Macroeconomic releases continue to disappoint across the globe. The main event last week was the US Non-Farms Payrolls number which missed expectations significantly. While markets rallied on the weak report as it puts more pressure on the US Federal Reserve to cut interest rates, it’s incredible to see how much has changed in a short space of time. Only a few months ago most seasoned economists were predicting rate rises, not cuts. But there are many old adages about economists and predictions that remain valid.
Politicians and pressure on monetary policy
Since Larry Kudlow’s now infamous “we’re killing it on the economy!” video in early May, (“wow! Low unemployment! High jobs! High wages! Big consumer confidence! Major productivity and no inflation! It’s totally awesome. We’re killin’ it on the economy”) markets have rapidly repriced further easing. Indeed, his boss, the US President, again went to Twitter to vent his frustration:
“The United States has VERY LOW INFLATION, a beautiful thing! This is because the Euro and other currencies are devalued against the dollar, putting the U.S. at a big disadvantage. The Fed Interest rate way too high, added to ridiculous quantitative tightening! They don’t have a clue!”
Increasingly, politicians are attempting to control the levers of central bank monetary policy. The separation of these powers, which was done to stop politicians using interest rates for short-term political advantage, is coming to an end:
Trump also told CNBC’s Joe Kernen on Monday that the Fed “made a big mistake: They raised interest rates far too fast.” Meanwhile, China keeps devaluing its currency, Trump added. “Don’t forget: the head of the Fed in China is President Xi … he can do whatever he wants.”
Contrasting fortunes for the US and Europe
The whole narrative is now geared to exceptionally accommodative monetary policy. What was exceptional ten years ago seems to be the norm today. It’s clear that this policy has created huge bubbles in tech, private equity and housing, as mentioned in previous issues. The Fed did attempt to unwind some of it but stopping this momentum is difficult, as they have now found out, especially with a President on your back who is not averse to exerting pressure publicly.
Yet the US, for all its problems, is in a far stronger position than the rest of the world. While the jobs number missed, for the first time in history there were more job openings than job seekers – a truly staggering statistic.
In Europe, on the other hand, the political deadlock of Brexit or more importantly, the new direction of the EU Commission after Juncker et al leave continues to contribute to an economy that cannot get out of first gear, despite incredible amounts of stimulus. The problem is summed up rather succinctly by Charlie Bilello @charliebilello on Twitter:
The ECB moved to negative rates five years ago (June 2014) and remains there today. The Fed has hiked 9x since Dec 2015. Total Returns since ECB moved to negative rates…
The US has ammo, while the ECB does not. The problem is compounded by a galvanized Italian PM who is pushing his Eurosceptic allies forward. The so called “minibot”, a sort of parallel currency that would be used by the Italian government to pay suppliers is the stuff of nightmares for ECB officials. It would fatally undermine the monopoly of the Euro. The fact it is still being forwarded as a policy proposal is an existential risk to the European project, much more so than Brexit.
Bad news = markets up
Ultimately, the only way out for all these economies is to print money. Ben Hunt from Epsilon Theory hits the nail on the head in this piece when he writes:
“What begins as emergency government action ALWAYS becomes permanent government policy.”
We often hear in financial markets of the goal of normalisation of interest rates to pre-crisis levels. The only normalisation now however is of the omnipotent central banks bailing out markets when they fall. This is why for so long, especially in equity markets, bad news = markets up. This is the new normal.
Gold is now close again to its recent high. The rest of the world has yet to wake up. Currency wars are back, this time coupled with trade wars. All led by a US Administration that has thrown out the rules of the last five decades. Those dreaming of a return to the days of globalisation and freer global markets are just that: dreamers.
In the unlikely event that Trump does lose to a Democrat nominee in 2020, the incumbent’s policies could be just as nationalistic and protectionist – perhaps even more so. Everywhere, so-called centrists are losing. Money printing, trade wars, currency wars, geopolitical strife and nationalism are all combining to create a perfect storm. There is too much debt, and only one way out.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.