Monday, 24 September 2018

The agony of seeking a reason

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  • Peters 475px June 2014

What a week, and it’s not over yet.

Forgetting Monday’s opening levels for a moment and looking back to Friday’s closes, most of the key equity indices closed higher as at last night. In the first four days of the week, the Dow has done about 1,300 points low to high and the Dax has done just under 1,050 points.

This is in the case of the Dax is a range of give or take 10% and 8-1/2% for the Dow. Just to put this in context, the source of all evil, the Shanghai Composite, has itself traded in a range of, dare I say this, no more than 11.4%. Chinese markets had cause to panic – they were doing what the Nasdaq and the dot.coms did at the end of the ’90s – Western ones didn’t.

The most painful thing this week has been to watch pundits sitting there trying to find underlying justifications in the direction of economies for the major down-ward price corrections – which of course, in the case of the West at least, they couldn’t do – only to find whatever they had said more or less instantly invalidated by the monster bounceback. Markets and their participants have not given good account of themselves in the first four days of the week and all we can hope for is a quiet and introspective fifth one.

That said, CNBC reports that 66% of money managers polled by them thought stocks still had further to fall. According to Citigroup, global outflows from equity funds hit a record of US$29.5bn in the week to August 26. Warren Buffett, on the other hand, insists that one should be selling when everyone else is buying and buying when everyone else is selling, which is of course what he has just done. Pays yer money, takes yer choice.

So roll on the last day of August. Watchers of UK commercial television might be aware of O2’s rather strange new advertising slogan “Be more dog”. Please, no. The so-called dog days of August have been quite enough for most of us and I think we’ll be quite happy to confine the hound back to kennels. The September pick-up of normal, routine activity has rarely looked more desirable and attractive.

Jackson Hole

Meanwhile, the high and mighty are lacing up their hiking boots in Jackson Hole, Wyoming. Other than having skied there once in the mid-1970s and even though I do still own the iconic Powderhorn Mountain ski jacket I bought there at the time, I have next to no memories of the place. I was probably on wacky-baccy at the time.

The Jackson Hole Central Bank Symposium was once the biggest thing next to Davos. That was of course during an era when the central banks were top dogs (apologies for another canine reference). They devised the monetary policy which led to the huge economic boom of late 90s and especially of the early noughties. When it all blew up in 2007–008, they were back and effectively bailed everyone out again. No reason not to, for the crisis was, to a very large extent, of their making.

Maybe they have had their day, as every dog does. Maybe there are people coming through the system who appreciate that monetary policy doesn’t make an economy work, hard work does. The economy is driven by people getting up early, spitting in their hands and getting on with it. Making money from money is ultimately a zero sum game. The to-ing and fro-ing by the Fed has contributed towards an appreciation that the central banks really don’t know all that more than we do and that they also have to break eggs to make an omelette.

Monetary policy should be the starter motor, not the engine itself

Bill Dudley’s “We’re on, we’re off” this week seemingly demonstrates that even the most powerful central bank in the world has no clear view of where it is going and why. The great mystique of central banking has gone and with it, to a large extent, its unquestioned authority.

Gone is the Greenspan era when the old dog (here we go again) once said to his audience: “I know you think you understand what you thought I said, but I’m not sure you realise that what you heard is not what I meant.”

What Greenspan said went and the more opaque he could make it, the more we lapped it up. One maybe listened to Alice Rivlin, his deputy, but that was about it. Now we micro-analyse what each of the 12 regional presidents has to say, day in, day out, and are still none the wiser.

Monetary policy should be the starter motor, not the engine itself.

Maybe we should look at Janet Yellen’s decision not to attend Jackson Hole and draw our conclusions.

All the while, the US Bureau of Economic Analysis yesterday furnished us with final Q2 GDP revisions which raise the figure to a pretty potent 3.7% which, even accounting for a implied deflator of 1.8%, is not to be sneezed at. There will of course be an element of catch-up embedded in the number following the travails of the extremely harsh weather which affected activity in Q1.

But still, how can the FOMC sit down in three weeks and then come back telling us with any seriousness that the economy still needs a zero-interest rate policy in order to foster growth while expecting to maintain credibility? Please, Madame Yellen, just cut the crap and go.

Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. Although Europe has been melting under record temperatures, the UK has had the summer it never had. My plums aren’t even ripe yet and the grape harvest is not going to happen at all. Including Easter Monday, we have four bank holidays on the calendar and this year every single one of them will have been wet and cold. Do I care in this case? Not at all. I have plenty to do cleaning the inside of the car in preparation for the Goodwood Revival in two weeks’ time. Bring it on! 

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