Anthony Peters, SwissInvest strategist
The UK government might have had a bit of a tough week in terms of the restructuring announcements by BAE Systems and the effects they will have on the future of ship building, or lack thereof, in Portsmouth in Hampshire and Glasgow in Salmondshire but it did have a little sweetener yesterday in the form of the Twitter IPO.
After the stick it took for the overly conservative pricing of the Royal Mail shares, Wall Street’s finest have proven that they are just as capable of misreading the public’s desire to get rich quick. Priced at US$26.00, Twitter shares leapt to just north of US$50 to close at US$44.90.
I can see and hear the comparisons to the heady days of the dot.com boom of 1999 and 2000 but having been there, I can assure you that there is nothing comparable between then and now other than the spelling of “greed” and “fear”.
A bit of the latter was on display yesterday in response to the release of advanced QoQ Q3 GDP in the United States. Forecast at +2.0%, it reported at a highly unexpected +2.8% along with a rather worrying implicit price deflator of 1.9%, forecast at 1.4%. This set the alarm bells ringing as far as future Fed policy is concerned and a strong Labor Report today will have the tongues wagging and the sell buttons being pressed.
Maybe the equity tribe is now simply snorting a higher purity of happy powder and the bond beasts have gifted control of their brains to the monetary authorities and their political masters.
Consensus was, until yesterday, that the probability of the Fed beginning its tapering process - withdrawal of stimulus and monetary tightening are not quite the same thing (yet) – was pegged at around 20%. The strong GDP indication and a positive Nonfarm Payroll report could push that straight up to 40-50%.
The question, as one senior strategist put it to me yesterday, is whether the temptation to move early is too much to resist “just so Bernanke can say he started the wind down before he headed into the sunset.” It would be a noble thing to do.
Not only that, but with stock markets up at or around 20%, year to date, the risk is that a serious correction which might and most probably will follow the launch of any tightening cycle will leave the Fed open to criticism that it let irrational exuberance prevail and an equity bubble form while it argued over timing. If 2.8% GDP growth doesn’t scare it into looking very carefully at tightening, then the 1.8% inflation reading should.
Proof, see pudding
Nevertheless, the FOMC has apparently firmly nailed its colours to the labour market mast so that, despite the stats we read yesterday, the proof of the pudding will be on our screens today.
All this causes the sort of conflict none of us want or need. There are those who believe that the US economy is on the cusp of a new golden era and those who are reading clear signs indicating the end of the growth cycle and the build-up of pre-recessionary pressures.
Should the recovery bulls be selling everything and the merchants of doom be buying the living daylights out of risk assets in their stead?
Having previously suggested that there is nothing to compare between 2000 and 2013, I might have to revise my judgement and add that, now as then, dips are being treated by petty retail as nothing more than cracking buying opportunities. Maybe the equity tribe is now simply snorting a higher purity of happy powder and the bond beasts have gifted control of their brains to the monetary authorities and their political masters.
In other words, the less you try to think for yourself, the more money you appear to make.
Severed Bundesbank link
Meanwhile, St Mario has done his bit for the unthinking by implementing another phase of his “whatever it takes” policy. The ECB Governing Council’s ¼-point rate cut, highly unexpected, left Germany’s Jens Weidmann on the wrong side of the argument that one-size-fits-all does not at all fit all. In the same way as Ireland and Spain were exposed to rates which were far too low for their economy during the middle of the last decade, so Germany is now at the receiving end of the same phenomenon.
The rate cut also finally severs the last ties the ECB, once seen as “Son of Bundesbank”, had with its erstwhile father. The old Buba distinguished itself from the Fed by a philosophy which apparently determined that the former’s key rates should be as high and as defensive as could be justified as opposed to latter which always kept them as low as it could get away with.
As of yesterday, it has been established that the ECB is just as happy to play fast and loose. This, I, for one, do not like. When will they learn that pain-killers cure nothing.
—————————————————————
Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful weekend. Signing off on a very personal note this week, Wednesday saw the end of a nearly three year process with the completion of my divorce. It has been a trying time and I would like to thank those amongst you who knew of what was going on in my life for all the support you have given me and also thank those who knew nothing of my travails of your indulging me in the occasional hiatus in my thinking and writing. Caveat lector.