ performance races ahead. Hedge funds with their black boxes – if they still maintain them – can afford to be short early and, if necessary, put the strategy on and take it off again several times but index shadowing long only funds will once again be sitting ducks.

I’m not criticising the Fed for its change in position – on the contrary I have often enough called for a novel approach by the monetary authorities – but I struggle to see how the “Old Greys” on the boards of insurance companies and who act as trustees for pension funds will be able to shift their investment strategies in time to deal with the end of the rate cycle, both in their fixed income and in their equity books.

Better lucky than smart

On a similar note, I was muchly tickled to read a piece by Steve Beck, now of Santander, in which he shared my view that Mark Carney has been at least as lucky as he has been smart at the Bank of Canada, that the conditions which he will find in the UK are very different indeed and that he does not possess – as I wrote on his appointment – some sort of magic potion.

Nevertheless, one word about targeting growth rather than inflation has been enough to fill half newspapers and whole research notes at the cost of millions of trees (felled in and exported from Canada of course) but which failed to recognise that the BoE’s failure to tighten rates here at the beginning of the last decade in spite of visible hubris in consumer credit and mortgage lending was largely due to the MPC’s hands being tied by strict and exclusive inflation targeting.

So, 2013 might be the year when the role of central banks and, more importantly, their recent trend towards total transparency might begin to shift. Perhaps being predictable isn’t all it’s cracked up to be – I remind that the Deutsche Bundesbank of old had a cult of secrecy as to its thinking – and markets might be a healthier place if they didn’t know quite what to expect next. “Oh!”, I can hear the cry of horror… “How is industry supposed to invest if it doesn’t know what the monetary authorities are thinking…?” Well, I don’t recall the rise of Germany having been hindered by that, or was it?

Proper growth is created by entrepreneurs and their employees producing goods and services better or cheaper (or both) than the competition, not by ten or twelve people on a rate setting panel and certainly not by twenty six prime ministers, presidents and one lady chancellor.

We end the year with lots of good news about the politicians beginning to find some agreement on bail-outs, banking oversight and so on. Much of this should have been considered after Maastricht when the decision on the common currency was taken. The cost of omission has been staggering and still appears to be growing steadily by the day. So much for “We can do it because we have the political will to do so.”

2013 will in all probability not display the sort of scary volatility in the periphery which we saw in 2011 and 2012 but we are far from being out of the woods. One senior portfolio manager I spoke to and whose intellect I very much respect told me quite clearly and fearlessly that his key positions into 2013 are – not will be; are – heavily short France and heavily short the UK.

2013 might, as my Swiss chum suggests, be difficult but I add that it will certainly not be boring.

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Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful week-end. May you go out and buy the tree, bring the kids in to help to decorate it with angels and candles and then ask yourself whether this is the right place, right next to the nativity, to put a gift wrapped copy of “Total Warfare VII, The World Ends”.

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