For better or for worse, the impact on markets of the Manchester outrage should be nil. We have enough experience with terror attacks to know that to be the case.
The aftermath of the 9/11 attacks on New York and Washington with Alan Greenspan’s concomitant slashing of interest rates was, to be frank, the rampant growth in credit and subsequently the global financial crisis of 2007/2008.
It was in the vein of trying to keep politics and economics apart that led me to conclude yesterday morning that long remains the new neutral and that index futures pointed towards further recovery from last Wednesday’s big wobble. In the event, the Dow put on 89.99 points, or 0.43%, and the S&P 12.29 points, or 0.52%, which leaves both indices no more than 0.5% below their respective pre-wobble levels.
That said, we are far from being out of the woods. The dollar index, which overcomes the dual input issue of a single exchange rate reading, continues to fall. At the time of writing, it stood at 96.89, which is well below its 2016 year-end high of 103.30, below its 12-month average of around 98.50 and even below where it stood before the US elections in November. Thus caution is of the order, not least of all when looking at the rise in the price of gold. It might have rallied the best part of US$40/oz in the past two weeks but expressed in euros, it is only marginally firmer. The same, incidentally, applies to sterling, which was being lauded by the local business press on Friday for having broken back above US$1.30 for the first time since the beginning of October and the second post-Brexit dump but against the euro it is at a two-month low.
If, as it has been said, democracy is far too valuable to be left to the people, then it is even more pertinent to conclude that the markets are far too complicated to be left to be written about by journalists. There are exceptions and Gillian Tett of the FT is a case in point. She gets markets but perhaps that is because she comes to the game with a background in anthropology. As a tribe, we can make of that what we like.
AVERAGE LIFE
In a slightly different context, I spoke yesterday to a senior Treasury official and we got to talk about my piece a few weeks back in which I alluded to the time it takes for a rise in interest rates to feed into the overall cost of borrowing and to significantly impact the burden of debt servicing costs on the public purse. The UK’s debt stock, as one should know, has an average life way beyond that of any other comparable country and it is therefore much less susceptible to the vagaries of shifts in monetary policy than that of its peers. We agreed that the current rush to issue longer dated government debt – Belgium is due to syndicate a 20-year bond today - will have next to no short-term impact on fiscal balances.
A change in attitude to long-dated liability matching by the investment community in general and by the pensions industry in particular is not a matter of today and tomorrow but of a generational development. Knocking out a few tens of billions of long bonds while rates are still this low is not a grown-up way to approach the issue. Pensions regulation, actuarial risk assessment and performance measurement need to be adapted at the same time. But that is the subject for another day.
My conversation partner and I had a little giggle about the sensitivity of the US debt stock with its obsession with short-term financing. We went back to the very late 1990s when the US Treasury said it was going to stop issuing long bonds. The reasoning was that it would no longer need any money that far out as, under Bill Clinton, the country was running a budget surplus and that by 2020 the nation, or so the forecast went, would have paid down its borrowings and be debt free. Yes, the best laid plans of mice and men…
Which brings us bang up to date and the release of President Trump’s budget proposals, built around a cut in central government spending of US$3.6trn over the next 10 years and achieving a balanced budget within a decade. Underlying the plan is a slash-and-burn of social expenditure, from Medicaid to agricultural subsidies. “We’re no longer going to measure compassion by the number of programmes or the number of people on those programmes,” White House budget director Mick Mulvaney said. “We’re going to measure compassion and success by the number of people we help get off those programmes and back in charge of their own lives.” As you can well imagine, in the land of pork-barrel politics, this budget will prove to have been a stillbirth.
But then again, until the public debate shifts from what we want to what we can afford, public sector finance will remain a dog’s breakfast. And to beat the old and well-worn drum, the most toxic of all mixes is running deficits without matching or near-matching inflation.
Back to Greece and the failed Eurogroup meeting. Once again the theme was that agreement on the next phase of the bail out could not be reached in light of the Athens government once again having failed to fulfil previously agreed conditions. All the while the debt relief issue is causing pain. It’s easy for the IMF to demand serious writedowns but for the euro area it’s not that easy, especially given the fiscal problems that Portugal is fighting, let alone Italy.
Market feeling a bit soft this morning but neither strong enough nor weak enough to call for any spectacular action.
A CITY UNITED
Finally, my thoughts on the attack on the Manchester Arena in the heart of my home town. Following the Charlie Hebdo and Bataclan attacks in Paris, and the atrocities of Nice or Berlin, I have rather stoically maintained that this is a price we as a society pay for our freedom and that nobody has ever said that democracy is a free gift. But blowing up a nail bomb among a bunch of innocents? No, that is too much and anybody who tries to justify it with some nebulous talk about the US’s and the UK’s policy on the Middle East can go and rot in hell.