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Monday, 23 October 2017

The importance of Lady Augusta, Pimco's Bill Gross and Cable's 'casino banking'

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Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

I was delighted to learn from the media that yesterday’s sharp rally in asset prices was the direct result of the German Constitutional Court’s decision to dismiss the challenge to the Bundestag’s eurozone bail-out actions. Obviously they’ve never heard of money having to be put to work. Obviously they are not aware that the summer is over and that investors have the things to do which they do. Obviously they’ve never heard of a dead cat bounce.

However, the underlyings remain weak. Of course there are rays of light here and there such as Tuesday’s report on the August Non-Manufacturing ISM which at 53.3 was firmer than the one for July and not softer as had been forecast or the Fed’s Beige Book which reported widespread but moderate growth from the regions, but as Humphrey Bogart says in Casablanca, it doesn’t amount to a hill of beans.

Any proper and meaningful economic rebound requires a bona fide above trend growth afterburner in order to get the beast off the ground; there is no sign of anything like that in either the immediate or the intermediate future. The number which we should ultimately be focusing on is employment and the rule of thumb is that the economy needs to generate more than 200,000 jobs a month in order to absorb new entrants into the labour force. Since bottoming in November 2008 when 820,000 jobs were lost, this has only been achieved on four occasions and the total job creation for 2011, year to August, reads a paltry 872,000. It is in front of this backdrop that President Barry O’Bama will make his pronouncements to the joint houses today.

“Any proper and meaningful economic rebound requires a bona fide above trend growth afterburner in order to get the beast off the ground”

I did get picked up on Tuesday by Hank in New York who questioned my use of an American debt/GDP ratio of 65% and who assured me that with GDP struggling at about US$13trn and the debt ceiling just having been raised to US$14trn, the number is a lot higher. I agree that I had erred as even I had commented when the figure was reported to have passed 100%; I must be getting a bit doddery.

Alas, the President will no doubt give one of his vacuous speeches about hard-working middle-class American families and I suppose many of the platitudes we heard in Detroit on Monday will be pulled out of the bag again. Judging by all the leaks, the package he is going to propose will be worth US$300bn in the form of tax cuts, infrastructure spending and direct payments to both state and regional government. This is just another case of a politician facing elections next year and being in denial that the Western economic model of the past 40 years of borrow and spend is broken and that the more we try to prop up a moribund system by even more borrowing, the worse things will get.

I can understand him wanting to be President once but having caught the hospital pass to end all hospital passes, why would he want to be in the White House to face another four years of abject economic misery? Enter, stage left Lady Augusta Bracknell? If the United States is not yet a carbon copy of Japan, then he is going all he can to make it one.

“If the United States is not yet a carbon copy of Japan, then he is going all he can to make it one”

Meanwhile, I read a column by Pimco’s Bill Gross (or should it be Bill Gross’s Pimco? Or both?) this morning in which he looks at the Fed’s decision to announce that front-end rates will be nailed solid for the next four years. I have already in the past commented on the significant flattening effect which this has had on the yield curve but Gross carries the thought a level further and concludes that bank’s basic earnings model of borrowing short to lend long goes for a burton when the two-year rate is flat to Fed Funds.

The mess goes on

Let’s face it, clever investment banking solutions aside, banks have basic costs and an equally basic need to generate provisions against loan losses. If the yield curve and roll-down offer no return, then the economics have to come from lending margin. This makes me think of Business Secretary Vince Cable and his ring-fencing idea. Given Gross’s comments, it might appear that the idea of splitting the fee earning investment banking – it’s not all about champagne-swilling barrow boys in striped jackets screaming and waving as I suspect Joe Soap still thinks of it and an image which Cable with his “casino banking” would no doubt love to perpetuate – from the interest margin earning retail banking could prove to be more damaging to small borrowers and depositors than it is beneficial.

There is no silver bullet out there. It will not be O’Bama’s speech today and it most certainly was not the German court decision of yesterday. The mess goes on.                                       

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