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Thursday, 14 December 2017

The Seven Year Itch

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Anthony Peters on central banks, growth cycles and “the new economic paradigm”.

Peters 475px June 2014

Last night I received a visit by the treasurer of a UK bank who stopped off for a cup of tea while taking a break on the Sunday night run back from the rather chilly week-end to his place of work. Before he left, I asked whether there might be something he thought I might want to write about this morning. His answer was a simple: “There is nothing to write about”.

To some extent I get his sentiment. Every piece I pick up seems to have little to add other than a comprehensive list of which members of the FOMC or the Central Council of the ECB are due to give public speeches. I understand if investors and traders alike want to focus on what Madame Yellen or Saint Mario might have to say but isn’t micro-analysing what each and every member of the respective committee has to say tantamount to trying to study a battle tank under a microscope?

In the case of the US central banks and its interest rate policy, the die is clearly cast. As far as the ECB is concerned, Draghi’s declaration at the end of last week that whatever needed to be done would be done in order to hit the institution’s 2% inflation target should suffice. On that basis and with the oracle haven spoken, who cares what the others have to say?

There is of course a massive weakness in Draghi’s plan and that is that the Bank of Japan has already plundered every last storage facility for kitchen sinks and, other than driving debt/GDP to levels which would have most countries teetering on the edge of default and departing investors laughing with disdain, it has achieved precious little.

Economies succeed or fail because of the way they are structured, not because the central banks pursue never-ending policies of zero cost money. Markets, nevertheless, took the bait and the euro did another one of its dives and simply pushing the currency down the pan doesn’t achieve anything of lasting value. At $1.0615 this morning, the European currency is not far from its cyclical low of $1.05 although it still has a quite a long way to go until it hits its all time low of December 2000 at $0.8230.

Let’s face it, the big question still remains what asset prices should be doing if, as and when the FOMC gets going. Consensus remains that the impending 25bp tightening of policy will be something of a one-off and that there needs be no fear of a second step up following imminently on its heels.

Given the historic precedence of growth cycles being, give or take, 7-7½ years long, and given that the current recovery began in 2008, the Fed will be well aware that it risks finding itself tightening into a recessionary environment. On the other hand, though, there is no saying that the “new economic paradigm” might not overhaul the 7-year rule and that we might still only be at the very beginning of a new, generational leap forwards. I can’t quite see it but everything is possible.

Backlog

Thanksgiving is upon us and given what a tricky year 2015 has proven to have been, it feels like it is time to slow down. Yet, there are still 26 trading days left in the year and, mathematically at least, that is 10% of the year. I repeat my view that I’d expect investors to be restrained through the end of this annus horribilis but for there to be a nifty back-log of cash being set aside ready to dive in at the beginning of the New Year.

Back in the real world, the Pfizer/Allergan merger/take-over/reverse take-over/tax arbitrage is expected to be formally announced at the New York opening today. It is yet another kick in the teeth for a now largely discredited Washington – be that Capitol Hill or 1600 Pennsylvania Avenue. There is no doubt that, tax inversions aside, investors will be looking for the next consolidation trade in the pharmaceutical industry. That should give equities a nice boost into the new week.

Since the 28th September, the S&P has rallied about 11% but it is still 30 points off the early November high. My guess is that we’ll see that level overtaken before the Yanks bunk off on Thursday lunchtime. In other words, go into this week long risk even though the index did close on Friday 67 points higher than it had done the Friday before.

Back here in the UK, everybody is waiting for Wednesday, with the Chancellor’s Autumn Statement and the announcement on the Comprehensive Spending Review. The PR machines have been forecasting a slash and burn, but I see no reason why government shouldn’t be playing the corporate game of giving guidance one way and then beating it the other. I’d be highly surprised is George Osborne is going announce cuts quite as deep as has been leaked which will give him the opportunity to look as though he had been sensitive to public opinion and had toned down the mandatory savings.

These will of course be garlanded with congratulatory words that the economy, under the Tories of course, has done so much better than anyone could have hoped for and that therefore fiscal revenues will permit austerity to be implemented with a little less ferocity than previously thought. I’m not going to opine on what he will give to and take away from the NHS or the police force or the armed forces, but I’m still sure that tax-free lump-sum withdrawals from pension schemes are for the high-jump; if not now, then at the Spring budget.

You have been warned…

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