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Tuesday, 12 December 2017

The end of Summers

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  • Anthony Peters

Anthony Peters on why the Summers’ withdrawal portends a deeper market fade

I guess the only people who will not have been shocked by the news that Larry Summers has withdrawn from the “race” to become the next Chairman of the Federal Reserve will be those who didn’t know that he was in the running. The rest of us can be nothing other than speechless.

The reason given by Summers is that there was too much resistance amongst members of the Senate against his appointment and that he didn’t want to get involved in a long and divisive approval process. It would appear that his role in bringing an end to the Glass-Steagall Act is being held against him and that it is the minority of Democrat Senators who would oppose his nomination which has brought him to opt out.

That spells a second decisive defeat for President O’Bama in a week – firstly his preferred policy on Syria was comprehensively derailed by Russia and now his favoured candidate for the Fed has been sunk by members of his own party. It is interesting that the President with the most evident left-wing leanings in a generation is the one who seems least able to unite his party brethren on Capitol Hill behind himself.

Alas, the king is dead, long live the king. Summers is now history and focus must return to the other candidates to replace Ben Bernanke. Yellen might now be the front runner but a shoe-in she is not. Apparently she does not “connect” with the President and he might well be given to considering Don Kohn, another former Vice-Chairman of the Fed who had also figured on the short list of potential candidates.

Then, of course, there is Tim Geithner who has all the qualifications to become Fed Chairman but who has tried to rule himself out although I’d be most surprised if he doesn’t get (or has already had) a call from the White House asking whether he might reconsider his position.

The President, who has discovered in the past few weeks to a greater extent than at any time in his near five years in office that even the smartest and most floral rhetoric is cheap, will not be a happy man. If he nominates Yellen, everyone will know that he is not selecting his favoured candidate. If he doesn’t, he looks churlish.

Overnight markets have clearly been backing Janet Yellen, a perceived dove when it comes to QE, by rallying asset prices and selling the dollar.

As recently as last week, James Saft of Reuters had penned a column on the unwelcome return of the “risk on/risk off” phenomenon, a market where the prices of all assets begin to correlate and to march in step. There was one part which particularly appealed to me which was, albeit with reference to Europe although it applies globally:

 “One group for whom this was a disaster was stock pickers, or really anyone who added value chiefly by analysing a given security or company. What is the point of poring over the books of an Italian dairy company, for example, if the value of its shares was going to be driven more by ECB chief Mario Draghi than by its own products and strategy? For several years the skills that mattered were risk management and the ability to gauge policy-makers’ commitment to the status quo.”

Today looks as though it will be one of those days where everything will rally for what I believe to be all the wrong reasons. However, I would not put it beyond O’Bama to consider delivering something of a fight.

If the Senate is going to sabotage his candidate for the Fed, then he will not necessarily do them the favour of producing the result they might be wanting or expecting. This is not the first time I have suggested that the 1600, Pennsylvania Avenue will be just as truculent as Capitol Hill and that straightforward policy issues might be turned into a cheap Punch and Judy show although I must admit that I suspect that the President will for once lie doggo, lick his wounds and let Yellen proceed without a further fight. What has he got to win?

A return to trading wholesale Fed policy, that is more or less QE, earlier or later withdrawal of stimulus, will be horrid for markets. The broking business has been in decline for several years and the stories on the Street are scary – I hear of the founder/owner of one brokerage here in London who has simply given up and gone home because he perceives it to be simply not worth the effort any more.

Saft refers to the difficulty individuals have in terms of adding value when investors aim to make their excess returns by betting on the big market movements rather than seeking true value. There was a time when everybody was leveraging beta and trying to palm it off as being alpha. I suppose they don’t even do that anymore.

Whether Janet Yellen would prove to be quite as dovish as the markets would like to assume is uncertain. No Fed Chairman (would she be Chairwoman or some horribly PC Chairperson?) would ever want to be remembered for getting behind the curve and for leaving the punchbowl hanging around for too long. Greenspan has and it’s not nice.

One way or the other, I’d be quite happy to recommend fading this rally.

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