The intrusion of politics

Have you heard the new smash hit "The Old Lady is a Tramp" from Tory Storm and the Hurricanes?

She gets too frightened to ever hike rates
She likes weak sterling and the way it inflates
She should have abstained from the Brexit debate
That's why the Old Lady is a tramp

Doesn't like bankers and the way they get paid
Hasn't put rates up in nearly a decade
Won't make a forecast without a downgrade
That's why the Old Lady is a tramp

She likes the free fresh price of money
Borrowing's free
We're broke, and it's oke
Carney hates London, it's cold and it's damp
That's why the Old Lady is a tramp

She gets too frightened to ever hike rates
She likes weak sterling and the way it inflates
She should have abstained from the Brexit debate
That's why the Old Lady is a tramp

Like Sven and Capello, old Carney's a fraud
We'll still make Nissans and maybe some Fords
Bye-bye to Marmite, it's too rich to afford
That's why the Old Lady is a tramp

She loves to mislead everyone with her forecasts
The PM's aghast
We're broke, and it's oke
Carney hates London, it's cold and it's damp
That's why the Old Lady...That's why the Old Lady
That's why the Old Lady is a tramp

Perhaps unsurprisingly, this seems destined to be one of those weeks when politics dominates sentiment in financial markets.  Say what you will about Carney (and your author has said plenty over the last few years), but if he calls it quits this week it will be a function of perceived political interference by the Government, which doesn't strike Macro Man as a particularly bullish outcome.  To be sure, replacing him with someone who might reverse the August easing decision could prove to be bullish in the short run for sterling, but in the grand scheme of things the criticism of independent civil servants by the political class is not a recipe for good policy outcomes.

The United States, of course, is dealing with its own issues pertaining to highly placed civil servants.  No, not the bloke who does the seasonal adjustments for soybean exports, which famously boosted Q3 GDP on Friday, but the latest Clinton email bombshell from the FBI that threatens to tighten a race that seemed like close to a foregone conclusion a few days ago. 

Now, as of yet there are very few concrete details that have emerged on the case, so much of what is out there is supposition.   You needn't be the second coming of Sigmund Freud to observe that GOP supporters tend to view this as a more serious issue than Democratic partisans, for obvious reasons.   At this juncture, the scandal is likely to be felt in two ways: the impact upon undecideds, and the impact on the marginal propensity to vote for partisans.   It unfortunately will be some time before there is polling data accurate enough to render a properly educated guess as to the impact of the latest "-gate" scandal to affect this election.

What we can say, however, is that uncertainty has increased and the chances of a Trump victory have probably gone up, as observed by the market's default Trump bellwether, USD/MXN...


Regardless of what you think of the candidates (and really, in this space there is no reason to express your opinion other than how they impact markets- there are other forums to express your support or opposition), it seems to Macro Man that a Trump victory would initially be perceived as equity negative.  As such we may perhaps see a risk premium get build into stocks if and as this Weiner-gate story gets legs.

Fortunately, there is also a slew of economic data this week, including ISM and of course payrolls on Friday.  The market is still pricing a ca. 70% chance of a December rate hike, though no one seriously looks for a move this week.   However, the statement should acknowledge the improved growth in H2 and suggest that the hurdle is higher to stand pat than to move.     This could then throw the onus back on markets to not fall apart, and thus on the politics not to embarrass everyone.  That, sadly, is more of a hope than an expectation.

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Anonymous
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October 31, 2016 at 7:59 AM ×

you call him Fabio, we call him Sven. One was sacked, the other resigned. I suppose we are close to discovering whose sobriquet is more apposite. I reckon he clings on hoping to ride a down wave when art 50 is triggered.

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Anonymous
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October 31, 2016 at 9:17 AM ×

I'm not the greatest fan of Carney, it's been easy up to now. I do think he will stay for his term as he values his reputation which would be damaged if he walked away.
Isn't he the highest paid central banker in the world?

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Error404
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October 31, 2016 at 11:25 AM ×

"Say what you will about Carney (and your author has said plenty over the last few years), but if he calls it quits this week it will be a function of perceived political interference by the Government, which doesn't strike Macro Man as a particularly bullish outcome."

Why shouldn't there be 'political interference' in what is one of the most critical areas of any government's responsibility? As a matter of principle, there is no more justification for an 'independent' monetary policy than for independent fiscal, defence, or foreign policies. As a matter of practice, 'independent' central banking has proven itself to be an unmitigated disaster - a bubble-factory which has generated financial and economic instability for over two decades (or just under, in the case of the UK).


"....in the grand scheme of things the criticism of independent civil servants by the political class is not a recipe for good policy outcomes."

'Independent' of whom, exactly? Sure, he's independent of the electorate and the government. But independent of the astrology that passes as an academic discipline in the economics departments of 'leading' universities? Independent of the group-think infecting his peers? Independent of think-tanks and the vested interests that bank-roll them? Independent of GS, of whichever hedge fund he reckons will give him his next sinecure, of pressure from the rest of the Davos crowd? As for the dismissive reference to 'the political class' - I have just as much disrespect for most of them as anybody, but at least I do get to pass an opinion every five years. I don't get to vote for or against Carney or the rest of the monetary politburo on the MPC, who seem to think that they can succeed where the Soviet Union failed by manipulating complex economic forces they quite clearly barely understand.

Central bank independence is just another of the creation myths underpinning a one-percent-centric 'new world order' which looks to be cracking. Just as Thatcher kick-started a global trend towards privatisation, May should have the courage to lead the way by taking back full control of monetary policy. Politicians will probably be as poor in this field of policy as any other, but they can do no worse a job than most of the G7 central bank heads of the last two decades (with one or two noteworthy exceptions).

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Macro Man
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October 31, 2016 at 11:48 AM ×

If you think that politicians cannot be worse than professional central bankers in conducting monetary policy, then I would submit that you probably haven't studied the data hard enough.

Point taken, however, on the difficulty of identifying true independence. In many cases the central bankers are beholden, either politically or ideologically, to the governments that appoint them.

But if we are going to enter a realm of free criticism of monetary policy from the pols, then presumably we also get to hear much more pointed criticism of fiscal policy from the monetary crowd. While it may make for popcorn worthy viewing, I am unconvinced that it makes for good policy.

(All this being said, it would be refreshing and credible if anyone, ever, admitted that their choices were suboptimal.)

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Anonymous
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October 31, 2016 at 12:05 PM ×

"Why shouldn't there be 'political interference' in what is one of the most critical areas of any government's responsibility?"

The basic rule of thumb would probably be that anything the government interferes in is made in the interest of getting re-elected. Do we know for sure that governments haven't so far been interfering in the loosening monetary policy? 2008 was originally supposed to be about saving a couple of banks and prevent a system crisis, but it's possible someone with an ulterior motive instead seems to have gotten addicted to the crack. I could actually understand now that no one (within the establishment at least) wouldn't want to be painted as the bozo who did something "risky" to burst the bubble. They just want to keep status quo and pray nothing happens on their watch.

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Flowthrough
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October 31, 2016 at 12:44 PM ×

Two election risks. Trump wins or pubs lose house. Senate does not really matter, though a slight positive if Clinton wins and Senate stays pub. Latest polls show just that result, with pubs holding Senate.
So question is how much of that is priced into market?
And how much downside if it comes out different and how much upside if plays out as I think (and polls show)?

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Leftback
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October 31, 2016 at 1:03 PM ×

At first LB thought that MM had penned another song for Dame Janet, but on further reading of course it was The Old Lady of Threadneedle Street to whom he referred.

So, eight days to the election, and the problem we are facing is two apparently unelectable candidates. One of them will of course be elected, but the real battle as flowthrough suggests above is the House of Representatives. That's difficult to track and trade. We concur with the above that the market will price in an outcome that is not going to play out, so there will be a relief rally after the results are announced next week.

LB has noticed the following:

1) crude is soft and has a date with a 47 handle this week, if not lower. You read it here first, with regard to the OPEC "deal" and the likelihood of it sustaining oil prices above 50. Kudos to anyone who used the extra pushes above 50 to add to their shorts.

2) the dollar suddenly looks slightly toppy. We are a little bit concerned that there might be a little of a bounce in JPY here, from 105 to the 102 area. Those moves are usually equity negative, but not necessarily fixed income negative.

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wcw
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October 31, 2016 at 1:07 PM ×

@Flowthrough, in my reading of survey data, the most likely Senate outcome is 50/50, next 51 D, third 51 R. Sure, anything's possible, but at even odds I'd bet against an R Senate. Both House and Presidency are baked by now, R House but losing ~10 seats, D President.

The market imo has priced in the same, but on the Senate it doesn't much matter. If we were talking about 60 D or 60 R, there might be a reaction if it didn't go as expected.

The only real downside scenario is the distant but nonzero chance of a DJT administration. The rest of the potential outcomes will be sound and fury, with lots of noise and no signal. If there is an outsized reaction to any electoral outcome (other than DJT), fade it.

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Unknown
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October 31, 2016 at 1:42 PM ×

@anon 9:17
"Isn't he the highest paid central banker in the world?"
I doubt he still is, at current exchange rate.

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checkmate
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October 31, 2016 at 2:22 PM ×

"I doubt he still is, at current exchange rate."
My irony of the award goes to Anon 1.42

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Celeriac1972
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October 31, 2016 at 3:51 PM ×

LB - I'll take a little of your oil kudos if I may. It might partially offset the intestinal discomfort I am feeling from my short XLU position...

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Celeriac1972
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October 31, 2016 at 4:09 PM ×

Here's a brief summary of various theories regarding Bitcoin: http://qz.com/823010/bitcoin-is-closing-in-on-its-2016-peak-a-handful-of-theories-attempt-to-explain-the-rally/

The big gaps in the daily char are very tempting, especially if (Chinese) retail money is the winning theory.

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abee crombie
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October 31, 2016 at 4:20 PM ×

https://www.businesscycle.com/ecri-news-events/news-details/economic-cycle-research-ecri-early-and-late-cycle-verdicts-are-baseless

LB, I think you will finally be correct on oil this time. Looked like a nice false breakout a few weeks ago

Celeriac, regardless of what bitcoin does in the ST, longer term crypto currencies are going to make real advances. I'm a big fan of the space. ETH in particular

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Hotairmail
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October 31, 2016 at 4:31 PM ×

Erro404.

"Why shouldn't there be 'political interference' in what is one of the most critical areas of any government's responsibility? As a matter of principle, there is no more justification for an 'independent' monetary policy than for independent fiscal, defence, or foreign policies. As a matter of practice, 'independent' central banking has proven itself to be an unmitigated disaster - a bubble-factory which has generated financial and economic instability for over two decades (or just under, in the case of the UK)."

I have a great deal of sympathy for that opinion except the reality of what occurs when politicians are in charge of rate setting.

I think rather that I would ask the politicians to take another look at the remit of the BoE (which they are in charge of) and ask what the effect of that has been re the bubbles you mention. I would proffer an opinion that the Central Bank's almost overriding remit to protect banks above people and their welfare has been a key mistake. They believe that protecting the banks and investors is the only route to 'financial stability' but I think that more innovative thinking could be applied to this problem. The other aspect is focusing on 'money' rather than 'assets'. Haldane et al think they are being original when they talk about debt jubilees but I would like them to think more about an asset reset.

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Anonymous
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October 31, 2016 at 5:59 PM ×

https://www.washingtonpost.com/news/the-fix/wp/2016/10/28/professor-whos-predicted-30-years-of-presidential-elections-correctly-is-doubling-down-on-a-trump-win/

Alan Lichtman, author of “Predicting the Next President: The Keys to the White House 2016,” is sticking with his prediction of a Trump victory. His system has correctly predicted the winner of the popular vote in every U.S. presidential election since 1984.

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Panda
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October 31, 2016 at 7:16 PM ×

@ LB: Should not have doubted you on oil, although it would've still been a painful few weeks when it was shooting past 50. Given that the next event is end of November, and that the market is once again turning very bearish, it wouldn't be too difficult for some sort of good news to induce a positive surprise. Would an oil call be a good way to play this?

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checkmate
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November 1, 2016 at 5:49 AM ×

http://www.bloomberg.com/news/articles/2016-11-01/brexit-s-leave-votes-came-amid-high-inequality

You don't say. Inequality and political dissention are correlated. Someone please tell Marie Antoinette. As I have said before satisfied people don't vote for political upheaval. Interestingly , the article also depicts the falling share of GDP going to labour across a period where capital returns increased and globalisation were manifest. So, the 'labour' says no thanks where's mine. Appears to me all that went wrong is fiscal policy fell down on the job although probably not for want of trying. By that I mean I suspect that public debt rose as goverments did try to borrow and fund a wealth transfer through public benefits in most of the Western developed world. Still clearly fell short of the mark in terms of checking the growth in inequality although there is no graph in the article that shows that trend. I suspect goverments felt rather toothless in trying to use taxation most of the time to remedy this because implicitly globalisation as also meant that capital is free to 'fly' free of taxation measures even if the post millennium as seen some attempts to check that.
So ,Brexititus in it's many guises across many countries is the cost of doing business in the sense of it's a running cost associated with the failure of fiscal policy to establish a suitable economic equilibrium necessary for political stability.
Bearing in mind I was a Brexit voter the irony probably is that no one is doing more to put a check on global free trade and penalise tax avoidance than the EU !
If only they could have done something like find grounds for a UK moratorium on their free movement of labour principle we'd probably be having a different conversation today.

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Celeriac1972
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November 1, 2016 at 7:01 AM ×

@checkmate: It is interesting to link inequality and the Brexit vote, but the May 2015 election result - where the UK populace rejected a party with an overtly redistributionist agenda - makes this very hard. I suspect that the real drivers were an island dwellers sense that "the laws that affect us should be made here" and overblown/overhyped perceptions regarding immigration.

The US situation feels subtly different. Trump's blue-collar appeal is perhaps centred on a covertly redistributionist agenda which is unusual ground. He promises to get the economy moving whilst making populist noise about Mexicans, off-shoring, corrupt elites etc. The US doesn't have the same sense of eroding self-determination.

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checkmate
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November 1, 2016 at 9:04 AM ×

Celeriac
"the laws that affect us should be made here" . I think that is more an intellectualists argument. Us common folk just thought f...it ;how can I get my kid into a local school and not one an hour away ; sod it I'm fed up of bleeding all over A & E for 4 hours because these Polish drunks ( 1 in there) can't leave the Vodka alone; local renter/buyer of property can't get into the slum shared by 12 Polish labourers. So on so forth. Underpinning all of that even if not at the front of the memory recall is a sense of estrangement, a sense of struggling and getting nowhere, now who can we blame?
I watched at least a solid decade of public underspend that was overwhelmed by increasing public demand that was bound to lead to a lowering of standards and aspirations. Not all of this is explainable by immigration ,but a contributory factor, for sure.
What isn't different about Trump is he can find an easily explainable target for public ire. It isn't even a lie, it's a less than full truth. The people receiving that message have waited in vain for many a long year to hear anybody promise them a better deal. It's what they want to hear so it's persuasive even if he has little chance of delivering.
There's an underlying commonality in all countries manifesting an anti establishment feeling. They all think that no one in government is representing them and their interests. It's economically complex ,but simple to understand psychologically

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