So that’s our holidays done for a bit. It’s a shame really as time spent dozing in far off climes, or time spent with people from other professions followed by the return to a room full of screens covered in dancing numbers from which one has to decide which ones are going to get bigger and which ones smaller really does make us go soft in the head and question exactly what we do. Yes, sorry folks, however fantastically clever you think the world of finance is, all that complex method, all those Nobel prizes, stats, PhDs, papers, research, central bank watching and even lunches, dinners, seminars in Bali all just boil down to guessing which numbers will get bigger and which ones smaller.
But hey ho, such is life and while there are still queues of brainwashed interns willing to work for nothing at financial institutions (that are ironically based in countries that pride themselves on abolishing slave labour over a hundred years ago) for the shot of maybe making it big time, it will probably go on. Huge quotients of intellect still willing to go through an X-factor ordeal (Do you really want it? Will you give your all for the chance to attain your dream? Or rather OUR dream). There will only be one winner and chances are it will be your employer rather than you.
Right, now with that dose of reality out of the way, lets crack on. What’s going on with these dancing numbers?
Well, to use the vernacular, bugger all by the look of it. Have we returned only to find that all other human market participants are left on the beach?
UK - Carney has managed to give the newspapers reason to think he will stay “low for longer” and reignite a buy to let property bubble and yet convince the market he is going to stay “low for shorter” kicking GBP higher. At which point TMM will congratulate their flawless TMM Holiday FX indicator as it once again managed to pick the top in EUR/GBP the moment we boarded the plane back from Europe to the UK. Carney appears to be able to speak “Parseltongue” which is a clever trick making their goal of achieving economic escape velocity whilst holding longer term rates down possible. TMM still like the UK prospects and though may cite “we have seen 3 recoveries fail so far so this one is likely to as well” as pretty much denial.
TMM had a bit of a debate today about the targeting of unemployment rates as far as CB guidance goes and note that despite the different mandates, most CB's do target it some way. As we have said many times it all comes down to wage inflation and though employment levels are a laggard they are not as much as a laggard as inflationary pressures caused by wage inflation. Wage inflation also being the component of overall inflation that has to be targeted rather than reacting to exogenous inputs.
But it does all depend on the assumption of a reliable relationship between unemployment levels and wage growth. Should we see that break down then we could see inflation pick up without the CB’s employment targets ever being hit.
how could that be?
Well some things to consider.
- Spain – what’s their employment rate been at and for how long? Targetting a 7% unemployment level would be a Utopian dream for them.
- In the UK there may be a bolstering of unemployment claims as disallowed disability claimants shift to “unemployed”.
- Continued widening income disparity. i.e. a shortage of highly paid engineers vs a surplus of low-skilled service workers. (Also the increasing dominance of global industries by the mega players and rising barriers to entry for the small fry)
The last of these points is a concern and TMM can't see a short term end to continuing wealth disparity trends, which means London, and Manhattan real estate prices will continue outperforming and the disconnect between stocks and the real economy could continue also, as more of the savings go to the wealthy, who put it into finance instruments, a form of saving which contrary to popular press who assume that all savers have their money in cash at 0.0001% at the post office, has seen savers rewarded with stellar returns. And with respect to inflation, while income disparity may not have a large impact on an aggregate level, these trends do suggest the increased likelihood of sticker prices (oligopolies aren't likely to cut prices!) and increased dispersion of the various components of inflation baskets. But we have digressed enough.
US – zzzzzzzzzz Really is there any major development to factor in over the last 2 weeks? The blogosphere appears to be rummaging in dustbins for old bits of bad news to cite ( trailering “The Cliff 3” – with all your favorite stars) but lets stick to the big stuff, not much other than the US bonds to stocks flow story seems to have got ahead of itself just on price action as bonds are doing ok and stocks are having a hard time rallying even though data has been ideal with strong ISM globally, while employment growth (and hence the timetable for CB tightening) remains slow. Maybe that just means they need to consolidate some. Clearly people do not hate bonds as much as maybe one would expect.
But the killer has probably been the mighty USD which, judging by the performance of FX dedicated funds, has taken many to the cleaners.
Europe – The data is getting incrementally better and monetary trends suggests growth through year end. The picture is less clear after that, but it appears to be the consensus view that Europe is economically on the mend, but we think it’s a begrudging consensus with positioning lagging belief. People still don’t appear to want to see Europe as a success and still seem to trade it as a “less short to flat” rather than an outright long. But its holiday time in Europe and the small Mediterranean island TMM were holidaying on, despite reported lower visitor numbers this year, was by no means dead. Unlike the markets.
China – Data continuing to improve, a turn around in all things China linked has lifted the foot off the Asian brake on global confidence but we do still wonder about what is really behind those figures (more soon on that).
That will do for now, the fractal component of markets means that there will always be some microcosm to break into even smaller discussion points but for now let's just accept that things are pretty quiet and there isn’t that much point in yelling about the next great move because most of the arguments behind each view really haven’t changed that much over the past 2 weeks.
Let the numbers dance and while they do
We’ll take a seat on the side for two
More weeks to pass, as data yields
Passage to Elyssian fields