Sunday, 19 August 2018

Scene set for Yellen's entry

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Anthony Peters considers financial stability and transatlantic negotiations… 

Anthony Peters columnist format

Anthony Peters

SwissInvest strategist

Although Monday was the third trading day of the year, for most of us it was the first one and certainly not one which will stick in the memory.

Interest in the weakish markets was limited with most conversations focused on family activities over the holiday period. In the words of Alex Moffatt of Joseph Palmer & Sons in Melbourne in his morning note to his clients today: “Trading volumes are still very thin so the move yesterday was probably more attributed to those who wanted to sell having few in the store to sell to…”

I suppose the key piece of news this morning is that Janet Yellen has been confirmed by the Senate as chairman of the Federal Reserve System by 56–26 although I’m not sure this is news rather than olds. The President, largely absent from the scene of late, gave his opinion on her confirmation by stating: “With the bipartisan confirmation of Janet Yellen as the next chair of the Federal Reserve, the American people will have a fierce champion who understands that the ultimate goal of economic and financial policymaking is to improve the lives, jobs and standard of living of American workers and their families.” Frankly, I cannot disagree.

Yellen may however find that she has accepted something of a hospital pass as her two predecessors respectively between them set the scene for the financial crisis and then threw the kitchen sink at getting the nation back out of it again. It will be her task to reflate without either inflating or deflating with a tool box now clearly devoid of kitchen sinks. This was a task that Larry Summers was evidently not prepared to take on and I wish Professor Yellen all the very best.

I still believe that tapering, if effected roughly in line with growing fiscal revenues, becomes economically neutral and that therefore the real challenge will not be facing the bright new chairman until the time comes to start adjusting the Fed Funds rate. In all probability that will not be in 2014 and some suggest not even until 2016; be it as it will, until then life at the Fed might prove not to be quite as fearsome as might have been suggested.

Jack Lew’s visit to Europe

US Treasury Secretary Jack Lew is apparently somewhere over the Atlantic on his way to Europe where he will be visiting France, Germany and Portugal. Here is expected to explain why worrying about the long-term financial stability of the nation is secondary and why austerity policies which aim to cut one’s suit to match the cloth are an altogether bad idea. He will also deliver a lecture to the Germans on why putting money aside and saving rather than buying new iPads and iPhones every year on credit is very naughty and should be desisted from.

According to the IMF, German household debt to GDP is just on 60% while the same number for the US reads 81¼%. I’m not quite sure what secretary Lew can do to convince Germany’s finance minister, Wolfgang Schaeuble, that the latter figure is something one should be aspiring to.

Yes, the US has created a lot of jobs in the past four years but at what cost to the public purse? The headline figures in the US look pretty impressive, both in terms of falling unemployment and rising output but as and when the Fed begins to tighten, US$17 trn in debt and rising debt servicing costs will look pretty ugly and maybe too high a price to have paid. By then of course Barak O’Bama will be packing his bags and preparing to move back in Chicago in order to do whatever ex-two term Presidents do while wishing the best of luck to his successor.

I am reminded of the anecdote told in the UK of the new chief secretary to the Treasury in the Cameron administration, David Laws, arriving in his office after the election only to find a note from his Labour predecessor, Liam Byrne, stating “I’m afraid there is no money left.”

Germany doesn’t like dressings down by the Americans at the best of times but in the wake of the phone tapping scandal likely less than ever. I well remember the same sort of complaints being lodged by Washington in Tokyo in the late 1980s along with the call for the Japanese not only to export cars to the US but also to import a few in exchange. That the Detroit car makers weren’t willing or able to produce a right-hand drive vehicle to meet the Japanese market requirement never appeared to have entered their minds.

Alas, not all will be in vain, for Lew is also scheduled to touch on banking regulation. Large parts of the European banking scene remain in zombie mode and much still has to be done here. The US set a high standard when it came to whipping the banking system back into shape in 2008–09 while the Europeans largely behaved as though things would work themselves out over time – if you think you won’t like the answer, don’t ask the question – which has left the Italian banks still a long way from healthy. However, beating up on the French and the Germans won’t help anyone and I expect that Italian banks will be theme which will be with us throughout the year.

Meanwhile, the US freezes and the UK is drowning. Has anyone got any bright for a quick and impromptu conference in Barbados?   


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