Anthony Peters, SwissInvest strategist
Over the past few years during which I have had a number of rather challenging personal issues to deal with, I have learnt that getting upset over predictable outcomes is a waste of energy and that one should save one’s strength for dealing with the unexpected.
On that basis, the events which are unfolding in Washington and which are apparently keeping us all on the edge of our seats should really be no more than water off a duck’s back.
Overnight, the rhetoric has calmed significantly and it appears as though the Republican hold-outs are beginning to talk to the President rather than to the media. They are looking and sounding like a spent force which is no great surprise given that apart from screaming “Nay”, they haven’t really brought anything positive to the party.
So, there we are. Dow, S&P and Nasdaq all made over 2% in yesterday’s trading and with all likelihood the rally will continue into the week-end.
Alas, how much energy have we unnecessarily wasted on the way to what will undoubtedly be the predictable outcome? However, I hasten to remind that the national debt has tripled in thirteen and a half years and although increasing the limit on the credit card might keep the lights on, the electricity bill should never have been paid on the credit card to start with and the higher limit does nothing to help to pay off the balance.I simply cannot see how anything less than 4-5% growth in GDP will be able to impact the debt pile and, let’s face it, those numbers are illusory in any mature Western economy.
Even the best of breed, Germany, only staggered home at 0.5% in Q2. It was Steven Beck, that old market dog who now bats for Abbey National Treasury, who articulated the thought of their not being enough money on this planet alone to pay back all the debts that have been run up in order to prevent previous debts from failing. It might have been a while since he last used that line but that doesn’t render it any less valid.
So back to the White House outside of which news correspondents are lined up and getting all excited about the fact that the cold light of reality has had the plug pulled out again while the punchbowl is being refilled. In the world of known unknowns and unknown unknowns, this is the greatest of known unknowns known to man. Next!
Magic Mark and Mario
Meanwhile, St Mario has spoken again and affirmed, as has Carney the Magician. that current low interest rates are here to stay. The latter has now clearly nailed his colours to the 7% unemployment mast while the former is still floundering around in the knowledge that it was the Germanocentric ECB “one-size-fits-all” rate policy of the past which drove the horrific boom and bust, especially in Spain and in Ireland, and that although the issues have changed, the problem facing him is still the same.
“The Governing Council has unanimously agreed to incorporate an easing bias that explicitly provides for further rate reductions, should the volatility in money market conditions return to the levels observed in early summer,” Draghi said, speaking at Economic Club of New York yesterday, the same forum at which Alan Greenspan coined the phrase of “irrational exuberance”.
On December 5th 1996, Greenspan declared:
“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade.”
Well, well, well… wise words. Had he only listened to himself and not waited until June 1999 to begin tightening, only to then go into easing mode again following the dot.com crash in January 2001 and into easing overdrive after 9/11.
In 2001, Fed funds fell from 6% in January to 1¾% in December and I still argue that without that aggressive action we would not be where we are today. If the problem was created by cheap money, why do we blindly continue to believe that it will bring the solution too?
Too much thinking for a Friday….
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Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful week-end. As summer finally signs off and autumn checks in, as we on the other hand check the oil levels and the wood piles as we go to dig out our woollens, may we be lucky enough to find that the moths have found somewhere better to spend the season than curled up in our cashmere sweaters. Yikes!